Short the Tether Peg with Tether Bear

Short the Tether Peg with Tether Bear

Toros Finance has expanded its product range to include a strategy to take advantage of the current market uncertainty.

Background

One of the lasting consequences of the Luna and Terra debacle recently was a renewed focus on the stability and reliability of stablecoins.

In particular, the ability of fully collateralized stablecoins like USDC and Tether (USDT) to maintain their pegged ratio to the associated fiat currency, in most cases USD.

Since the start of May we’ve seen market caps of some of these coins drop significantly , in particular DAI dropping from $9.5b in March to currently approx. $6b, and Tether dropping from $83b in May to just over $65b now.

Of interest, however, is the well documented lack of transparency regarding the depth of collateral Tether claims to have. Tether was fined in 2021 by the New York attorney general for apparently lying about its reserves, and the opacity of these reserves continues today.

Tether de-peg

During the peak of emergency drawdowns in May 2022, Tether appeared to seamlessly operate redemptions to almost $10b of requests over a week, with its peg to USD shortly drifting to about 95c, depending on the exchange. But ultimately recovering back to $1.

The question remains, should the run in Tether liquidity continue, how deep can redemptions be supported whilst maintaining a healthy peg?

Tether Bear

The Tether Bear strategy is designed to take advantage of this potentially unique market condition via:

  • Borrowing Tether on Aave,
  • Swapping this Tether to USDC,
  • Repeating the above multiple times to achieve a target 3x short position

With this leverage, a Tether Bear holder faces conservative risk through using a strategy composed entirely of stablecoins. But in the case where a depeg event occurs, a holder can capitalize on 3x the depeg range.

Given that this strategy maintains a persistent leveraged short position on USDT, the borrowing costs from Aave need to be taken into consideration. These interest rates are highly variable, so it’s suggested this strategy is used over relatively short time frames versus holding longer term.

For example:

USDT depegs to $0.95, and the holder sells their position, this would return a 15% gain if the holder entered the position at peg parity.

This strategy relies on a holder having significantly more confidence in the ability of USDC to hold its peg, versus that of Tether.

Keep a look out for more innovative Toros strategies over the coming weeks!

About Toros Finance

Toros Finance is a dHEDGE incubated protocol integrating Aave and 1inch. Toros Finance aims to simplify access to complex derivative strategies, safely, via offering these strategies through a single token.
Toros Finance offers a suite of on-chain tokenized derivatives products. Currently Toros is deployed on Polygon and Optimism.