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It's hard to overemphasize how big a deal the Tether peg breaking would be (is?). At $78B, it dwarfs UST/Terra, and it's supposed to be an asset-backed stablec
by thematrixturtle 4y ago
It's hard to overemphasize how big a deal the Tether peg breaking would be (is?). At $78B, it dwarfs UST/Terra, and it's supposed to be an asset-backed stablecoin, not a risky algorithmic boondoggle like UST. If Tether plunges, it will take the broader crypto markets with it.
Emphasis on the "supposed to be", since many, many, many unanswered questions have been raised about Tether's reserves and they've previously been caught straight-up lying about them.
- xmprt 4y agoCan someone explain stablecoins to me? Most online explanations talk about how the currencies are "pegged" to various assets/real world currencies/physical objects/algorithms/cryptocurrencies, however they never explain how the pegging is done. What is happening right now that is causing the price to fall, what prevented it from falling over the last few years, and why isn't that thing preventing it from falling now?
- tcharlton 4y agoMatt Levine did a great write up of algorithmic stablecoins here: https://www.bloomberg.com/opinion/articles/2022-05-11/terra-flops https://www.bloomberg.com/opinion/articles/2022-05-11/terra-... "1. You wake up one morning and invent two crypto tokens. 2. One of them is the stablecoin, which I will call “Terra,” for reasons that will become apparent. 3. The other one is not the stablecoin. I will call it “Luna.” 4. To be clear, they are both just things you made up, just numbers on a ledger. (Probably the ledger is maintained on a decentralized blockchain, though in theory you could do this on your computer in Excel.) 5. You try to find people to buy them. 6. Luna will trade at some price determined by supply and demand. If you make it up on your computer and keep the list in Excel and smirk when you tell people about this, that price will be zero, and none of this will work. 7. But if you do a good job of marketing Luna, that price will not be zero. If the price is not zero then you’re in business. 8. You promise that people can always exchange one Terra for $1 worth of Luna. If Luna trades at $0.10, then one Terra will get you 10 Luna. If Luna trades at $20, then one Terra will get you 0.05 Luna. Doesn’t matter. The price of Luna is arbitrary, but one Terra always gets you $1 worth of Luna. (And vice versa: People can always exchange $1 worth of Luna for one Terra.) 9. You set up an automated smart contract — the “algorithm” in “algorithmic stablecoin” — to let people exchange their Terras for Lunas and Lunas for Terras. 10. Terra should trade at $1. If it trades above $1, people — arbitrageurs — can buy $1 worth of Luna for $1 and exchange them for one Terra worth more than a dollar, for an instant profit. If it trades below $1, people can buy one Terra for less than a dollar and exchange it for $1 worth of Luna, for an instant profit. These arbitrage trades push the price of Terra back to $1 if it ever goes higher or lower. 11. The price of Luna will fluctuate. Over time, as trust in this ecosystem grows, it will probably mostly go up. But that is not essential to the stablecoin concept. As long as Luna robustly has a non-zero value, you can exchange one Terra for some quantity of Luna that is worth $1, which means Terra should be worth $1, which means that its value should be stable. All of this is, I think, quite straightforward and correct, except for Point 7, which is insane. If you overcome that — if you can find a way to make Luna worth some nonzero amount of money — then everything works fine. "
- ezzaf 4y agoAn important distinction between Terra (what is being described there) and Tether (what this thread is discussing), is that Tether claims to be backed by real assets.
- robocat 4y agoThere is no strong distinction in backing: USDT just has a slightly more believable story. Also the price of a stablecoin can shift from it's peg, even if it has 100% backing, when there is latency/congestion/spread/volume for the arbitrage trade. That said, there is a whole heap of plenty of evidence that USDT is not backed by dollars 1:1.
- prox 4y agoSo why would one want to have Luna when you got Terra? I know Terra is backed, I know Luna is speculation, not any different from doing a roulette game.
