Tether Required Recapitalization in May 2022
kalzumeus.com
kalzumeus.com
That's been my personal conclusion as well but it led me to the next question of what # is the breaking point for these well-capitalized parties?
I tried looking at the size of other well-known collapses like Enron, LTCM, Lehman Bros, etc. LB reportedly had $700B in assets and liabilities before the underlying asset devaluation precipitated their cave in. Tether survived the recent de-peg due to trading shops like Alameda absorbing the free 1-5% with their cash flow, which I believe is also responsible for the recent 11% drawdown in Market Cap (I assume due to redemptions). That said I'm not really experienced enough to know how these backroom overnight liquidity issues get resolved.
My hunch is given the true global reach of the crypto market Tether could easily get to $nnnB or $nT before we experience a black swan event that results in a liquidity crisis. Assuming they survive these short-term recessionary pressures, my long-term prediction is we're just setting ourselves up for another roaring '20s again, with crypto eventually learning all the same fundamental financial lessons we did back then.
https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera...
This is a ticking bomb.
This is true for every pile of toxic crap that's ever been financially engineered.
The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)
Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.
Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.
I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.
The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.
> "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more
Great example. In 1958, the Congress banned "the trading of futures contracts on onions" [1]. By the 2000s, increased price volatility--which had to be borne solely by farmers and distributors--prompted "the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading" [2].
There is a middle ground between banning and a free for all. In the former, useful financial products and innovation is suppressed. Finance is about allocating real resources in our economy. Bad finance is bad. But on the other end, everyone steals everything, and investor self-interest gives way to the animal spirits we saw leading up to the Panic of 1907, the Great Depression, the S&L crisis, the Financial Crisis and whatever we'll call crypto.
[1] https://en.wikipedia.org/wiki/Onion_Futures_Act#cite_note-fo...
[2] https://archive.fortune.com/2008/06/27/news/economy/The_onio...
For example, bank prop trading bans went into effect but really how does one differentiate prop from “customer facilitation” or heding. Its a sliding scale of grays.
So instead of Citi having a trader going “I think I’ll buy some S&P calls today and bet on the index” he instead can only do that if 1) a client wants to sell some & he takes the other side, or 2) there is some other exposures accumulated do to customer facilitation such that he can justify buying S&P as a hedge.
The same risk is being put on, but for different reasons. Or you could say the only thing that is changed is who has initiated the risk - customer, instead of bank.
Futures of course exist for very good, historical reasons. How do people think their home heating oil company offers you fixed price contracts for the season, etc?
Reducing the number of players in a market usually only increases volatility, transaction costs and illiquidity.
Providing basic banking as a public utility so most deposits by individuals, local governments, and small businesses are not stored with investment banks engaged in speculation. Public banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel and prohibited from originating loans on security of state property such as money (which might be obtained via leveraged loan from another lender) or on security of common property such as excess real estate values attributable to land scarcity.
The problem isn't getting loans on one's crops. It's transferring the price risk to someone better able to bear it.
Farmers want a guaranteed profit when they plant. Loans don't address that. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.) The only real alternative is government guarantees. Those bring their own host of problems.
the problem isn't the existence of the futures markets, but the same kind of over-consolidation that corrupts every laissez faire market, making them inefficient and brittle in the long-run. if regulation encouraged primarily mid-sized firms, rather than a few large ones, we'd have better informed and more efficient markets, albeit less lucrative since the firms wouldn't have undue (read: corrupting) influence.
note that insurance is another alternative to futures or gov guarantees, though i'd question the need to externalize risk, which manifests a critical market-shaping signal.
The problem is excess credit available to financial firms engaging in leveraged speculation and financial services investment, resulting in financial sector employment and compensation that is super-proportionate to any real savings generated for non-financial producers. This leverage is enhanced by the lack of free (zero-fee) public alternative for basic banking services. It is not necessary for public banks providing basic banking services to guarantee profits for farmers. Provide savings, transfers, and liquidity loans at present values at what an option to sell existing previously planted crops would be worth might be sufficient to reduce deposits held by banks engaging in leveraged speculation. Providing basic banking as a public utility is the middle way the parent commenter advocated because it does not require banning anything.
This is just the finance sector subset of the larger problem of bullshit jobs. We know a substantial fraction of jobs are bullshit (non-value-creating), but which ones? I have a strong suspicion this is unsolvable because any metric you start using to decide which jobs are bullshit will instantly be gamed. The system will work as hard as it can to prevent you from figuring it out, and since it's made of people it is at least as intelligent as you are.
The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession, but unfortunately that also takes a ton of fragile but very innovative and promising things down with it. Recession is a bit like extreme chemotherapy. It might kill some cancer cells but it also kills a shitload of healthy ones and sometimes the treatment ultimately fails because it doesn't kill enough of the former to justify the latter.
Similar principles exist in other areas like advertising. There's a saying in the ad business: "I know I'm wasting 80% of my ad spend. I just don't know which 80%."
That is a very convoluted way of implementing negative yields.
Because people want to avoid losses associated with negative interests they instead do the inflation thing and pretend there are no losses, the discrepancy between book value and real world value grows ever bigger as the book value is not representing losses in the real economy. The moment sentiment even dares to look at a downward trend poof reality has come back from its slumber. Negative yield is coming out of hiding, all at once.
