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I don't get it. If everyone starts selling their Tether (because they're afraid of it not being able to maintain the peg), even if they can't sell the Tether ba

I don't get it. If everyone starts selling their Tether (because they're afraid of it not being able to maintain the peg), even if they can't sell the Tether back to the company, won't that crater the Tether price- possibly to zero- effectively killing the currency? Like, this happens with currencies that are pegged to the dollar. The government that's supposed to be maintaining the peg starts to run out of dollars and starts limiting dollar redemptions. People turn to the black market to obtain dollars. The price of a dollar (in that currency) goes up. The value of the currency (again in dollars) drops. Now the peg is broken. Tether the company could walk into the sunset with whatever they're holding- they can just honor "friends and family" withdrawals, but that doesn't prevent the coin going to zero for everyone else. It actually makes it even worse for the currency: suppose it's collateralized at 50%. Tether could honor withdrawals at 50 cents on the dollar, force every holder to take a 50% haircut. The price might settle to something less than $1 but more than $0 and continue on. But if they abscond with the money instead, the currency will have even more reason to drop to nil.

potatolicious 5y ago
Exactly this - the idea that Tether not being legally obligated to let you cash out USD somehow being a shield against a run seems ridiculous. Being unable to redeem your USDT for dollars - regardless of reason (because Tether is out of money or Tether is refusing) - is what causes the run and the crash. An entity that is holding a bunch of cash but refusing to honor IOUs it has issued will find that the value of those IOUs will rapidly approach zero. Permanently. Even if it laters starts honoring those IOUs, the IOUs have lost their utility forever and the price will remain at/near zero.
arcticbull 5y ago
The reason it hasn't collapsed already is that all the exchanges are in on it. It's crypto's equivalent of "too big to fail." Individuals will be told they're not customers by Tether (this happened on Twitter a while back, someone set out to prove you could and Tether stonewalled them, so he deleted his account). They're offered a piddly USDT:USD market pair on a few exchanges, like Coinbase and Kraken, as a distraction. There, they can sell their USDT to folks trying to buy it (for instance, to fund a DeFi position) or the exchange obo Tether, Inc. to keep the charade going. Only institutional parties like exchanges, Alameda and Cumberland are "deemed customers" and they'll never redeem because they know they can't. Everyone's in on this. I think only a court-ordered exchange liquidation could possibly end the game, like a Binance collapse for instance.
- roywiggins 5y ago
  Oh, I understand why it hasn't collapsed already. I just don't see how Tether refusing to honor redemptions makes it more resilient to a run in progress, rather than less. If nobody wants to buy 1 USDT for a dollar, the peg will break all the same. If Tether stepped in as a buyer of last resort, that would make it more resilient- but if it doesn't, that worse for the peg, not better. It's better for anyone with physical custody of the Tether assets I guess (they have a pile of gold to Scrooge McDuck dive into) but the currency is even more boned than if they'd propped the market up by buying Tethers back. A 100% collateralized stablecoin that just hands everyone back their dollars if they ask can survive anything, a 50% collateralized one can spend a lot of it back into the market to prop the price up, at least for a while. But if Tether can't or won't, that's going to make maintaining the peg a whole lot harder!
  - arcticbull 5y ago
    Ah I see. The point I was making is that since it brazenly doesn't have backing and it openly gets to choose who is allowed to redeem, a run would be very hard to actually start. The exchanges themselves are incentivized to backstop the pegs (up to a point) out of their own capital to ensure their own survival. Beyond that, you are correct of course!
    - roywiggins 5y ago
      That makes some sense, since in normal banking you can bleed collateral until you're nearly dry without actually provoking a run, and when you're forced to start looking under your couch cushions for change and ask your depositors for patience, there's the trigger for your run. Tether doesn't have to worry about that... But if "folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange" then surely the most desperate will be willing to take a haircut on their Tether to get out of it first, and then the Tether price collapses anyway, through some combination of the exchanges shutting down trading, drawing down their own collateral to maintain the peg (and then running out), and/or the exchange reluctantly allowing the price to float? Like, the too-big-to-failness is definitely part of why it's still a thing, but that just means that the real buyer of last resort is other large crypto holders who don't want the ecosystem to collapse. That's great for Tether-the-company, and maybe good for Tether the coin, but it seems to me sort of distantly related to Tether allowing direct withdrawals. There's an obvious mechanism for maintaining the peg if Tether allows large holders to redeem Tether: those holders buy any slightly discounted Tether, then hand it back to Tether and redeem it and keep the tiny profit. This will work but it's just Tether propping up the price with its capital with extra steps...

