Luna is a sideshow. Sad for the people who got caught up in it and lost their savings, but Tether is the real game. When Tether blows up the entire crypto system is going to blow up. And this is why Luna was important, because it caused a loss of confidence in stablecoins across the board. For a while this week, it looked like Tether might actually lose its peg and start a death spiral.
DISCLAIMER: Never hold Tether, for obvious reasons
That said, Tether can't pop the way LUNA/UST did. UST was basically propped up by the value of LUNA such that when the UST peg is lost, more LUNA gets printed to buy back the difference. This causes the LUNA price to crash when the peg is lost, so people who know better try to sell before the rebalancing, crashing the price further, meaning more LUNA needs to get minted for every UST burned, causing rapid deflation. This is all done in a smart contract, and can't really be turned off.
Tether is run by humans. Turning USDT back into USD requires actual human interactions. The peg can be lost, and maybe permanently, but it's not going to suddenly go to zero over night.
If Tether isn't redeeming fast enough for the traders who want to cash it in, won't the market price drop quickly in the meantime, due to the run on it?
Yes, the price would go down, but there's no way to fully deplete the backing assets as there is with UST/LUNA. Unless iFinex literally says "lol we took all your money and won't be doing any more Tether redemptions", there will still be some people with faith in the system, presumably hoping for partial redemptions.
Unless iFinex literally says "lol we took all your money and won't be doing any more Tether redemptions"
You mean like this insane set of requirements that makes it basically impossible for the average retail investor to redeem their USDT for USD? [1]
- $150 for KYC + verification, minimum transaction amount is $100,000
- U.S. citizens must be classified as Eligible Contract Participant to redeem USDT via the website (ECP = individual investors with more than $10 million, individuals with $1 million net worth, businesses, etc)
- 0.1% fee for withdrawals up to a maximum of $1,000, which means Tether is redeemable at $0.99 for up to $1 million
- Any individual who is a U.S. Person and any entity that is a U.S. Person is prohibited from using the Site or any Services, [...] Exceptions to this policy may be made by Tether, in its sole discretion, for Eligible Contract Participants only, which shall be customers solely of TLTD.
If you so desperately need to trade tether for USD as a retail consumer then you can do it on Kraken.[1]
A dozen other websites will let you trade it for other types of crypto, which is the entire reason for its existence.
I find it amusing why people get so hung up on this. They aren't a retailer where you can pointlessly spend your USD to buy USDT and vice versa, the people who first offered a similar thing spent years in jail.[2]
Not going to jail is a strong motivator to let others deal with consumers. They are a b2b service for exchanges to provide an dollar equivalent.
As long as there are actors in the system who can liquidate Tether at ~$1, the peg will be maintained. If it goes to 99 cents, those actors would buy and immediately liquidate for risk-free profit. Who cares if you personally can redeem them -- you don't need to, as long as someone can.
Whether someone always will be able to is the critical question, and there are certainly enough red flags that I wouldn't touch tether personally.
I care because I don't require an intermediary to withdraw my USD "IOUs" from a normal bank.
In the case of Tether these intermediaries that decide whether or not I get my USD (Alameda, FTX, etc) are located on the opposite ends of the earth stockpiling cash by playing trading games and have a vested interest in ensuring I don't get my USD, especially when they don't have the full capital to redeem. You know this will eventually end up in a redemption crisis that will be magnified by shady loans/guarantees that attempt to stave off a de-peg but eventually blows up.
That's really the problem with Tether, they want to be a bank without the regulation, backing, or standard courtesies provided by banks. Everyone will eventually learn their 1920s banking lessons all over again.
There's a question of what rate these traders are going to do this arbitrage in a bank run situation. To do the trade, they need to pay cash under the assumption they'll be able to get it back later. (How long? A day? More?) Their risk of losing the money might be low on a normal day, but not zero. What if today is the day things get weird?
So any trader is going to have a limit on how much cash they're willing and able to put at risk, based on Tether's promises. This limit may be lowered if things look iffy.