If I am a farmer and I want to lock in a price for my crops right now, who am I supposed to sell that future to?
Sure, a small percentage of the time, I can sell to someone who knows that they need my crops on exactly that date of delivery, but a lot of the time there simply won't be anyone who knows at that exact moment that they need exactly what I am selling.
Having traders in the system means that I always have a buyer when I want to sell (and similarly when a user of the item wants to buy).
>They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
So what? If, through the trader solely enriching themselves, we get something useful from it, why does their motivation matter?
A baker bakes solely to enrich themselves as well - this is the nature of capitalism. The end result is what I care about.
Any conman worth his salt can sell a lemon, a toxic financial product or snake oil.
In UK naive homebuyers bought leaseholds where service charge and ground rent increased EXPONENTIALLY every 10 years. They even had lawyers, and those greenlit the deal.
Or when banks handed loans to strippers and then sold the loan to 'investors' causing subprime mortgage loan crisis of 2008. S&P were meant to do due dilligence, the 'sophisticated investors' were meant to do due dilligence, but here we are
Measuring people by how much 'value' they bring to society is a real slippery slope, my friend
Good people as defined by a social credit system. I will decide what is a productive reason & what is the carbon threshhold!
People totally have the option of living under this type of government - it exists in top down centralized places like China.
Oh wait ...
I think for most rich people, having a lot of money means, as ironic as it sounds, not having to think about money.
Growing up fairly middle class and eventually making a lot of money once I made it out on my own, the types of tortured price comparison shopping & concerns that my parents made (and I did my first 5 years of career) are just not something I worry about.
Being able to just go to a grocery store and fill the basket/cart until I have everything I want (NOT need, and without checking every items price and cross checking every price option for every items competitors), and then pay whatever it rings up to.
Doing weird as it sounds things like - cross shopping a $40k & $120k car because, well, they both sort of hit different parts of my interest lists.. and maybe I just keep my current car + add the $40k, vs trading in towards the $120k.. or really.. who cares, just buy the $120k car anyway.
Being able to knowingly overpay for home repair/renovation contractors because they give you a much higher level of confidence, communication and convenience. We got 3 bids, the guy who was 2x the price of the other guys was just such a professional we decided to go with him. He was like dealing with a professional tech/bank project manager rather than a squirrel guy you can't get hold of.. He started on time, finished days early, went not a penny over budget and gave us start&end of day updates with plans of attack for the next day.
Meanwhile some of our friends who did not have budget to pick the highest bidder had contractors disappearing to do work on other houses, had to call their contractor daily to force him to show up, had guy starting the work day at 2pm and then taking an hour lunch break, and every other crazy home renovation story you hear where 2 weeks of work takes 3 months.
So for those outside the billionaire class, being rich mostly means not having to deal with the inconveniences of being on a budget.
you’re right, i much prefer to live under a decentralized government like the United States.
Small farmers hedging next years crop would like a word with you ...
... and there are one hundred examples just like that.
Did you ever convert foreign currencies in advance of an international trip when you saw the currency pair move favorably ? Have you ever bought an ETF ? Do you have a mortgage in the United States ?
All of these things are possible because of a highly liquid, regulated market with diverse participants ...
... which brings us to the obligatory Margin Call[1] quote:
"Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big fuckin' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really fuckin' fair really fuckin' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from."
The bank in Margin Call was packaging MBS out of mortgages, not speculating on the price of commodities using derivatives to gain leverage.
Correct. That's my point.
It's not merely that you can't have one without the other ... it's that you very likely wouldn't want to eliminate the (margin call guys) even if you could.
This is how things like 30 year fixed rate mortgages, low fee index ETFs, target date retirement funds, fixed price home heating oil contracts, every form of insurance, etc can exist in the consumer space.
In the B2B space you have all the companies with needs to lock in prices for future inputs in order to control costs & plan their own output pricing, etc.
All of this has greatly reduced the boom-bust cycle of the pre-Fed economy. As bad as 2000 or 2008 may have felt, they were nothing like the great depression of numerous 19th century recessions & depressions.
fields, mines and factories. we don't need anything else
I would point you to Stuart Banner's Speculation: A History of the Fine Line between Gambling and Investing
https://www.amazon.com/dp/0190623047/
Excellent coverage of the history of the attempt to make a distinction.
One day, people who think like you will come to power and decide that under their administration, [activity your livelihood is based on] constitutes “extracting value from the system” and is no longer permitted.
Maybe you are a golfer, or a restaurateur. But “what you’re doing is solely about enriching yourself.” Your fine cuisine is not feeding the poor. It is immoral to play golf while children go hungry. You have clearly become wealthy while doing nothing for the greater good.
They will come to you holding guns and demand that you cease your activity, and hand over your “wealth” - maybe your house, your savings, the food in your pantry, the clothes on your bank, maybe your wife or your daughter.
“We will take back for the People what is theirs” they will say. If you refuse, you will starve in prison, and they will take your life anyway. If you accept, you will starve in the street.