- charcircuit 4y ago>So why would one want to have Luna when you got Terra? There are 3 different things: Governance related, market module related, and staking related. You can spend 50 LUNA to submit a governance proposal. The second is to stake your LUNA. When your LUNA is staked the first benefit is that you can vote on governance proposals. Proposals can be onchain changes such as modifying a parameter or an offchain change which people should respect even if there is nothing technically forcing them to follow it. There is a limited amount of UST that exists so what happens if more people want UST? You can burn LUNA to mint new UST. In times where the demand for UST is strong enough to make UST go above $1 it may be profitable for someone to burn their LUNA to mint UST. Every transaction has gas fees. Any swaps between stable coins have a tobin tax. Using the market module to exchange UST for LUNA has a spread fee. All of these fees are collected and then distributed to the stakers. To help protect against times when the protocol is less active the fees are actually spread out over time. Right now every 5 blocks 5/9400000 of the reward pool is paid out to people staking. 9400000 is how many blocks there are in 2 years.
- can16358p 4y agoThey are backed by real dollars that they have in cash reserve in a bank. At least in theory. What is currently happening is because of too much volume they have hard time putting more money back into the ecosystem (which is the good scenario, it means they have money but things are going just a bit slow), or they are running out of money (which is a bad scenario that would cause many things to go down with it).
- bspammer 4y agoTether the company guarantees it will buy all tether for $1 each. The drop in price reflects people suddenly realizing they can’t do that if everyone tries to turn in their tether at once.
- randomsearch 4y agoSurely it is very difficult for a company to "guarantee" anything about the price of a commodity sold in a large open market. There are all sorts of reasons prices go up and down, it seems hubris to imagine you can tether anything. Even national governments struggle to do this. https://en.wikipedia.org/wiki/Black_Wednesday https://en.wikipedia.org/wiki/Black_Wednesday
- FeepingCreature 4y agoTheoretically, they could guarantee it by just holding all dollars they are given originally. A price is just an abstraction for the willingness to buy and sell. If you know there are 1000 of some token in the world, and you have 1000 of some item, you can guarantee that people will always be able to buy one item for one token - by selling your items to them at that price. But of course, just holding the dollars makes it hard to profit.
- lupire 4y agoCredit cards do it by charging transaction fees.
- mcintyre1994 4y agoIn theory you should be able to do it if you always have reserves worth more than the total number of outstanding tether. If you distribute 40b tether and have $50b in liquid cash, you can guarantee that you will pay exactly $1 for each tether. Obviously everyone holding your coin is exposed to changes to the value of your dollars, but you can always give them $1 for 1 tether. The problem is of course that you can make a great deal more money for yourself if you invest in riskier ways than holding liquid cash. I don't think the Black Wednesday situation is similar, because the UK was never going to be able to hold enough of the currencies it was supposedly pegged to to make that same promise. Definitely not my expertise there though!
- ryanSrich 4y agoYou give me a dollar, I give you a digital currency equivalent. When you need your real USD back, you tell me and I give it to you. That means in an ideal world, you have your stable coins backed 1:1 with real USD. Of course, this isn’t always the case, and with Tether, there has been much scrutiny over the years that they do not have the USD collateral to back their stablecoin. Ok, but let’s assume Tether has the USD. Why is it depegging? This is most likely due to sell pressure and Tether’s ability to liquidate their USD holdings. I think Tether has more than enough real USD to deal with the sell pressure we’re seeing now, but the system is having a hard time keeping up.
- gadnuk 4y agoThis is an amazing explanation. Thank you!
- usednet 4y agoThat explanation is not correct. Algorithmic stablecoins rely on a pairing with another crypto, in UST’s case LUNA. 1 UST can always be swapped to $1 US dollar of LUNA. It is interchangable, so $1 US dollar’s worth of LUNA can also be swapped for 1 UST. Hence, the “algorithmic” in the name. This way traders are always incentivized to keep the price of UST at $1. There is no collateral requirement. In UST/LUNA’s case they had collateral, mostly in Bitcoin, in the Luna Reserve Guard but their collateral proved insufficient. Some algorithmic stablecoins are entirely uncollateralized.