They do profit if they can buy at a lower price. It's only competition that keeps them from doing that.
Oh suddenly middlemen are fine. I thought crypto was all about cutting out the middlemen?
Also, even if you follow that premise, that someone should at least be independent of Tether. With so much of the classification "at their sole discretion", this seems questionable.
> I thought crypto was all about cutting out the middlemen?
No, there are hundreds of great use cases for cryptocurrency. The idea that every currency should do everything is ridiculous. Tether was specifically designed to be a tool for "middlemen" to avoid the overhead of dealing with the archaic US financial infrastructure.
If you want to be able to redeem a stablecoin directly to USD in a bank account at a moment's notice, use USDC and a Coinbase account or something. Those extra benefits come with extra risks, where certain organizations can seize your USDC at a moment's notice. If you need to move dollars between crypto exchanges, use Tether. US bank accounts and crypto exchanges are like cesium and water. They do not mix, and tend to explode violently.
The reason that multiple things exist is that there are multiple use cases, even for things that seem to an outsider like they are very similar. Tether, USDC, and DAI all have very different use cases, even though they all represent a dollar. This is fine. This is the way things are supposed to work.
This assumes that the backing assets: 1-actually exist in the claimed amounts, and 2 - are easily liquidated in a timely fashion to provide cash to USDT holders when they trade in. You can cause a liquidity crisis in USDT if either of those are not true.
The problem is the same as with other bank runs: when people withdraw and there are not enough reserves (lets say temporarily - for example when the reserves are too illiquid) the ratio of reserves to obligations diminishes further - so when people get suspicious it will get into the same death spiral - more suspicious -> more people withdrawing -> the rations become worse -> it gets more dangerous -> more suspicious. Eventually there will only be illiquid assets left and a fire sale will get a small fraction of value back.
But yeah - initially it should go slower than LUNA.
Oh good lord no. It's backed by something they originally said was dollars, they then relented after people poked around a bit and confessed it's just a basket of stuff they consider equivalent to dollars (plus probably some dollars I guess?)
You're forgetting the 6 trillion-dollar "IOU, I'm good for it, pinky swear" from Deadbeat Dave. I'm assuming that's what their commercial paper holdings resemble.
Most of Tether's MC increase has come since the pandemic started. Since then roughly $70B+ USD has been handed to Tether, who have used that $70B+ to purchase backing assets at heavily inflated pandemic valuations, corporate paper of suspect ratings, loans of USD for BTC at high prices, etc.
This all works if the assets are stable and inflation continues. If the assets behind Tether are deflating or turn to junk they'll increasingly be unable to redeem.
Part of keeping this going is not allowing average retail to redeem their Tether for USD (imagine a one-way bank where you can deposit but not withdraw) and working with the larger crypto trading shops to shore up short-term liquidity issues.
A partial asset backing is not necessarily a bad thing (fractional reserve banking), but banks are far more firmly backed and regulated by the USG and have FDIC guarantees. The longer assets deflate and recessionary pressures increase the higher statistical likelihood of an eventual bank run on Tether.
I am just waiting for the day Tether is attacked is some coordinated way like this which tanks the value. It will be chaos, unless USDC, USDP, maybe DAI can replace it before it happens.
It’s certainly possible but much less likely than the attack on Luna. Attacking Luna gives the attacker enormous amounts of profit shorting due to the catastrophic failure inherent in Luna/UST design. Attacking USDT requires much larger capital with much fewer profits and may even backfire.
The problem with Tether is that the exchanges themselves have huge stakes in it. If Tether were to lose its peg all of a sudden by a significant amount, the exchanges themselves would have huge holes in their balance sheets. They may refuse to allow redemption of any crypto during that period where they're trying to raise capital otherwise they themselves might go bankrupt. A liquidity crisis in Tether could cause a bank run at every exchange, which could take down the entire crypto ecosystem.
The funny thing is whenever people attacked tether in the past there was always someone who shilled UST because it was "decentralised" and "not a scam"