Would a company controlled by their own workers choice to funnel parts of their profits to wall street traders? Probably not. Would there be any money to be gained on the stock market in such an environment? Probably not.
So a natural question to ask then is. What value is there in the stock market which does not rely on money being siphoned away from workers?
In efficient markets profits trend toward zero so having more traders will accomplish that goal better than banning traders. It is the same with interest, interest goes to 0% if there is enough saved capital to fund all investments banning interest makes it harder for the interest rate to go down.
It would be better if we built an economy that can handle low amounts or even zero profit by eliminating the dependency on yearly growth.
LOL yes I am assuming some sarcasm here. Sticking ones finger up to the man by.. holding cash equivalents in forms not eligible for FDIC insurance, yes!!
Me reaping the whirlwind: this is not what I was told to expect! It's just what I put in, but more whirly! Huge disappointment.
But tether only works if backed by well-capitalised entities, i.e. the Man, so you are sticking what?
Buy Iranian government bonds, Venezuelan government bonds, Bolivian government bonds, etc
Will you get a return? Not all that likely (not unlikely either) , but you would indeed be sticking it to "the man"
Buying tether? Ha heck no
Even if buying a bond issued by an unfriendly nation isn't illegal at a given moment, you might find yourself forced to divest if relations between your country and the issuer sour. I'm sure a few people who held Russian sovereign bonds lost their shirts when sanctions were levied and they had no choice but to dump their assets.
In the absolute worst case (e.g., if you held Japanese sovereign debt in December 1941 or Afghan sovereign debt in 2001), holding a bond might be grounds for you to be charged with treason or sponsoring terrorism.
How exactly do cryptocurrencies finance their DeFi yields to their investors? The only way I can think of is with the money of future investors, but that is a pretty blatant Ponzi scheme.
These DeFi yields must be funded in other ways than just loans.
Which is exactly how protocols like Compound work, although 'governance tokens' are also issued simply for using the system.
> These DeFi yields must be funded in other ways than just loans.
Which? DeFi stands for Decentralized Finance, which pretty much means the rules are easily available - as long as you talk about a specific example, not spherical cows.
Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.
EDIT: I went on a little scouting mission on google (well DDG actually) to find out if I could borrow some USDT on the Compound and how much it would cost me. But I mostly came across articles explaining how you could make money by doing the opposite (buying Tether and lending it), and numerous dashboards with all sorts of hard to understand data with the prices of various cryptocurrencies and some rates I couldn’t understand. I suspect that the only people borrowing USDT are actually also speculators that are invested in the cryptocurrency market (perhaps they are trying to short it).
USDC is at 2.3% APR, USDT 3.78%. I think you'll find that most people cannot obtain unsecured loans that low, and the forms of collateral a bank will accept are much more limited. The biggest reason is also the reason why people like Elon Musk have massive loans: avoiding taxes on realized gains.
https://compound.finance/markets
> Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.
Sure, just like how "startups" are actually Ponzi schemes with early investors preying on the later ones. Same people owning it, too!
That said GP’s claim was that these yields are “much better "passive" interest than bank deposits or treasuries” however that doesn’t seem to be the case for all but few of the currencies. I get better interest rates at my credit union. For those currencies that are actually yielding higher interest (USDT being one of them) are also being borrowed with higher interest then loans at my credit union. So I think GP’s claim is simply wrong. Yields are only higher if you offer your money in a lending scheme with abnormally high interest.
As for who takes these loans. I don’t see that though. You need up to 2× the loan amount as collateral in an asset that is already as liquid as the cryptocurrency you are getting. Normal people would just use the money they already have and pay 0% interest, not put it up as collateral so they can borrow half that amount. I don’t even see how this could even be used as a tax evasion scheme because the collateral is equally liquid to your lending amount and should be under the same tax clause. The only use case I can see are speculators. And the only way to make these higher yields, is if a speculator makes a financial blunder, which is not sustainable either.
aka obfuscated
does the yield come from anywhere other than funds deposited by new users?
The 2 sources I mentioned above are essentially flows that accrue during the bull markets. It's not magic, when people want to long assets they borrow stables. If you lend into these markets you'll get the yield. With liquidity pools you can get some transaction fees even during market volatility and draw-downs, in the short term at least.
Unrealistic yield is one of the hallmarks of a ponzi scheme. The DeFi yield opportunities require more money to flow in than to flow out.
Apple stock, for example, pays a dividend that is not dependent on more people buying Apple stock but on the company profits for the next quarter.
Not exactly. In DeFi they just give you newly printed tokens. That's the "yield". Why wait for money to flow in when you can instead print it at will.
"stable" coins... yes, that's been an interesting ecosystem lately.
> access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries
Not to mention much greater risk of losing everything.
When you deposit your Tethers somewhere, you're taking an additional risk, namely the risk that you might not get the deposit back. The interest that you get on deposits is compensation for taking that risk, but not for the other risk.
https://www.investopedia.com/ask/answers/08/george-soros-ban...
That, in and of itself, is worth a lot -- potentially even more than having a large military.
They are so unbelievably powerful it blows my mind.
I think most of UK public would consider that a prime minister that plans using nukes in offensive capacity belong in a padded cell.
https://worldpopulationreview.com/country-rankings/military-...
