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If Tether worked as it was advertised there would be no profit opportunity. The purported reason Tether exists is to help the crypto markets deal with the liqui

If Tether worked as it was advertised there would be no profit opportunity. The purported reason Tether exists is to help the crypto markets deal with the liquidity problems because of how difficult Fiat banking is, essentially Tethers value proposition was “we (by some miracle) have reliable banking, we can buy and sell 1 Tether for 1 USD at any time regardless of other crypto currencies value”. In reality Tether is a shit-show because it doesn’t provide reliable banking (even before considering the fact that it isn’t even solvent) and that’s why the value of Tether offers any arbitrage opportunities. If we were in a fantasy land where Tether wasn’t fraudulent then the price variance of Tether on exchanges would be so minuscule that there would be no arbitrage opportunity for anyone to take advantage of. Your hypothetical profit opportunity only exists because Tether is (ultimately) fraudulent. Remember that Tether was pitched as a 1:1 USD backed cryptocurrency that could be exchanged 1:1 at any time (in both directions). The mess that it is now (only liquid on exchanges at a variable rate) is not what Tether was marketed as. Tether (as promised) is the equivalent of you accepting $100 USD from your friend and giving them $100 of Monopoly money and promising them that at any time they can trade their monopoly dollars for your real dollars... and you won’t ever use the USD for anything, it’ll be locked away untouchable by you. How do you profit from that? You can’t lend it, you can’t invest it, you can’t use it as collateral, it has to be unencumbered at all times and you have to incur the costs of managing it. Read the original whitepaper and try and identify a profit opportunity. This is all before considering that Tether is a fundamentally flawed concept: if Tether could operate a reliable banking relationship, so could others, and Tether would be pointless.