- thematrixturtle 4y agoThat's all irrelevant, since Tether is not an algorithmic stablecoin, and they claim to have 1:1 reserves for every USDT.
- usednet 4y agoThe parent comment was edited to remove the section on UST after my comment.
- BbzzbB 4y agoMarket pricing and arbitrage pegs it, is how I understand it. It's "worth" whatever price the bid-ask spread meets at. It's exchangeable for USD to the company. As long as there isn't a bank run where they'd stop fulfilling exchanges, when the price drops below $1 anyone can arbitrage it. It reached like 95 cents earlier, anyone could've bought millions of it and got USD for it at like 6% profit. It creates buy pressure/price support as the price falls.
- irjustin 4y agogenuine question - why does the asset need to be backed? more specifically - who would you need to give the physical currency to?
- cheeseface 4y agoThe promise of a stablecoin, in this case Tether, is that you can always change 1 USDT into $1. When people buy Tether, they pay then $1 and believe the promise that they will get $1 when they want to.
- irjustin 4y agoRight but how... where does physical money come into play? How can I or anyone get 1 physical dollar from selling USDT? All I've ever done is exchange some coin => USDT and vice versa. So if no one is actually asking for a physical dollar, why does it need to be backed by a physical dollar?
- FabHK 4y agoThere are exchanges (such as FTX) where you can trade USDT/USD. The basic premise is that USDT/USD will always be around 1, because Tether (the organisation) stands ready (always) to give you a) 1 USDT for a USD, and b) 1 USD for a USDT. Any USDT/USD deviation from 1 thus gives rise to arbitrage opportunities. Tether can guarantee a) because they can issue an unlimited amount of USDT, so when you give them 1 USD, they can definitely give you 1 USDT, and b) because b1) they do not issue USDT without someone giving them the equivalent amount of USD, and b2) they keep those USD safe in cash, deposits, or equivalent, without price, credit, and FX risk. a) is undisputed. b) is the tricky part, both b1) - they could just issue USDT without having received USD. Who's checking? b2) - they could just take the USD they've received and buy a yacht, or put it in shares (price risk!) or commercial paper (credit risk!) or Chinese Yuan (FX risk!) or anything else. Who's checking?
- alexb_ 4y agoIdk, try paying your rent or buying lunch with Tether and see how that goes for you.
- mwill 4y agoDo people in crypto sincerely believe Tether is backed? I'm not being sarcastic here, I'm genuinely asking. I'm a bit of a skeptic of how the crypto market has developed overall, and the intentions of the major players, so I keep reminding myself that I'm biased, but I haven't believed Tether is even remotely close to being fully backed for a long while, and I've just sort of assumed everyone who's 'bought in' to the crypto space also knows and just doesn't care, or they think it's 'too big to fail'. Is that the case or is there genuine belief it is fully/mostly/partly backed?
- mattdesl 4y agoA lot of pro-crypto users avoid USDT like the plague and assume it will at some point come crashing down (and drag the market down along with it).
- dmichulke 4y agoThere are exchanges that refuse to use USDT, with deribit and bitstamp at the top of my head
- usednet 4y agoNo, but when many major exchanges only have USDT pairs people are forced to use it.
- dropnerd 4y agothere are some markets you can't participate in without holding usdt, so for some, it's a calculated risk why anyone would keep usdt if not actively trading is beyond me
- bulbosaur123 4y agoIt wouldn't be a big deal, because people would just switch to USDC.
- overtonwhy 4y agohttps://www.coindesk.com/markets/2021/08/09/tether-reveals-more-details-about-its-reserves/?outputType=amp https://www.coindesk.com/markets/2021/08/09/tether-reveals-m...