At #5 world-wide by expenditure this may be a bit over-stated. Or else "vast military" is just a standin for "US or China".
Beyond the nukes another comment mentioned, the UK is also a permanent UN Security Council member, a founding NATO member and a productive member of the Five Eyes and AUKUS [1]. And it still has the world's fifth most powerful navy [2].
> substantial colonial possessions
No, but they have overseas military installations in Gibraltar and on Cyprus, the Falkland Islands and Diego Garcia. Smaller installations at Ascension Island, in Singapore and Brunei "provide important staging posts and logistical support facilities for British and allied forces passing nearby" [3]. In terms of practical force projection radius, they're in a very small club of nations.
[1] https://en.wikipedia.org/wiki/British_Armed_Forces#cite_note...
[2] https://worldpopulationreview.com/country-rankings/largest-n...
[3] https://www.europarl.europa.eu/meetdocs/2004_2009/documents/...
Roughly half of USDT is circulating on Tron, which is a dead chain. This TRC20 Tether is almost exclusively used for inter-exchange transfers (since fee is capped at $1/transaction)
On Ethereum, USDC is now bigger than Tether. Over a month, Tether on-chain supply has dropped nearly 12% [0]
Crypto risks are highly correlated. The ability to bail out Tether is not a given.
Oh wait, I'm just getting word that Tether isn't a bank. I wonder what ratio you can have if you aren't a bank?
Weird to think about because I thought that it was very illegal to have an unregulated bank. Oh well, I'm sure nothing bad ever happened before bank regulation.
There's a nuance here.
If Tether IS full collateralized, then it does not matter since a run on Tether is by definition impossible.
If Tether IS NOT fully collateralized then it may or may not matter depending on the size of the run and the ability of Bitfinex etc. to contribute capital.
Nothing lasts forever, especially in cryptoland.
Doesn't that make Tether a fiat currency?
More examples: Metamask, Moralis, Blockchain.com, Kraken, Binance
This reads like the honest description of a Ponzi scheme.
As long as the originating parties, or newbie rubes, continue to prop up this sham it will not collapse.
This is misleading. Tether has consistently traded between $0.998 and $0.999 between May 13th and May 20th. See https://coinmarketcap.com/currencies/tether/
Is it trading at 0.1% lower than it was before the Terra USD collapse? Yes. Has it "lost its peg"? No.
Completely. For context, "the Reserve Primary Fund broke the buck when its net asset value (NAV) fell to $0.97 cents per share" [1].
[1] https://www.investopedia.com/articles/economics/09/money-mar...
The goal of Tether is a little different. One USDT is meant to be worth one USD. It's just as much a problem for the purposes people use it for if USDT is trading above one dollar as below, because they're paying more than its value. That is, the Tether peg is meant to be two-sided, both above and below, and all that's happened is that it's gone from trading at slightly above the nominal value to trading slightly below it. That's not really "breaking the peg" in any meaningful sense.
Tether is supposed to be a safe non-interest bearing instrument. (Its promoters just keep the interest.)
I am no fan of tether, but small fluctuations like this have always been normal for "stable coins".
Longer comment: https://news.ycombinator.com/item?id=31449400
Remember this is the price on the secondary market, and these are just random people who see the price and then shuffle money around so they can buy a dollar for 99.9 cents. Anyone can do it (if you can stomach exposure to USDT of course). So if the system is working properly the price should generally hover within $1 plus or minus the cost to move money, but there's nothing keeping it at exactly $1.000000.
most liquidity tends to aggregate on dexes like Curve, which is also where you could have seen the whole LUNA/UST debacle play out in real time as large actors swapped out of UST into USDC/USDT/DAI
Sidestepping the definitional issue, I certainly worry when a pegged asset trades at a persistent discount, even a small one, when it didn't before. A stablecoin should generally trade at a premium just as often as it trades at a discount. When one goes long periods without ever being above, that is a strong signal. And when everyone panics, that's exactly when it's too late to get out. You have to beat the rush.
Remember, even up until the morning of May 9th, the day of the real TerraUSD depeg, people made that exact objection. "Oh come, on being 0.1% off is normal for stablecoin." Indeed it is -- but not in a persistent fashion!
Disclaimer: I closed out my Tether longs last week.
I had also held a small amount for online purchases.
More generally, the reason to hold a stablecoin rather than a "real" dollar is because you need the former in order to interface with smartcontracts on blockchains. Also, to buy from merchants who sell goods for stablecoins because they're in a grey market that banks don't want to touch.
Side note: I don't know why people keep asking that question -- it gets asked and answered each time this topic comes up e.g.
There is Gemini USD - similar story.
There is DAI if you are long on ETH/BTC and still want/need liquidity.
Curve has a pool without USDT (cDAI/cUSDC).
Uniswap lets you make any type of pair. On its heyday (before v3), I was providing to DAI/USDC and I was getting 2% returns per month.
So my question is: why USDT, when there is a handful of better stabletokens that can be used for the exact same purpose? If it is common knowledge that Tether is not to be trusted, why would any honest person still use it?
https://news.ycombinator.com/item?id=31422545
https://news.ycombinator.com/item?id=31417134
https://news.ycombinator.com/item?id=31412835
My comment was answering a question about “why stablecoins at all”.
