Key Takeaways

  • Patrick McKenzie shorted Tether without trusting centralized exchanges by depositing USDC and borrowing USDT on the Solana lending protocol Solend.
  • The trade involved selling borrowed USDT for USDC on open DeFi markets, planning to repurchase the depreciated tokens later to settle the loan.
  • During the November 2022 FTX crash, systemic panic hit Solana liquidity pools instead of Tether, forcing McKenzie to manually liquidate an underwater whale account 22 times.
  • Counterparty risk in DeFi shifts from centralized custodians to protocol smart contracts, cross-currency liquidity pools, and cascading collateral liquidations.

The Method

McKenzie's short trade avoided centralized exchanges entirely. If you believe an issuer like Tether holds bad reserves, holding a short position on an exchange like Binance or FTX exposes you to the exact counterparty risk you want to avoid. If the exchange halts withdrawals when Tether wobbles, you cannot collect your profit.

McKenzie structured the trade across decentralized finance tools:

1. Deposit collateral in a preferred token. McKenzie deposited USDC into Solend, a lending protocol built on Solana. USDC was a token where he had relative confidence in its backing and dollar peg.

2. Borrow the target asset. He borrowed USDT against that USDC balance sheet. Solend tracks collateral ratios algorithmically, calculating how far an asset can fall before liquidation triggers.

3. Dump the borrowed tokens immediately. McKenzie took the borrowed USDT to a separate DeFi swap protocol and sold it for USDC.

4. Hold the cash position. In McKenzie's words: “In my case, the specific use case was deposit USDC, a stablecoin that I have some degree of trust for, borrow Tether, use a separate DeFi program to sell Tether for USDC, wait for the price of Tether to decline, buy the now-cheaper Tether with the USDC, repay the Tether-denominated loan to Solend, profit according to the degree of decline less the net interest paid over the interval.” (play from 22:08)

The bet had an asymmetric payoff logic. As McKenzie framed it: “In worlds where you are right about Tether, you will make money and feel vindicated. In worlds where the DeFi protocol blows up due to any of a long list of causes, you'll get a great story of it.” (play from 15:39)

Where This Breaks Down

The trade broke down because systemic shocks do not wait for your specific thesis. In November 2022, the crypto market did not crack because Tether depegged. It cracked because FTX collapsed.

When FTX unraveled, contagion rushed across Solana. Liquidity vanished across decentralized automated market makers. Instead of sitting back and waiting for Tether to drop, McKenzie had to manage immediate operational chaos on Solend.

A massive whale account on Solend became insolvent as token prices plummeted. The protocol's automated liquidation bots froze under transaction congestion on the Solana network. To prevent bad debt from destroying the protocol pool holding his collateral, McKenzie had to step in directly. He manually triggered liquidations on that single insolvent whale account 22 separate times.

Every short position carries hidden dependencies. When you put on a borrow, you take on three simultaneous bets: the solvency of the lending protocol, the speed of the underlying blockchain, and the depth of market-wide liquidity pools. When an adjacent player fails, your clean trade becomes an operational emergency.

What to Do With This

Audit your company balance sheet for unhedged structural dependencies. Map every external platform or vendor where you hold cash, receivables, or critical infrastructure. If a secondary vendor in that chain suffers a liquidity freeze, identify the exact manual intervention you must take within 12 hours to prevent your own balance sheet from locking up.