I’m borrowing a coin on Aave that I feel could go down in price a lot. I sold it and re-deposited it as USDC collateral. What happens if it goes down 99%, or even gets DELISTED on Aave? Do I keep ALL the collateral? (Does anyone has experience from the LUNA collapse?)
Good question, similar scenarios have played before. I’ll try to explain my experience with it briefly. You can skip to bottom for short answer.
When a coin dramatically goes down, it creates panic among holders. So people start withdrawing their coins from money markets to sell on market. This leads to increase on borrowing rates to force more borrowers to repay their debts.
Borrowers have two options in this case. Either they can eat hyper borrowing rates and keep their debt open, if they think that coin will go to zero. Then they can pay their debt and keep their collateral. Or they can repay their debt to avoid high interest rates at current market prices.
Short answer, if you can hold your position open until borrowed coin goes to zero, you can pay your nominal debt at current price and keep all of your collateral.
This is literally what shorting something is. When you short an asset, you borrow it from somebody and sell it, knowing that at some point in the future you’ll need to buy it back and return it to them. The goal is to sell it and be able to buy it back later for a lower price. So what happens if the coin you’re borrowing goes to zero? You’ve successfully shorted it into the ground and made money, congrats.
You make money. Say there is a token with current price of $100. You borrow 1 and sell it, now you have $100. If the token goes down to $20 then you only have to pay $20 to unlock your collateral. So you’ve pocketed $80. That’s what a short is. You just have to make sure the interest rate for borrowing isn’t eating away at your profit.
I don’t think things get delisted that easily and if they do it’s probably cause it’s gone down in price a lot, so you just pay back your debt and close the short.
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Have a look at the Harmony market on AAVE.
This is literally what shorting something is. When you short an asset, you borrow it from somebody and sell it, knowing that at some point in the future you’ll need to buy it back and return it to them. The goal is to sell it and be able to buy it back later for a lower price. So what happens if the coin you’re borrowing goes to zero? You’ve successfully shorted it into the ground and made money, congrats.
Well, before it gets to zero, you’d have been liquidated long ago and paid off your loan. Then your balance would be zero. hahaha