lupire 7y ago
$100M in deposits is $5M/yr in returns on float, just as your bank and insurance companies do with your deposits and premiums. It's technically not risk-free (FDIC notwithstanding) but that doesn't stop anyone.
- vegannet 7y ago
  I’m not clear how that applies to Tether: “[...] each tetherUSD in circulation represents one US dollar held in our reserves (i.e. a onetoone ratio) which means the system is fully reserved when the sum of all tethers in existence (at any point in time) is exactly equal to the balance of USD held in our reserve.” Where does the 5% come from?
  - sk5t 7y ago
    I, too, am interested to learn more about this totally risk-free 5%.
  - Thorrez 7y ago
    5% isn't possible, but you can make over 2% on treasury bills currently. The risk of the US government defaulting on loans can be essentially ignored.
    - dmix 7y ago
      This might be a dumb question but can you sell a treasury bond to a 3rd party before the terms are over without losing too much money?
      - Canada 7y ago
        Yes, they are completely liquid.
      - rags2riches 7y ago
        You can sell them before maturity, but their value will depend on current interest rates, of course. If rates are up, you will have to discount the price.
      - Thorrez 7y ago
        This might not be exactly answering your question, but you can buy 4 week treasury bills. Even if you can't sell bonds, having money tied up for 4 weeks might not be a big problem.
    - londons_explore 7y ago
      Except in the crypto industry, where US bonds are likely to be seized, and therefore probably have an average payout rate below parity.
      - Thorrez 7y ago
        Do you have any information about US bonds being seized like this? I don't understand how it could happen.
- foobarbazetc 7y ago
  Who’s making 5% risk free? Can you point me in their direction?
  - Scoundreller 7y ago
    You take some risk while externalizing the risk of insolvency to your customers. It’s what every insurance company and bank does. Or if you don’t want to do that, put it in treasuries or something and take your 1,2,3% of whatever it may be. Tether could have replicated either strategy, but seems to not have. They could also have profited from those that lost their keys (it happens).
    - FreeRadical 7y ago
      They would need access to a broker to invest in treasuries and pass KYC/AML. Which treasury broker would onboard them if they struggled to get a bank?
    - tinco 7y ago
      Even treasuries are not risk free, nor are they unbounded. Tether is trying to play in the big league, I'm not certain what the rules are, but I'm pretty sure making 1%-2% annually on the float is a pretty good deal, and that might even be a conservative estimate. In addition you have to keep in mind that it is also about absolute numbers. No one invested these billions with them, no one is charging them some kind of relative rent. Every dollar is profit. If you could make 0.001% off storing 5 billion, that would still be an attractive business model.
georgyo 7y ago
You can invest the money, the same as banks do. It's why they don't charge you to store money with them, especially if your balance is high. You only need and should keep enough liquid cash needed to handle day to day withdrawals. Everything else is fair game up invest. See: https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Bank_run https://en.m.wikipedia.org/wiki/Bank_run
- vegannet 7y ago
  I’m talking about the specific promises made by Tether. The question is not about whether or not fractional reserve banking exists, the question is how can Tether engage in fractional reserve banking (or any profit making activity) without being fraudulent when they explicitly claimed to hold 100% of their USD in cash reserves at all times? “[...] each tetherUSD in circulation represents one US dollar held in our reserves (i.e. a onetoone ratio) which means the system is fully reserved when the sum of all tethers in existence (at any point in time) is exactly equal to the balance of USD held in our reserve.”
  - georgyo 7y ago
    For the record, I think all this crypto currency stuff is plain dumb, and that tether is likely a fraud. That said they don't state anything about what their reserve is. Wealthfront has a 2.3% savings account for us normal people. If I created a stable coin like tether is and had a billion dollars of investment; I could make 23 million dollars a year and tell people that I have a 1:1 backing without lying. If I went to a bank with a billion dollars I could likely negotiate an even higher rate for such a savings account.
    - ctrl_freak 7y ago
      > If I went to a bank with a billion dollars I could likely negotiate an even higher rate for such a savings account. I don't think that's how it works. As others have mentioned, FDIC insurance only covers 250k per depositor per bank. Typically when entities have that amount of cash (think Apple, Google, etc.), they put them into US government bonds, which are effectively equivalent to deposit accounts. Edit: this is an interesting point, though. Ignoring the insurance issue, what would a bank do if you asked to open a deposit account with a billion dollars (paying, say 2%/year)? My uninformed layman's speculation would be that they would reject you because they wouldn't know what to do with that much money: they have to somehow lend out enough of it to at least break even on the 20 million/year that they're paying you for interest, but at the same time they have to be able to give you back your 1 billion at any time you ask for it.
hjk05 7y ago
> If Tether worked as it was advertised there would be no profit opportunity Of cause there would. Even if the tokens are backed 1:1 by dollars it still has an exchange rate. So tether could issue at above 1 rates and buy at below 1 rates. That provides a very simple profit making scheme. For users, they would often like to “cash out to tether” quickly, which means they’d undercut the exchange rate thus providing tether with a profit in exchange for swift processing. > If we were in a fantasy land where Tether wasn’t fraudulent then the price variance of Tether on exchanges would be so minuscule that there would be no arbitrage opportunity for anyone to take advantage of. I’m reminded of the joke where two wallstreet stock brokers are walking down the street, one says to the other “look a 50$ bill on the ground!” The other without looking down replies: “that’s impossible, if there was a 50$ bill on the ground someone would have picked it up.”
- notahacker 7y ago
  > Of cause there would. Even if the tokens are backed 1:1 by dollars it still has an exchange rate. So tether could issue at above 1 rates and buy at below 1 rates. That provides a very simple profit making scheme. If USDT is credibly backed by dollars this spread is tiny, not least because other holders of Tether can play the same game. And if USDT is backed by dollars held in cash in customer accounts as originally claimed, there's an enormous opportunity cost of not investing those dollars.
  - tinco 7y ago
    Holders of Tether can play the same game, but they don't have the same advantage. Because of the knowledge imbalance, Tether has zero risk in this game. Any other player has the risk that they might lose money on a trade for whatever reason. I agree the spread might be tiny though. Though if Tether puts itself in a bad light every now and again it could force the spread a bit wider.
dwild 7y ago
> If Tether worked as it was advertised there would be no profit opportunity. Everyone gave multiple good profit opportunity already, but what about having a transaction fees? They still have a cost related to operating this business, you put that cost toward a transaction fee and you put a small profit on top. That's how credit card works, though their fees apply much more often than it would for a stablecoin, where most transations aren't from the coin to fiat money. > you accepting $100 USD from your friend and giving them $100 of Monopoly money That's pretty much the definition of a bank. Banks does it for free ALL the time and has actual physical locations on top of that and has to operate locally too.

lupire 7y ago

$100M in deposits is $5M/yr in returns on float, just as your bank and insurance companies do with your deposits and premiums. It's technically not risk-free (FDIC notwithstanding) but that doesn't stop anyone.

vegannet 7y ago
I’m not clear how that applies to Tether: “[...] each tetherUSD in circulation represents one US dollar held in our reserves (i.e. a onetoone ratio) which means the system is fully reserved when the sum of all tethers in existence (at any point in time) is exactly equal to the balance of USD held in our reserve.” Where does the 5% come from?
- sk5t 7y ago
  I, too, am interested to learn more about this totally risk-free 5%.
- Thorrez 7y ago
  5% isn't possible, but you can make over 2% on treasury bills currently. The risk of the US government defaulting on loans can be essentially ignored.
  - dmix 7y ago
    This might be a dumb question but can you sell a treasury bond to a 3rd party before the terms are over without losing too much money?
    - Canada 7y ago
      Yes, they are completely liquid.
    - rags2riches 7y ago
      You can sell them before maturity, but their value will depend on current interest rates, of course. If rates are up, you will have to discount the price.
    - Thorrez 7y ago
      This might not be exactly answering your question, but you can buy 4 week treasury bills. Even if you can't sell bonds, having money tied up for 4 weeks might not be a big problem.
  - londons_explore 7y ago
    Except in the crypto industry, where US bonds are likely to be seized, and therefore probably have an average payout rate below parity.
    - Thorrez 7y ago
      Do you have any information about US bonds being seized like this? I don't understand how it could happen.
foobarbazetc 7y ago
Who’s making 5% risk free? Can you point me in their direction?
- Scoundreller 7y ago
  You take some risk while externalizing the risk of insolvency to your customers. It’s what every insurance company and bank does. Or if you don’t want to do that, put it in treasuries or something and take your 1,2,3% of whatever it may be. Tether could have replicated either strategy, but seems to not have. They could also have profited from those that lost their keys (it happens).
  - FreeRadical 7y ago
    They would need access to a broker to invest in treasuries and pass KYC/AML. Which treasury broker would onboard them if they struggled to get a bank?
  - tinco 7y ago
    Even treasuries are not risk free, nor are they unbounded. Tether is trying to play in the big league, I'm not certain what the rules are, but I'm pretty sure making 1%-2% annually on the float is a pretty good deal, and that might even be a conservative estimate. In addition you have to keep in mind that it is also about absolute numbers. No one invested these billions with them, no one is charging them some kind of relative rent. Every dollar is profit. If you could make 0.001% off storing 5 billion, that would still be an attractive business model.

