Seraphim.xyz Profile picture
Sep 20 31 tweets 10 min read
USDT (@Tether_to) is a $68 billion dollar stablecoin, but no major lending market lists it as collateral.

There is a proposal on @eulerfinance to make it the first.

After speaking to major USDT traders and policy pros, I fully support this. Here's my take 🧵 1/31
First of all: why would listing USDT be good for DeFi?

🔼 Foster stablecoin competition within DeFi
🔼 Increase financial inclusion

2/31
There is irony in the fact that while DeFi is about decentralisation, there is only one dominant stablecoin in DeFi: @circlepay's USDC

Circle have created a phenomenal product and more such products are desired to foster more open markets in the stables space.

3/31
At the same time, you've got stables like @Tether_to that use the same redemption mechanism as USDC, have similar liquidity and are used by thousands of users.

Many of these users are based in emerging economies in Asia and Latin America. Why should they miss out on DeFi?

4/31
Financial inclusion of USDT users in emerging countries is also reinforcing USD as the dominant currency, which IMO is a net positive thing for the world.

5/31
All I'm trying to say is this: if the risks of USDT and USDC are comparable and manageable (I will try to prove this in this thread), it would be net positive to have diversity of collateral in DeFi lending.

6/31
As a responsible innovator, Euler Labs perceives USDT as a hedge against centralisation of stablecoin issuance.

Sure, @Tether_to aren't perfect and not run purely by smart contracts, but so far it's the only viable alternative to USDC in terms of liquidity and usability.

7/31
So why would this be good for @eulerfinance?

Because billion-dollar USDT holders like @justinsuntron can finally utilise their balance sheet for effective trades like long/short wstETH/WETH, which has been a killer trade on Euler.



8/31
And not only them, but also thousands of smaller USDT holders (particularly in EM) who cannot access DeFi without selling their holdings for USDC or ETH.

9/31
With increased USDT liquidity, TradFi firms would happily use @eulerfinance to short USDT. It's a trade they've been putting on and on and can never get enough of.

Shorting USDT would generate lending APYs for lenders but also reserves for the DAO

decrypt.co/94866/4-billio…

10/31
Overall, this would create a flurry of activity and inflows on @eulerfinance as it would be the only major lending protocol to support USDT.

11/31
Now let's talk about risks and specifics. For this particular proposal, there are 3 thing to consider:

🔼 USDT onchain liquidity
🔼 Is USDT backed?
🔼 Redemption mechanism

12/31
🔼 USDT is one of the most liquid assets onchain.

The 3pool on @CurveFinance is one of the most liquid DeFi pools and contains circa 260mil of USDT, and there is another 200mil of USDT on @Uniswap as well.

Frankly, not too concerned here.

13/31
🔼 Is USDT backed?

This is what the FUD is about. Does @Tether_to hold enough high-quality assets to meet redemptions?

First of all, what are redemptions and why are they important?

14/31
Example: if you see USDT at $0.99 on some exchange, you would

1. Buy 1 million USDT at $0.99
2. Call Tether
3. Ask to convert 1 mil USDT into 1 mil USD.
4. Tether would either give you the cash from their reserves, or sell cash-like assets and hand you $1 million.

15/31
Since you bought $990,000 worth of USDT and redeemed it for $1,000,000, you’ve just made a risk-free $10,000. Pretty neat.

But imagine you could lever up and buy billions of $ worth of USDT and make even more money! This is what the big USDT traders are doing.

16/31
The FUD is essentially that in the event of a USDT selloff, either

(1) The assets won’t be there or
(2) They are not high-quality assets and can’t be immediately sold for cash.

17/31
Basically, Tether was initially accused of not having enough funds to cover all redemptions supposedly because:

1. The money is unavailable because it’s loaned out to Bitfinex (who has same owners as Tether) or sth else
2. Tether funds were not ring-fenced from Bitfinex

18/31
And this is what these 2 important settlements with CFTC and NY Attorney general are about:

cnbc.com/2021/02/23/tet…

19/31
Another fear is that Tether holds too much commercial paper (short-term loans to companies) that cannot be sold easily to meet liquidations.

21/31
Here's what changes the situation:

Firstly, Tether needs to submit detailed reports to NY Attorney general on the composition of USDT reserves, proof of ring-fencing and what payment processors they use (Section 57) according to the settlement:

ag.ny.gov/sites/default/…

22/31
Tether has also commissioned a proof-of-reserves from BDO (top 5 auditing firm) and it was released at the end of August 2022:

assets.ctfassets.net/vyse88cgwfbl/2…

23/31
Commercial paper is a decent chunk, but in the footnotes we see that: The average duration of items in this category is 27 days and the average rating is A-1.

A-1 is the highest rating CP can get according to S&P.

24/31
Basically, it would be insane now for Tether to lie about their reserves and ring-fencing of funds because they’d be in BIG trouble with the authorities, as they’d be submitting false reports.

25/31
🔼 Redemption mechanism

If you talk to the big boiz who mint and redeem USDT, they're very happy.

Tether could handle 100s of mill in redemptions, even when 3AC, Celsius and co blew up. That was the ultimate stress test and USDT passed it.



26/31
The only complaint I’ve heard is that the Bahamas-based bank handling the redemptions for Tether is constrained by market hours at times, leading to delays in redemptions during odd hours.

27/31
So for eg if you bought 500 mil USDT at 0.99 and want to redeem it at $1 during Asian trading hours, you might have to wait a few hours till the Bahamas bank staff are online.

