How to short Tether (USDT) with DeFi

In this post I will share with you the most efficient and economical way to perform a short on Tether (USDT), the stable coin which I believe it will collapse anytime soon.

Please be aware betting short on USDT does involve a lot of risk, not just the risk of betting on the wrong side, but there’s also leverage risk, timing risk, and most importantly technical risk too.

As much as I hate to, but when making this bet I have already prepared myself mentally to lose all the money I put into this, but if you are not then maybe you are betting more than you can afford.

Why Short USDT, the stable coin?

It’s not fresh news we knew that Tether limited, the company that issuse USDT have been avoiding proper audit for years, and any sane person would be able tell how shady this company is.

But why now? The acceleration rate of Tether printing USDT coin this year made me think we’re very close to seeing the largest exit scam in crypto space soon, more than 40 billion USDT printed in last 6 months, that’s 2/3 of the market cap of USDT that started in 2014.

Since this post is not about my opinion, if you are interested with the USDT thing, take a look at:

Why short with DeFi, not exchanges?

A few major reasons I wouldn’t make the short bet with exchanges are:

That’s why I rather use DeFi such as Compound and Aave v2 to short USDT, I rather put my money on a decentralized network than a centralized exchange, plus I get to earn interest instead of paying interest.

aave2 usdt short
Positive APY 1.15% for my short position

There is however a technical risk when using DeFi, as a non-programmer myself, we can only rely on third party audit to tell us whether the smart contract of these DeFi platform are safe or not, and it’s always not impossible some exploit to be found later that make us lose all the money.

If you fully understand the risk and decided to continue, let’s see how we make the short bet.

How to Short Tether on DeFi (Aave v2)

Shorting USDT is basically borrow USDT that you don’t own, with the collateral of other coins you own, then you anticipate the collapse of USDT so that you can buy it back later at significant lower cost and repay what you’ve borrowed and keep the rest as profit.

Here is the simple idea and step by step with Aave v2, but if you understand it you can do it on other platform such as Compound:

  1. Deposit your collateral coin, this could be ETH, USDC or anything else.
  2. Borrow as much USDT as possible
  3. Swap USDT into your collateral coin
  4. Deposit the swapped coin as collateral again
  5. Borrow more USDT
  6. Repeat as much as possible, but keep a buffer between liquidation and current debt-to-collateral ratio.

For those that need video that demonstrate how to deposit and borrow on Aave, although the video deposit USDC and borrow ETH, but the steps are same for any coin, just note that every coin have different interest rates, LTV and liquidation factor.

YouTube video

Now if you take a look at my previous screenshot you see that my collateral is ETH, that means not only I’m betting short on USDT, I’m also betting long on ETH, which might not be very ideal if you just want to short USDT.

I can lose money first if ETH have major correction before USDT collapse, if you do not want to worry about the price of your collateral coin, and just want to short USDT and anticipate the event of it collapse, then I would suggest using other stable coin such as USDC as your collateral.

Why I choose Aave v2 compared to the other DeFi lending platform?

If you take a look at there’s a few platform you can short (borrow) USDT, initially I started my position at Compound, then later I moved to Aave v2, there’s a few reason:

  • Higher loan to value (LTV) ratio and liquidation factor for my collateral, in this case ETH has 80% LTV and 82.5% liquidation factor, USDC has 80% LTV too and 85% liquidation factor.
  • Lower penalty on liquidation, 5% for ETH and USDT, which means when there’s a liquidation because your collateral value drop, half of your collateral will be sold at 5% below market price to repay the loan.
  • Only 50% of your collateral will be liquidate to repay loan instead of 100% (Compound too.)

Source for update info:

Dapp for CDP management

There’s some dapp that helps us manage our collateralized debt position, and the more popular one such as InstaDapp (the one I using) and DefiSaver.

Through the use of proxy contract they offer us the feature of deposit collateral and borrow USDT in one single transaction. Which help us save on gas fee.

Both of them also offer simulation with 100 ETH balance, which let you play around with their feature before putting your money into it.

I highly suggest trying out their simulation so you can avoid mistake when using actual money. In simulation you don’t have to sign any transaction with your wallet.

Let me show you an example of shorting USDT with InstaDapp simulation on Aave v2:

YouTube video

In above video I swapped the simulation balance of 100 ETH to USDC, and using USDC as collateral, because some people may just want to short USDT without betting long on ETH.

If you want to short USDT while also betting long on ETH you can simply skip the first step of me swapping ETH into USDC, and directly deposit ETH as collateral.

Note that you still need to make that initial transaction just to supply your collateral before you use other feature of InstaDapp.

You are also required to create a DSA (proxy wallet) the first time you using InstaDapp and transfer your collateral to that proxy wallet.

5 thoughts on “How to short Tether (USDT) with DeFi”

  1. “.. can buy it back later at significant lower cost and repay what you’ve borrowed and keep the rest as profit.”

    I guess the difficult part here is if Tether goes to 0, you are basically holding a massive pile of nothing in a sense correct? Can you short tether without the fundamental asset you buy back at a future time being Tether?

    Thanks for the write up????

  2. Thanks! Great article! I’ve often wondered how that might be possible. I have similar beliefs about Tether, but wasn’t aware there was a way to short it. This could be a really good trade!

    Can you explain more about earning interest? Is that’s possible then the trade has no carry! I’d love to get paid interest to short this scam!

  3. Thanks for the write up Joseph.

    I too, believe that USDT is horse-shit. However, it won’t be until there is a major correction, that things will become unstuck – IMO.

    So I would stick to using stable-coins.

  4. Hello,

    Thank you for this great article.

    AAVE only lets me swap my deposited tokens (not the borrowed ones). So I can’t execute Step 3 of the plan above (I am connected using Avalanche network as I found ETH fees too expensive).

    Could you please help with step 3 ?


  5. How did this work out ? The problem I see is that all of crypto seems faith based .. even now with 12% decline of BTC since start of year tether simply issues more tether. And it’s not clear how a run on the tether bank will happen where the exchange control outflow and would slow this down or manipulate supply to wether the outflow. I.e BTC probably has to drop to 1/5 to 1/10th it’s peak value before tether gets dislodged.


Leave a Comment