To answer your question, because some uniswap v3 pools with USDT offered competitive returns, like the 0.05% WETH/USDT one. That was one of many I used, which included those that paired DAI or USDC with ETH.
I considered the concerns overblown at the time and so was okay with making some the USDT pools a part of my LP portfolio.
I’m honest.
Honesty is not just about "I wasn't the one profiting from the bad thing". It's also "I'm willing to call evil/immoral for what it is".
And I wasn't comparing in terms of returns. I just pointed out that there is no real use-case for USDT that can't be served by the other tokens, including yield-farming in liquidity pools.
That makes the peg loss seem significant
It’s seeing the redemptions that show it is significant
A peg is a peg, it's supposed to be more or less certain.
USDT maintains its peg by allowing certain entities to redeem USDT 1 to 1. How much USDT's price fluctuates depends on how well that mechanism works, and market conditions.
Are you just making stuff up? There were $10B worth of redemptions only last week.
Documenting a redemption would involve using the official redemption mechanism where you redeem $100,000+ at a time, pay a $100-$1000 fee, get a wire transfer from Tether etc. If you can find anyone ever documenting having done that, let me know
But, what I said was it’s never been documented.
* Does he buy Tether at par or at a discount?
* Can he redeem when he wants, in any quantity, or do they have arrangements?
* Is he redeeming for dollars or in kind? Terms allow for latter
* Does he buy with dollars or with commercial paper?
I do not believe he has shown material which would let us answer any of these questions
the 'fee per fiat withdrawal' is 'The greater of $1,000 or 0.1%'
so it would theoretically make sense for the peg to be 0.1% off as there is no more profit from redemptions at that level.
The $0.99 Only Store could do stable coin. You could even redeem your coins for items in the store!
This non-linear relationship is literally programmatically hard coded in the case of money markets such as curve.fi
Currently the largest money market pool (https://curve.fi/3pool) it has a 5:1 USDT:USDC imbalance. In dollar amounts, the pool contains $1b USDT and $0.2b USDC.
This 5:1 imbalance only gives way to a 0.1% de-pegg.
In the past the balance used to be perfectly 1:1 USDT:USDC. The fact that a multi-million dollar arbitrage opportunity still exist is worrisome.
There is more money to be made on the gravy train of providing liquidity for trades, yield farming, etc. than in trying to short Tether and potentially bleeding out before it goes bust.
Dai is an ERC20 token on top of Ethereum. It might be more accurate to say Dai is a stablecoin coupled to MKR (MakerDAO), a governance token. Dai is over-collaterlized.
https://makerdao.com/en/ https://developer.makerdao.com/dai/1/
Terra is a coin with ticker LUNA, and is coupled to a stablecoin UST. As I understand, LUNA/UST was under-collateralized and could not handle what was essentially a virtual bank run.
Tether is a centralized stablecoin that is also reported to be under-collateralized, but it has bridges and industry connections to the wider crypto market which has kept it from crashing and burning so far.
More importantly, DAI is overcollateralized using ETH and other coins. UST was algorithmically pegged to the USD with an implicit backing by Luna. DAI still technically has a depeg risk (e.g. if ETH has a flash crash of > 50% that it doesn't recover from) but the risks are much lower. It's _probably_ safe in the long term although my stablecoin of choice is USDC.
Its trading at $0.99974 and has gone over $1 several times just today and over the last week. Which definition of peg matters here? Its not causing mass liquidations in Defi platforms because it trades so close to peg, it is still redeemable for $1.00 if you are non-US and have over 100,000 units.
This article has percentages for everything except when they don't reinforce the universally negative view of tether.
Is there another source that is less invested to corroborate everything more accurately?
Its kind of stupid to observe something different and be seen as “pro tether”, but lets just stick to accuracy.
If there was no leverage, then yes, a 1:1 backed stablecoin would hold it's value.
EDIT: I mean the story here is far from clear, you also need to consider arbitrage bots that act between exchanges, etc. etc.
If they engage in fractional reserve issuance (which it appears they do) then all holders of the coin will be subject to losses if they can’t cash out before the reserves run out. Pretty much guaranteed run by that point.
edit: more likely held by some holding company controlled by those two companies.
https://ag.ny.gov/press-release/2021/attorney-general-james-...
> In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’
> On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
An attestation tells you what the bank balance is. An audit tells you where it comes from, who has claim on it, etc.
Is that a guarantee? No, but I don't understand why anyone would use USDT instead of USDC.
[edit: s/UST/USDT]
> No, but I don't understand why anyone would use UST instead of USDC.
That's fair, I just don't understand using either.
It's only ~$0.2B of a ~$160B market, though.
The usual expectation is that arbitrage opportunities vanish as the rush of risk-free profit takers closes the price gap. As such, it doesn't matter what other participants are in the market; the arbitrage buyer is always going to be the best bid below 1.
You might see temporary breaks from the arbitrage-free price due to liquidity (e.g. in a thin market, there might not be enough buyers initially).
If you keep selling, you'll eventually get to a situation where no Tether are in circulation, but every last Tether will sell for ~1.
