Crypto traders turn on each other in a crashing market

  • Many shark traders scour blockchains – digital ledgers for recording transactions – for information about other traders, especially those with highly leveraged positions.
  • Related Strategies Perhaps Contributed to the TerraUSD Stablecoin Collapse
  • With crypto prices under pressure, tackling leverage has brought even greater danger.

(Olga Kharif, Bloomberg) – With cryptocurrency prices plummeting, traders began to turn more and more against each other in the battle for fleeting profits.

Many shark traders scour blockchains — digital ledgers for recording transactions — for information about other traders, particularly those with highly leveraged positions, an anonymous user known as Omakase, a contributor to decentralized exchange Sushi, said in an interview.

Sharks will then attack positions trying to push them into liquidation and earning liquidation bonuses that are common in decentralized finance (DeFi), where people trade, lend and borrow from each other without intermediaries like banks.

Related strategies perhaps contributed to the collapse of the TerraUSD stablecoin, with shark traders cashing in on reduced price arbitrage between decentralized exchange protocol Curve and centralized exchanges, according to blockchain analytics firm Nansen.

Recent problems at cryptocurrency lending company Celsius Network have also been exacerbated by traders. The price of the stETh token that Celsius bought in the hope that its value would increase has started trading at a deep discount to Ether, to which it is tied.

“As stETH falls, traders buy stETH and short ETH against it, causing ETH to depreciate further, which again reduces collateral values ​​across DeFi,” effectively worsening Celsius’ position, according to a recent note from Ark.

As Omakase described it, “in a downtrend environment where yields are more difficult to access, what we will see is that some traders use some more aggressive strategies, and that may not necessarily be good for the community”.

“The environment has become more player versus player,” added Omakase.

With cryptocurrency prices under pressure, tackling leverage has brought even greater danger. Last year, Sushi launched a margin trading and lending platform. Most cryptocurrency exchanges offer margin trading, and in the past, it has been as high as 100X, meaning people were able to borrow up to 100 times more than what they offered as collateral.

However, most DeFi apps require traders to offer collateral in excess of the amount borrowed – in effect borrowing less than the collateral posted.

A trader may find that others can be liquidated when the price of a currency drops to, say, $100. Then, the trader can reinforce a sufficient position in the currency, then sell to pull the price below $100, while at the same time also getting a reward, which most DeFi apps offer, for liquidating the trader.

“Most protocols offer a settlement fee of 10% to 15%,” Omakase said. “Provoking enough liquidations would cause a liquidation cascade in which a motivated trader could simply hold a short position to profit from the subsequent secondary dip.”

Other traders are simply cashing in on liquidations they didn’t trigger. Nathan Worsley manages a series of bots – software programs – that look for traders about to be liquidated and receive a commission for liquidating them.

“In recent times, the number of liquidations has been huge,” Worsley said via email. “However, liquidations are not a constant strategy, sometimes you go a week or more without any significant liquidation. However, when liquidations do happen, there are usually many of them at once. You basically have to work for a long time, without any profit, to be ready for the big day, or the lucky two days, when maybe you can make a million dollars in one go.”

Their bots continuously scour blockchains, keeping a list of all borrowers using a specific application and checking the health of their accounts. Once positions are ready for liquidation, “it’s often a battle to be the fastest to liquidate,” Worsley explained.

“I wouldn’t classify this as an ‘attack,'” he added. “The reason is because without liquidations, you can’t have a lending market. So while nobody likes to be liquidated, it is essential that people are liquidated to make the market possible and protect the protocol from insolvency.”

Settlements can be triggered after traders who have applied for loans with apps such as Aave or Compound and deposited collateral – say in ether – which are often larger amounts than what is lent to them, perhaps 120% of the funds lent. . If the price of ether goes down, that collateral might now only amount to 110% of what the trader borrowed.

“My job as a liquidator is to protect the protocol by closing your position,” Worsley said. “The protocol gives me a reward for being a liquidator to encourage this activity, because blockchains cannot move by themselves. You borrowed $1,000 in bitcoin, so I pay the $1,000 in bitcoin you owe the protocol. In return, the protocol gives me $1,000 of your ethereum collateral plus a $100 ‘settlement bonus’ of your additional collateral. I take a profit, you are liquidated and your position is closed, and the protocol itself has been protected from default.”

With settlement targets becoming increasingly tempting in a tumultuous market, Omakase gives this advice: “generally everyone should stay safe, everyone should avoid using leverage.”

*Translation by Romina Cacia