Why USDT Actually Makes Sense For Decentralized Margin Trading
Liquidity is vital to Margin Trading.
Greater liquidity leads to tighter bid-ask spreads, lower slippage rates, higher leverage rates, and robust liquidations. Both the borrower and the lender greatly benefit from increased market liquidity.
The demand for decentralized lending, borrowing, and trading is strong. Despite liquidity challenges, Decentralized Finance (DeFi) has become an increasingly popular and rapidly expanding industry.
While DeFi trading volume is increasing, it is still currently dwarfed by centralized exchange volume. Liquidity is a commonly cited reason for this lack of market share. Prominent figures in the DeFi space are now voting to bring in more liquid stablecoins such as Tether (USDT) into the ecosystem.
https://app.compound.finance/vote — USDT is currently #2 on Compound’s voting to add new markets, with over 175,000 votes.
In this article, I will discuss why the desperate need for liquidity makes USDT a powerful candidate for use in decentralized margin exchanges.
Why Margin Trading Must Have Liquidity
In margin trading, the importance for liquidity is magnified even more than in traditional spot trading.
In both spot and margin trading, greater liquidity yields lower price slippage rates, tighter bid-ask spreads, and greater depths. These alone can make a huge impact on a trader’s profit/loss.
In addition to reaping all of the aforementioned benefits, increased liquidity also allows margin platforms to more safely offer higher leverage rates, further enhancing user purchasing power. More liquidity = more leverage.
Also consider that Margin Trading is inherently reliant on lending — without assets to borrow, there is no margin. Market liquidity is also critical to lenders as greater liquidity leads to more robust liquidations. A failed liquidation means a socialized loss for lending pools, so smart lenders should be cautious if their assets can be used on illiquid markets.
*The Poloniex CLAM fiasco is an example of failed liquidations on an illiquid market resulting a in a socialized loss for lenders. These BTC lenders probably had no idea that someone could use such a highly illiquid token like CLAM as collateral for their loan.
To summarize: in addition to price benefits, increased liquidity yields higher leverage rates for their margin traders and greater security for lenders.
USDT’s Liquidity
My case for using USDT in decentralized margin exchanges is largely based on the fact that it has drastically more liquidity than the current popular stablecoins in the DeFi space. Currently, Maker’s DAI is the most commonly used stablecoin in DeFi projects.
To be clear, I’m not arguing for the use of USDT exclusively. DAI provides a ton of value to the decentralized ecosystem — Maker’s DAI loans still dominate the decentralized lending leaderboards. It is the addition of other stablecoins alongside DAI which further enhance the depth of the DeFi ecosystem.
The image above compares market cap and 24-hour (reported) trading volume for USDT and DAI.
Liquidity and trading volume are often synonymous. Tether (USDT) has drastically more reported trading volume than any other stablecoin. At the time of writing this article, the reported 24 hour volume for USDT exceeds $20 billion USD, and accounts for approximately 33% of all reported daily cryptocurrency trading volume.
By comparison, DAI’s 24-hour trading volume is currently around $24 million USD. The difference between Billion and Million is large: USDT’s volume is multiple orders of magnitude ahead of DAI.
If liquidity is a hurdle for decentralized projects to overcome, adding in the most liquid stablecoin seems like a logical step. Despite the questionable reputation, USDT’s liquidity is undeniable.
All liquidity is helpful in this realm, it’s really the more the merrier. Coinbase is also contributing to the liquidity of the DeFi space through their USDC. They recently launched a fund designed to inject millions of dollars worth of USDC liquidity into emerging DeFi projects.
Ownership vs Speculation — Understanding Risk
Using USDT as a stablecoin actually gives users who don’t believe in it more power: if they truly believe that USDT will collapse, they can profit off of this.
Margin Trading uses one asset to leverage another asset. While trading is involved, a margin position is effectively just a speculation on an asset’s price. You typically only hold assets on one side of the market.
If you’re going LONG on ETH, you don’t own the paired asset. You just owe it.
This forms an important distinction between ownership and speculation. In forming a LONG ETH position, it doesn’t matter if your quote token is DAI, USDC, or USDT: you only own ETH for the duration of your position.
If the counter asset crashes, it’s actually beneficial for the LONG trader. The amount they owe just decreased in value!
Summary
Liquidity has been an ever-present challenge in the road for DeFi adoption. Using USDT in decentralized margin exchanges can provide drastic improvements to decentralized liquidity: allowing traders to reap the benefits of improved liquidity while circumventing any potential risk of holding assets they don’t believe in.
Want to learn more or try our new DDEX Margin Platform? Come talk all things DeFi with us on discord.
Thanks for reading!