georgyo 7y ago

You can invest the money, the same as banks do. It's why they don't charge you to store money with them, especially if your balance is high. You only need and should keep enough liquid cash needed to handle day to day withdrawals. Everything else is fair game up invest. See: https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Bank_run https://en.m.wikipedia.org/wiki/Bank_run

vegannet 7y ago
I’m talking about the specific promises made by Tether. The question is not about whether or not fractional reserve banking exists, the question is how can Tether engage in fractional reserve banking (or any profit making activity) without being fraudulent when they explicitly claimed to hold 100% of their USD in cash reserves at all times? “[...] each tetherUSD in circulation represents one US dollar held in our reserves (i.e. a onetoone ratio) which means the system is fully reserved when the sum of all tethers in existence (at any point in time) is exactly equal to the balance of USD held in our reserve.”
- georgyo 7y ago
  For the record, I think all this crypto currency stuff is plain dumb, and that tether is likely a fraud. That said they don't state anything about what their reserve is. Wealthfront has a 2.3% savings account for us normal people. If I created a stable coin like tether is and had a billion dollars of investment; I could make 23 million dollars a year and tell people that I have a 1:1 backing without lying. If I went to a bank with a billion dollars I could likely negotiate an even higher rate for such a savings account.
  - ctrl_freak 7y ago
    > If I went to a bank with a billion dollars I could likely negotiate an even higher rate for such a savings account. I don't think that's how it works. As others have mentioned, FDIC insurance only covers 250k per depositor per bank. Typically when entities have that amount of cash (think Apple, Google, etc.), they put them into US government bonds, which are effectively equivalent to deposit accounts. Edit: this is an interesting point, though. Ignoring the insurance issue, what would a bank do if you asked to open a deposit account with a billion dollars (paying, say 2%/year)? My uninformed layman's speculation would be that they would reject you because they wouldn't know what to do with that much money: they have to somehow lend out enough of it to at least break even on the 20 million/year that they're paying you for interest, but at the same time they have to be able to give you back your 1 billion at any time you ask for it.

hjk05 7y ago

> If Tether worked as it was advertised there would be no profit opportunity Of cause there would. Even if the tokens are backed 1:1 by dollars it still has an exchange rate. So tether could issue at above 1 rates and buy at below 1 rates. That provides a very simple profit making scheme. For users, they would often like to “cash out to tether” quickly, which means they’d undercut the exchange rate thus providing tether with a profit in exchange for swift processing. > If we were in a fantasy land where Tether wasn’t fraudulent then the price variance of Tether on exchanges would be so minuscule that there would be no arbitrage opportunity for anyone to take advantage of. I’m reminded of the joke where two wallstreet stock brokers are walking down the street, one says to the other “look a 50$ bill on the ground!” The other without looking down replies: “that’s impossible, if there was a 50$ bill on the ground someone would have picked it up.”

notahacker 7y ago
> Of cause there would. Even if the tokens are backed 1:1 by dollars it still has an exchange rate. So tether could issue at above 1 rates and buy at below 1 rates. That provides a very simple profit making scheme. If USDT is credibly backed by dollars this spread is tiny, not least because other holders of Tether can play the same game. And if USDT is backed by dollars held in cash in customer accounts as originally claimed, there's an enormous opportunity cost of not investing those dollars.
- tinco 7y ago
  Holders of Tether can play the same game, but they don't have the same advantage. Because of the knowledge imbalance, Tether has zero risk in this game. Any other player has the risk that they might lose money on a trade for whatever reason. I agree the spread might be tiny though. Though if Tether puts itself in a bad light every now and again it could force the spread a bit wider.

dwild 7y ago

> If Tether worked as it was advertised there would be no profit opportunity. Everyone gave multiple good profit opportunity already, but what about having a transaction fees? They still have a cost related to operating this business, you put that cost toward a transaction fee and you put a small profit on top. That's how credit card works, though their fees apply much more often than it would for a stablecoin, where most transations aren't from the coin to fiat money. > you accepting $100 USD from your friend and giving them $100 of Monopoly money That's pretty much the definition of a bank. Banks does it for free ALL the time and has actual physical locations on top of that and has to operate locally too.