This is the correct answer. In regular markets, price discovery happens because people can take both long and short positions on an asset, and thus the equilibrium price reflects something close to the true price (theoretically anyway.)

In tether, there is no real way to short it because of the counterparty risk -- if you short Tether and win, when the time comes for the payout your counterparty would have gone the way of Tether itself, and you will have no one to collect payouts off of.

You can short it on a decentralized exchange if you want to avoid counterparty risk

You then have a different risk though, protocol (smart contract) risk. As long as the smart contracts don't have exploits, you'll be able to withdraw your collateral after repaying your borrowed Tether.

Of course, this also means you have to be fairly overcollateralized. If you want to short say $100 of Tether you'd do well to deposit $200 of funds as collateral, because each asset has its own collateralization ratio that's not 1:1 to protect against liquidity crunches.

Aave and Compound (v2) would be safe places to execute a strategy like this, as they've been battle-tested for years at this point and have received multiple audits.

There's always risk of course, but I don't think this is any more risky shorting through a centralized exchange, and much more transparent than something like shorting traditional securities

I am incredibly tired of hearing this same argument, especially because DEXes like AAVE and Compound does not have anywhere close to the liquidity it is needed to short Tether to the point it causes any trouble (or even slight discomfort) for them. I just checked, and it seems like the total size of the borrowing pool of USDT there is about $500MM (~$330MM AAVE, $170MM Compound v2), which, together, makes 0.73% of their total market cap. That could probably cause trouble if Tether was, say 0.5% capitalized? But we know that number is probably above at least 20%, as in, Tether may have ~$13.6B in cash that they can and will spend to defend their peg.

So the liquidity is enough for small fishes to take bets that they don't know is actually swindling them out of their money. However, it is not large enough for an institutional/activist investor with a few billion in capital to take up a real position against Tether/Bitfinex.

I'm sure getting to tens of billions of USDT is more difficult, but in general, if borrow interest flows in, supply will chase it, as the supply rate automatically adjusts according to the ratio of the pool which is being borrowed.

More people borrowing drives up the supply rate, until more suppliers come in.

You can probably only get so much Tether into the protocols that way, maybe $5-10B

I didn't realize you were talking about shorts of larger size though. I think you'd have a hard time shorting, say, 20% of the supply of a stock also

The point being made is that no one can profit by shorting USDT to the point where they would be shown not to have anywhere close to the reserves they claim. So the argument "no one has successfully shorted USDT, so Tether must actually hold the needed reserves" is false.

This of course doesn't prove that they don't the reserves, it's just that this is a bad argument.

DEXs don't trade money, they trade crypto. So, if you believe that USDT crashing will bring down the value of all other crypto near 0, DEXs are just as bad a place to short Tether as any other part of the ecosystem.

> you will have no one to collect payouts off of.

any yet, back in the GFC, people shorted mortgage bonds so much that paying out would've bankrupted the banks (as they are the counterparty). So why doesn't that apply here? As long as you are the first to collect the short, you will still win.

In the GFC, most people expected the system of rules, trade settlements, and, at last resort, lawsuits to probably make them whole when they trade in a volatile environment against counterparties that they believe are likely to go bust.

(There are still ways to guess right, but lose big on a trade, like shorting a company, whose stock collapses, and then gets delisted!)

In the crypto world, your counterparties might, quite literally, run off to Singapore, leaving you holding a worthless bag of toxic garbage.

Unlike the GFC, the first evidence of any weakness will be your counterparty being bankrupt. With the GFC, it was based on available information that the specific trades were going bad. In this case it will be "redeem for a dollar, redeem for a dollar, I cannot redeem/am broke so obviously your short is now good".

Because the US government doesn't want the US economy to go up in flames, and thus stepped in to make sure the bank's debtors are made (somewhat) whole. Who would be the "lender of last resort" in crypto?

IIRC those credit default swaps actually almost became worthless overnight due to an important bank almost failing.

>> Because it’s in no one’s interest to see Tether collapse.

That kind of sounds like magical thinking. On the other hand trying to short USDT sounds insane from a practical point of view.

I think the reality is that we talk and think about all crypto way more than they actually are going to matter, particularly relative to the amount they are actually used. Not the BS "market cap" which is phoney in so many ways. Can we admit that maybe this isn't very important?

> up to this point anyone has been able to redeem 1 USDT for 1 USD through Bitfinex

What do you mean "up to this point anyone"?

For several years Bitfinex (who also assured everyone that they had NOTHING to do with Tether) or Tether would only let you redeem if you were a "whale" with over $30K in holdings, were a non US-national, were subject to a six month waiting period. Random people absolutely could not redeem say 10 USDT.

Also during that period people would post bounties, some of which were a couple of thousand dollars, for -anyone- to demonstrate that they'd been able to redeem, and none of those bounties were ever claimed.

Things might be different now, but let's not try to claim that it's all been all good so far.

> and have a vested financial interest in seeing it fall

Who can actually profit from it falling? The problem with shorting it is that you have to find someone who will remain solvent when Tether collapses to take the other side of the bet.

It’s in shorters’ interest.