• Wed. Jun 22nd, 2022

As Bitcoin and Other Cryptocurrencies Plunge, Traders Turn on Each Other

ByHazel R. Lang

Jun 17, 2022

With crypto prices plummeting, traders began to turn against each other more and more for ever-elusive profits.

With crypto prices plummeting, traders began to turn against each other more and more for ever-elusive profits. Many shark traders scour blockchains – digital ledgers to record transactions – looking for information about other traders, especially those with high leverage positions, a known anonymous user said. as Omakase, a contributor to the decentralized exchange Sushi, in an interview.

The sharks then attack the 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.

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Related strategies may have contributed to the collapse of stablecoin TerraUSD, with shark traders making money on price arbitrage between decentralized exchange Curve and centralized exchanges, according to Nansen, a blockchain analytics firm .

Recent problems at crypto lender Celsius Network have also been exacerbated by arbitrageurs. The price of the stETh token in which Celsius has a large position has started trading at a steep discount against Ether, to which it is pegged.

“As stETH declines, arbitrageurs buy stETH and sell ETH against it, sending ETH lower, again reducing collateral values ​​on DeFi,” worsening Celsius’ position, according to a recent Arca note.

As Omakase said, “In a downtrend environment, where returns are harder to come by, what we’re going to see is some players using more aggressive strategies, and that may not necessarily be good for the community.”

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

With crypto prices under pressure, leverage presented an even greater peril. Last year, Sushi launched a margin trading and lending platform. Most crypto exchanges offer margin trading, and in the past it was up to 100X, meaning people could borrow 100 times what they posted as collateral.

However, most DeFi apps require traders to over-collateralize — effectively taking out fewer loans than they put out.

Lower the price

A trader may discover that others might be liquidated when the price of a coin drops to, say, $100. The trader could then build up a sufficient position in the coin and then sell in order to pull the price below $100, while collecting the reward for trader liquidation offered by most DeFi applications.

“Most protocols offer 10-15% liquidation fees,” Omakase said. “Triggering enough liquidations would result in a liquidation cascade where a motivated player could simply hold a short position in order to take advantage of the subsequent secondary decline.”

Other traders simply profit from liquidations that they do not trigger. Nathan Worsley runs a host of bots – software – that seek out traders who are about to be liquidated and receive a commission for liquidating them.

“Recently the number of liquidations has been huge,” Worsley said in emails. “However, liquidations are not a continuous strategy, sometimes you go a week or more without significant liquidations. However, when liquidations occur, there are usually many at once. $ profit, so you’re ready for the big day or two where you might be able to make a million dollars at a time.

Its bots constantly crawl the blockchains, keeping a list of all borrowers using a particular app and scrutinizing the health of their accounts. Once positions are ready for liquidation, “it’s usually a battle to be the fastest and liquidate,” Worsley explained.

“I would push back against classifying this as an ‘attack,'” he added. “The reason is that without liquidations, you can’t have a credit market. So even though no one likes being liquidated, it is essential that people be liquidated in order to make the market and protect the protocol from insolvency.

Liquidations can be triggered after traders borrow from apps like Aave or Compound, and put up collateral – say, in Ether – that is usually greater than what they are borrowing, perhaps 120% of the funds borrowed. If the price of Ether drops, this collateral may now be worth only 110% of what the trader borrowed.

“Protect the Protocol”

“My job as liquidator is to protect protocol by closing your position,” Worsley said. “The protocol rewards me for being a liquidator to encourage this activity because blockchains cannot move on their own. protocol. In return, the protocol gives me $1,000 of your Ethereum collateral, plus a $100 “liquidation bonus” on your excess collateral. I made a profit, you’ve been liquidated and your position is closed, and the protocol itself has been protected against bad debts.

As liquidation targets become increasingly tempting in a tumultuous market, Omakase offers this advice: “Generally, everyone should stay safe, everyone should avoid the use of leverage.”

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