On paper this sounds reasonably OK, but when you examine the market structures it starts to fall apart quickly. There are 3 key problems with this; pricing, exposure, and collateral.
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Pricing is the big one, so let's dig in. The contract is going to trigger at a pre-defined time against a price set by a specific exchange (Kraken). This is a structural weakness that will absolutely be exploited.
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If I know exactly the time that the price is going to be set, I can set up a huge spike in trading to manipulate the prices exactly at that time to get the result that I want. If I unload a huge amount of Tether on Kraken to blow through the order book, I can drop the price.
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Just 12 months ago,
#ETH had a flash crash from $319.00 to $0.10 in a few seconds on#GDAX. Was the real market price for Ethereum really $0.10? Of course not, it was a clear example of how real-life markets are an imperfect reflection of the Market.https://www.cnbc.com/2017/06/22/ethereum-price-crash-10-cents-gdax-exchange-after-multimillion-dollar-trade.html …1 reply 1 retweet 5 likesShow this thread -
So I would hate to be Kraken, they have unwittingly become a target for order book manipulation. Remember that in the long term these manipulations don't affect the price, but when a contract triggers at a specific time the long term doesn't matter.
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How else are these contracts vulnerable? The FX markets had a standard that contracts would be valued at the market price in the 30 seconds before and after 4PM London time - a window called the 'fix'. Guess what happened?
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Traders would conspire to artificially inflate or deflate the price of a currency JUST within that window. Again in the long term it didn't impact the price, but at the very specific time when a contract was valued it mattered a lot.http://www.bbc.com/news/business-26526905 …
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But let's assume that CoinEx has solved those manipulation problems, and the contracts are working as expected. And then, one day, Tether is exposed as having very little funds behind it. Exchanges freeze trading. What is the price of Tether now?
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This is default pricing - and it's not as clean or as liquid as market pricing. Presumably there is some USD behind Tether, it will just take time to figure out who gets redeemed and for how much. Figuring out the fair price at default is exactly what
@Markit did for CDS.2 replies 0 retweets 6 likesShow this thread -
And let's not even discuss the possibility that Kraken de-lists Tether. and I'm out of space (thanks Twitter), without discussing collateral and correlation risks. I appreciate the concept of CDS on blockchain, but the execution is a disaster.
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I would actually love to hear your thoughts on the implications of Kraken delisting tether while contracts are active, given your background.
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