How do you get the idea that leverage matters here?
If you're long on an asset and are not lending it out, neither short selling nor leverage can hurt you with a fully backed stablecoin – you can always just go to its issuer and redeem it.
As an analogy, consider owning shares of some publicly traded corporation. No matter what happens on the stock market, this doesn't impact your ownership of the actual, physicaly corporation, which entitles you to dividend payments, a proportional share of its assets when liquidated etc.
Let’s imagine that I have 1000 cans of beer in my warehouse and I give out 1000 tickets to exchange for a beer.
Let’s further imagine you have infinity dollars to “break the peg”. So you buy tickets, trade tickets, give them away for free after re-buying them… doesn’t matter. As many times as you want.
Everyone who has a ticket at the end can still visit my warehouse to claim a beer — no matter the financial manipulations you engaged in.
If I start with 1000 tokens I distribute and 1000 dollars in my vault, no matter what you do with the tokens, I can exchange a token for a dollar — because your manipulation of the tokens doesn’t remove dollars from the vault. Those only change when: 1. I receive a new dollar, so issue a token; or 2. I destroy a token and release a dollar.
“Shorting” doesn’t impact that: if you borrow someone’s ticket, then sell it for $0.85, that doesn’t create a new ticket — there is still one ticket and one beer… and one IOU. What happens to the original owner is either the borrower buys a ticket back and returns that (canceling out the IOU) or else that original owner no longer has a ticket — they’re owed the value of a ticket by the borrower.
In the case of tokens/dollars, that value is easy to assess: the person borrowing your stable coin token who fails to return it owes you $1… but that doesn’t come out of my vault, because you don’t own a token. You’ll have to get that $1 by suing the borrower over failure to deliver.
Typically, people who want a 1-1 backed coin are uncomfortable with that model… so you instead take profit on the issuance: you charge $1.05 to issue $1 in tokens (while keeping $1 in the vault) — a process called seigniorage.
0: The tweet: https://twitter.com/patio11/status/1241551327743770624
The, ah, assertion: https://twitter.com/patio11/status/1241553311024603140
> I am materially wrong about the most consequential thing I've had to have a view on in 15 years. You should probably degrade your estimate of my ability to think through complex problems.
The prediction: https://twitter.com/patio11/status/1252584289486565377
which is a link to https://www.kalzumeus.com/2020/04/21/japan-coronavirus/ , which states, on April 4 2020:
> Japan will face a national health crisis within a month.
Of course, he then edited it with a framing in which he claims:
> The core result was correct.
> ...
> This prediction was correct.
So not only was he wrong, he refuses to acknowledge or understand how and why he was wrong. And continues to tweet hashes as though we should give anything he says any merit whatsoever.
(spoiler: they didn't)
Further, it's apparently a very common thing in cybersecurity circles (though I've worked in cybersecurity for a decade and don't recognize the idiom, but my experience is more in software dev than research), so I don't really get why he'd stop even if he got a prediction wrong.
There's a lot of doomsaying around it, but after seeing the crypto market shrug off the loss of Terra Luna without contagion or bailout ala GFC crisis, the fear may be overblown. Terra was backed entirely by hot air, whereas Tether is mostly backed. Wouldn't the net loss be similar or even less?
By moving to a pseudo-dollar like Tether, market makers can hang out while they wait for a suspect better buy-in price in the future. Should pseudo-dollars go way, they actual-Dollar transactions get a taxable haircut. Additionally, the friction of going from actual-Dollar to Bitcoin increases.
Tether is effectively behaving as a crypto-clearing house with their pseudo-dollar.
Maybe in US, but not everywhere. For example in Poland where I live crypto to crypto transactions are not taxable.
1. Anyone holding Tether tries to cash out. Whales and important customers are allowed to redeem USDT for USD at a 1:1 ratio. Tether sells its crypto and other assets to cover redemptions, driving down the price of those assets.
2. Eventually Tether limits the withdrawals.
3. You're stuck with Tether you can't withdraw. What do you do? Try to exchange it for BTC or ETH ("blue-chip" crypto), which you can then hold or cash out on an exchange that is USD- or USDC-denominated.
4. Any exchange with Tether-denominated crypto prices are going to see those prices EXPLODE as there will be no sellers of the crypto. So you'll see some sort of weird market where BTC on Bitfinex costs $500k but BTC on Coinbase costs $10k.
5. If you're still stuck with Tether, you lose all your money or everything gets tied up in court a la Mt. Gox.
EDIT:
Fun potential #6 - if you're holding crypto on an exchange with Tether exposure, they may not allow withdrawals. The holder of the private keys may seize your assets to cover their debts.
Not sure how likely this scenario is, but even Coinbase (about as regulated as it gets in crypto) recently admitted that its bankruptcy could wipe out user funds: https://fortune.com/2022/05/11/coinbase-bankruptcy-crypto-as...
That being said, from an outside observer, the crypto market does not look healthy right now, and Tether is part of that. The safe guess is that the crypto market hasn't reached its low point yet, and its impossible to say if it will ever get back to November 2021 levels again.
Well that would not be good for Bitcoin and the entire cryptocurrency market would it?
