By Olga Kharif BLOOMBERG
With crypto prices tumbling precipitously, traders have begun increasingly turning against one another to eke out ever-elusive profits.
Many shark traders scour blockchains — digital ledgers for recording transactions — seeking information on other traders, particularly those with highly leveraged positions, an anonymous user known as Omakase, a contributor to the Sushi decentralized exchange, said in an interview.
The sharks then attack the positions by trying to push them into liquidation, and earning liquidation bonuses that are common in decentralized finance (DeFi).
Related strategies may have contributed to the collapse of the TerraUSD stablecoin, with shark traders making money off price arbitrage between the Curve decentralized exchange and centralized exchanges, according to Nansen, a blockchain analytics firm.
As Omakase put it, “In a downtrend environment, where yields are harder to access, what we are going to see is some actors utilize some more aggressive strategies, and that may not be necessarily good for the community.”
With crypto prices under pressure, taking on leverage has 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 has been as high as 100X, meaning that people were able to borrow 100 times what they put down as collateral.
Most DeFi apps require traders to overcollateralize, however — effectively taking out less in loans than they put in.
A trader may find out that others could get liquidated when a coin’s price drops to, say, $100. The trader could then build up a sufficient position in the coin, then sell in order to pull the price below $100, while also collecting the reward for liquidating the trader that most DeFi apps offer.
“Most protocols offer a 10-15 percent liquidation fee,” Omakase said. “Triggering enough liquidations would cause a liquidation cascade where a motivated actor could simply hold a short position in order to profit for the subsequent secondary decrease.”
Other traders are simply profiting off liquidations they don’t trigger. Nathan Worsley runs a slew of bots that search for traders who are about to get liquidated and gets paid a commission for liquidating them.
“Recently the amount of liquidations has been huge,” Worsley said in emails. “However, liquidations is not a continuous strategy, you sometimes go for a week or more without any significant liquidations. However, when liquidations happen there are usually a lot at once.