potatolicious 5y ago

Exactly this - the idea that Tether not being legally obligated to let you cash out USD somehow being a shield against a run seems ridiculous. Being unable to redeem your USDT for dollars - regardless of reason (because Tether is out of money or Tether is refusing) - is what causes the run and the crash. An entity that is holding a bunch of cash but refusing to honor IOUs it has issued will find that the value of those IOUs will rapidly approach zero. Permanently. Even if it laters starts honoring those IOUs, the IOUs have lost their utility forever and the price will remain at/near zero.

arcticbull 5y ago

The reason it hasn't collapsed already is that all the exchanges are in on it. It's crypto's equivalent of "too big to fail." Individuals will be told they're not customers by Tether (this happened on Twitter a while back, someone set out to prove you could and Tether stonewalled them, so he deleted his account). They're offered a piddly USDT:USD market pair on a few exchanges, like Coinbase and Kraken, as a distraction. There, they can sell their USDT to folks trying to buy it (for instance, to fund a DeFi position) or the exchange obo Tether, Inc. to keep the charade going. Only institutional parties like exchanges, Alameda and Cumberland are "deemed customers" and they'll never redeem because they know they can't. Everyone's in on this. I think only a court-ordered exchange liquidation could possibly end the game, like a Binance collapse for instance.

roywiggins 5y ago
Oh, I understand why it hasn't collapsed already. I just don't see how Tether refusing to honor redemptions makes it more resilient to a run in progress, rather than less. If nobody wants to buy 1 USDT for a dollar, the peg will break all the same. If Tether stepped in as a buyer of last resort, that would make it more resilient- but if it doesn't, that worse for the peg, not better. It's better for anyone with physical custody of the Tether assets I guess (they have a pile of gold to Scrooge McDuck dive into) but the currency is even more boned than if they'd propped the market up by buying Tethers back. A 100% collateralized stablecoin that just hands everyone back their dollars if they ask can survive anything, a 50% collateralized one can spend a lot of it back into the market to prop the price up, at least for a while. But if Tether can't or won't, that's going to make maintaining the peg a whole lot harder!
- arcticbull 5y ago
  Ah I see. The point I was making is that since it brazenly doesn't have backing and it openly gets to choose who is allowed to redeem, a run would be very hard to actually start. The exchanges themselves are incentivized to backstop the pegs (up to a point) out of their own capital to ensure their own survival. Beyond that, you are correct of course!
  - roywiggins 5y ago
    That makes some sense, since in normal banking you can bleed collateral until you're nearly dry without actually provoking a run, and when you're forced to start looking under your couch cushions for change and ask your depositors for patience, there's the trigger for your run. Tether doesn't have to worry about that... But if "folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange" then surely the most desperate will be willing to take a haircut on their Tether to get out of it first, and then the Tether price collapses anyway, through some combination of the exchanges shutting down trading, drawing down their own collateral to maintain the peg (and then running out), and/or the exchange reluctantly allowing the price to float? Like, the too-big-to-failness is definitely part of why it's still a thing, but that just means that the real buyer of last resort is other large crypto holders who don't want the ecosystem to collapse. That's great for Tether-the-company, and maybe good for Tether the coin, but it seems to me sort of distantly related to Tether allowing direct withdrawals. There's an obvious mechanism for maintaining the peg if Tether allows large holders to redeem Tether: those holders buy any slightly discounted Tether, then hand it back to Tether and redeem it and keep the tiny profit. This will work but it's just Tether propping up the price with its capital with extra steps...