I've not seem credible proof that Tether has even 50% backing, especially 50% backing in uncorrelated assets (since if the holdings are in other crypto, those holdings will likely all take a dive when Tether does).
I don't pretend to know. I am asking if that might be the case.
https://en.wikipedia.org/wiki/Harvey%27s_Resort_Hotel_bombin...
There's definitely outflow. Tether's reported market cap peaked at $83 billion in early May, and now it's down to $74 billion. So at least 10% of Tether has already been redeemed. There are other major stablecoins now, so nobody has to use Tether.
This is one of those things that will look fine, until it doesn't. As has now been demonstrated several times, stablecoins have only two stable points: 1 and 0.
>"It is well-understood in the cryptocurrency community that Tether’s reserves are a polite fiction. If pushed on this, clueful members of the community, such as their co-conspirators, will (quietly) admit that Tether depends on a de facto guarantee of support from members of its consolidated group, such as Bitfinex, which can inject more equity at will.?
Can someone say what is meant but "its consolidated group"? Is this a loose alliance or something more formal?
Of course, panic would happen, but still. I think people would move on, forget, and continue believing whatever they want to
just curious to read counterarguments
Let's say you want to actively trade ETH against the USD. If you think ETH will go down the you want to sell it. Now if it's in a non-custodial wallet that you control, you would need to send it to an exchange, sell it, then hold USD on the exchange (were you have no control of it and they can seize it for fraud investigations, etc. - basically your money is held by a 3rd party).
Instead you can "sell" your ETH by trading it for a stablecoin pegged to the dollar. This way the only risk is the contract for the trade (which can be publically audited) and your money stays in your control.
Or if you wanted to accept cryptocurrency as payment but still only wanted the USD because of it's stability - you could accept that (this isn't very common as gas fees are rather high).
tl;dr - With exchanges a 3rd party has your money and a IOU. Coinbase has already said user crypto could be at risk in the case of bankrupcy. De-Fi removes this risk while still allowing you to trade against the USD.
disclaimer - Whether you want to do this might be a different question, just giving the reason for wanting a stablecoin.
edit: For those saying taxes - the US IRS still counts this as a sale and it's still taxed the same as an exchange trade - other countries might differ. Given the KYC/AML requirements and lack of general public knowledge about anonymity of crypto - I think sooner then later we'll see a crackdown.
It’s plausible that there’s less than $80bn of USD in the crypto market and so tether could well represent every single dollar available. I don’t know if I’d argue that is the case, but it’s certainly plausible — and so it’s easy to see how a collapsing tether could take down the entire market, or at least, represent a far greater threat than the ~5% it represents in market cap numbers.
it feels odd to speak about this scenario like it's a foregone conclusion.
Not really.
> I’ll do it—don’t need your approval, really
Mine? No. You want a title to go with that house ? Well then, yeah, there are some third parties whose opinions matter.
The workaround is to put everything on exchanges, but then you've lost the decentralized nature of Bitcoin and you are back to just a central database owned by a company, AKA a bank.
Besides, Coinbase/Circle is already miles ahead in this race for institutional credibility.
And anyway, your cheap jab at Coinbase has no comparison with Tether. Circuit breakers are not an invention from crypto exchanges. Besides, they also are one of the investors in Uniswap, which lets you trade without any middlemen.
https://www.cnbc.com/2022/05/02/greenwich-mansion-for-sale-w...
Legally though, the transaction still has to be recorded and taxed in USD.
The only unconditional claim I saw was that Tether will lie again. Am I missing something?
This one is a bit more interesting:
> Tether originally promised to back the reserves with cash in a bank account. This was a lie. It was a well-chosen lie, because the value of cash does not routinely fluctuate. Backing a fixed liability with volatile assets and a wafer-thin equity cushion would have the predictable result of causing the liabilities to become unbacked in many stressful situations for any of the backing assets.
What's interesting is that I'm not sure many banks would want to hold the cash, regardless of the source.
When a bank receives cash deposits it has to do something with it. The money doesn't sit as bank notes in a vault.
The bank has a problem. The cash becomes its own liability. The depositor can withdraw the cash at any time and the bank needs to fulfill that obligation. And a lot of cash means a lot of obligation. So the bank desperately wants to turn the cash liability it faces with a deposit into an asset (i.e., somebody else's debt).
How do do that?
Banks are highly regulated on this point, especially post-GFC. There aren't a lot of options. What they'd like to do is issue loans to high-quality borrowers at profitable rates. But if the quality of borrow is going down the tubes (it is) and interest rates are at historic lows (they were), they would rather not do that.
Treasuries are an option. But the demand for short-term treasuries has been so intense that yields have been driven down to absurd levels relative to other instruments.
All of which is to say that the very idea of a US dollar-backed "stable" coin may not be possible for any entity other than the US Federal reserve or the Treasury.
And this defeats the entire purpose for Tether holders. They can already park cash at a bank. They hold tether to be out of the US banking system jurisdiction.
And yet, users out there are holding a total of $73 billion worth of Tether.
Who are those users holding Tether? Who wants to hold Tether? What's the motive of Tether holders? What market need is Tether addressing, and how can that need be addressed while avoiding Tether's issues?