Actually I am told they've improved on that front a lot since May.

28/31
Still, it only leads to volatility for a few hours before arbitrage is possible again, meaning it does not pose significant systemic risk as there is a USDT:USD price at which everyone will bid even if there’s a redemption delay.

29/31
Conclusion

As a delegate, I think USDT by @Tether_to should be collateral on @eulerfinance because it meets the risk criteria while allowing USDT holders to use Euler, thereby broadening its reach.

This would grow TVL and boost borrowing activity

30/31
But now, it's up to the DAO.

Please make sure to vote on Snapshot:
snapshot.org/#/eulerdao.eth…

And read the forum post:
forum.euler.finance/t/eip20-promot…

31/31

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More from @MacroMate8

Aug 25
The guys from @coinbase have supplied liquidity to cbETH on @Uniswap and that's wonderful. But only 0.16% of the price range has any liquidity.

For a strong oracle, it needs full range liquidity. A few suggestions 🧵 1/5

You can see that when you simulate buying cbETH/WETH.

2800 WETH barely moves the TWAP, but 3000 WETH worth of buying pushes spot to infinity and the TWAP to 85% or so.

2/5
But hey, that's easy to solve. If @coinbase provided even 20 WETH worth of full range liquidity, TWAP attack becomes unfeasible.

As you can see, TWAP impact goes from 85% to <3%.

3/5
Read 4 tweets
Aug 24
Another proposal (eIP17) on @eulerfinance to promote @LidoFinance's stETH to collateral tier.

This would make @eulerfinance the most competitive place for stETH leverage in terms of LTVs. 1/5

forum.euler.finance/t/eip-17-promo…
This is directly related to eIP16, which includes changing the oracle to @chainlink and amending the interest rate model.

2/5

The proposal includes Collateral factor of 0.87 and borrow factor of 0.91.

If you lend stETH to borrow ETH, your max leverage is almost 5x. That's more competitive than any lending protocol.

3/5
Read 5 tweets
Aug 16
As the merge approaches, ETHPoW creates a novel risk for lending protocols: 100% utilisation of ETH pools.

At 100%, lenders can't withdraw. Effectively a bank run.

Here's an explainer of how and why this may occur 🧵 1/9

Let's same assume you lend USDC and borrow ETH on @eulerfinance just before the merge. You pay some borrow APY on ETH.

Say the merge occurs, but as @Galois_Capital suggested, there's an ETH fork as well. What now?



2/9
Now your position is duplicated on 2 chains: ETH2 and ETHPoW.

On ETH2, it's the same as before the merge. If you want to get USDC back, you need to repay the ETH debt + borrow APY.

On ETHPoW... it's a bit different.

3/9
Read 9 tweets
Jun 29
New proposal on @eulerfinance to allocate treasury $ to EUROC by @circlepay and WETH.

The funds are intended for strengthening @Uniswap oracles and laying the foundation for onchain EURUSD FX trading powered by Euler and Circle.

Let's discuss the proposal and onchain FX 🧵 1/13
@eulerfinance @circlepay @Uniswap EUROC by @circlepay will launch soon and has the potential to become as big as USDC. To get there, it needs two things:

🔺 Good onchain liquidity
🔺 Strong decentralised oracles.

Should eTP1 pass, @eulerfinance could contribute to strong oracles.

2/13

@eulerfinance @circlepay @Uniswap With a strong oracle and good onchain liquidity, listing EUROC as collateral on @eulerfinance becomes more likely.

This would allow leveraged longs or shorts on EUROC/USDC... which is basically onchain FX trading.

3/13

Read 13 tweets
Jun 21
Recent market volatility highlighted why it's crucial that collateral assets are extremely liquid.

In response to market conditions, there's a new proposal to adjust LTVs for UNI, LINK and MATIC on @eulerfinance

Let's dive into risks this is trying to avert

1/13 🧵
@eulerfinance While @eulerfinance performed extremely well during market vol, one cannot be complacent. Recent news around @CelsiusNetwork and @3arrowscap highlight hidden systemic risks.

In fact, poor risk choices can lead to teams taking untenable positions

2/13
@eulerfinance @CelsiusNetwork @3arrowscap The unfortunate situation at @solendprotocol highlights why illiquid collateral can lead to bad debt.

Essentially, this user is better off borrowing USDC vs SOL than selling his SOL for USDC because his collateral cannot be liquidated.

solend.fi/dashboard?wall…

3/13
Read 13 tweets
Jun 7
DeFi is eating TradFi and @HaunVentures, @variantfund, @FTX_Official are betting big.

To succeed, we've got to be better than TradFi in 3 ways. Let me tell you how @eulerfinance accomplishes all 3.

1/19
@HaunVentures @variantfund @FTX_Official @eulerfinance 🔺 Wide choice

Hedge Funds & retail love a wide array or products, be it FX, stocks, bonds or crypto. But ultimately, these providers decide which products you can trade.

Unlike TradFi, anyone can create markets on @eulerfinance. It's now at 60, but the sky is the limit

2/19
@HaunVentures @variantfund @FTX_Official @eulerfinance To showcase this, @LidoFinance's wstETH was activated on Euler and promptly promoted to collateral tier. Within a few weeks, the wstETH market on @eulerfinance has grown >$50 million.

The quick onboarding of products is possible because of how @eulerfinance is built.

3/19
Read 19 tweets

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