[dia80]

Patrick McKenzie makes the usual smart person mistake of trusting their intuition on finance because it has served them well in other domains.

In this case the pertinent question to ask oneself a priori is: "if, as I believe, tether breaks down what are the chances that people will be defaulting on Defi platforms thus turning my clever trade in a catastrophe where I lose my principal?"

This is what traders call "wrong way risk" - your trade becomes self-defeating. An example.od this from real life is JPY cross currency basis swaps. A cross currency basis swap consists of 2 back to back loans in different currencies. Japanese investors have excess JPY and seek to convert it to USD via this mechanism so they can buy higher yielding assets in USD. Cross currency basis swaps attract a premium, in this case as the flows are predominantly lending JPY, the lenders get a lower interest rate than the prevailing market rate. The problem arises if you are a US or European bank and wish to do this trade with a Japanese bank. If there is a JPY crisis the premium will become even more negative as Japanese entities scramble to get USD in to meet liabilities by lending JPY. As the foreign bank you will have a mark-to-market profit on the JPY you lent but your Japanese counterparty may well be unable to pay due to the unfolding crisis in Japan.

[patio11]

> In this case the pertinent question to ask oneself a priori is: "if, as I believe, tether breaks down what are the chances that people will be defaulting on Defi platforms thus turning my clever trade in a catastrophe where I lose my principal?"

I am extremely aware counterparty risk in DeFi protocols, which is why I have a toy-sized position and only put that on once someone explained to me, persuasively, that in futures where DeFi explodes I will gain more utility from the story than I will lose from a toy-sized position. I have sometime sardonically referred to this as 'mining comedy gold.'

This is also why, when people ask me how to short Tether, I try my darndest to avoid blessing any particular mechanism, because you can be right and still lose everything, as you're aware. I have been saying that on HN since before DeFi existed as a concept.