Doesn't DAI work toward basically the same market need as Tether, but in a way that's actually decentralized and actually has checkable reserves? Why don't people desert Tether for DAI?
If we held the industry that Patrick works in to the standards that Patrick wants to hold the crypto world to we would call all of them "scams". Basically every international bank has a long history of money laundering. Every single large bank is doing much more complicated and riskier things with their balance sheet than Tether.
I don't think they are scams but I don't think Tether is either.
In many ways this is just the crypto world leveling down to the level of sketchiness that the average large bank exists at. Which is really not a defense, I dislike those banks and I dislike and distrust Tether.
But I don't think the risks of some kind crypto solvency contagion event are even as high as what's going on in the traditional banking world right now and that is given that traditional banks balance sheets at least on the surface are in the best shape they've been in in a decade.
Any way tldr: I think Patrick is technically correct but framing the large picture according to a big double standard.
Ignoring that, it's still about the farthest thing from a "circular economy" imaginable...
I can't really imagine any motivation for buying milk in this fashion unless I'm seriously into tax evasion. So good luck buying day to day shit with gift cards once you've had to move to El Salvador to evade the IRS... Which is incidentally one of the jurisdictions bitrefill.com is incorporated in.
Since most of the USDT is owned by big exchanges who need it to provide liquidity and have no interest in crashing the crypto market, I don’t think this is likely to happen.
These events ultimately lead to the creation of the Federal Reserve for banks to participate in a semi-cooperative system that didn't devolve into save-yourself during times of crises.
The story here is that "unless there is a massive run" is actually a fairly common event.
I'm not saying that Tether the company is not shady. They should definitely be more transparent about what assets they are holding and their collateralization, but I think the risks of total collapse are largely overblown.
As an exchange, if you keep some reserves in USDT and you think it might collapse soon, you might have an interest in dumping your positions before it completely loses value. Maybe exchanges would benefit from responding to such a situation collectively as you suggest, but I think it's likelier that they will just protect their own interests as individual entities.
At some point, total collapse of Tether’s pseudo-dollar will happen when the revenue generating exchanges feel they are support bad-money with good. All it takes is one player signaling a lack of support, and others stop supporting as well.
It’s a human psychological problem that’s a old as time. Think crypto can win over human rational to preserve self-interest? (side note: manipulation of self-interest is the goal of “weak hands” / “diamond hands”)
Tether is NOT a bank. They are not regulated and have no guarantee that depositors will be paid back. They promise a 1-1 backing and instead of people holding them to their promise their supporters desperately try to compare it to moderns banks.
No. Tether is not a bank. It is not doing fractional reserve banking. It is committing fraud. It’s that simple.
Tether is not a bank. Not in the US, not in the Cayman Islands, not anywhere. Everyone holding or trading Tether could be using a test network, and the monetary value of the token should be the same.
"So you have this Monopoly money backed with a real dollar?"
"Yes"
"Can I see the dollar?"
"No"
So if a well-capitalized arbitrageur can buy a million USDT at a price less than 0.999, they can redeem them for a profit, as long as Tether keeps honoring redemptions.
I think that at this point, these risks are priced in by the market (Tether is selling at a discount from USDC). If you disagree with the market, it is your speculation, and also an opportunity to get rich if you are right. For example, the FTX exchange offers Tether put options as well as the ability of shorting Tether, and there are many other similar products.
There isn't any real visibility into the balance sheet, but I'd guess most of the "collateral" boils down to margin loans issued at the exchanges, and since the house has the edge on those platforms, their ship stays afloat.
A FRB is a bank where deposits exceed liquid liabilities (cash), but do not exceed liquid plus illiquid liabilities (cash + investments).
When deposits exceed liquid and illiquid liabilities you can't operate as an FRB. Because you are insolvent.
But this is all irrelevant, because Tether isn't a bank. Your bank promises that you can withdraw your deposit. Tether does no such thing - it provides withdrawals as a courtesy. If Tether doesn't feel like letting you withdraw, it's not going to let you withdraw.
If we take a step back and look at the key takeaway from the audit report is that amount of commercial paper was reduced and amount of T-bills (essentially cash) was increased by 5 bil. Good news if you think solvency is an issue, but of course they're all scoundrels eh?/s
Tether might have done shady things in the past as the article, but the scale to which Tether operates now (10s of bllns), in addition to scrutiny from SDNY, external audit, etc mean that Tether from before is much different from the Tether now, and it has pulled off the made it portion of "fake it till you make it".
Remember, there is literally no upside, it's not as if USDT will go to the moon.
So why not dump it for the time being in either Bitcoin or USD?
As long as the US government itself doesn't try to destroy them again - in few years tether is going into hundreds of billions.
They gave nearly a billion dollars to someone without a contract. That's a higher level of stupidity than just "we used a shady banking partner because we had no alternative".
Actually, come to think of it, Tether does claim to publish asset and liability totals (if not breakdowns) in near real time, so let's see how it's doing. And, surprise, Tether somehow still has just $160 million in extra assets over liabilities. In fact, between the attestation date of March 31, 2022 and the latest update as of last night, this buffer has changed by just $186. That kind of performance is... well, not credible.