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It's absolutely true of other algorithmic stablecoins. When it comes to "backed" stablecoins like USDT the scam is even simpler: you just say it's backed by ca

It's absolutely true of other algorithmic stablecoins. When it comes to "backed" stablecoins like USDT the scam is even simpler: you just say it's backed by cash when it's not.

ryanSrich 4y ago
> When it comes to "backed" stablecoins like USDT the scam is even simpler: you just say it's backed by cash when it's not. This is such a silly argument. USDT is definitely backed by USD. To claim that it isn’t is just a lie. I think what you meant to imply is that it’s not backed 1:1. This isn’t only an issue with Tether. This is the case with any fractional reserve banking system.
- simulate-me 4y ago
  Fractional reserve banking lends out deposits. This creates risk, but the net assets on the books remain the same (actually assets increase due to interest). With USDT, they may have bought something like commercial paper, which would be similar to fractional reserve banking, or they could have spent it on something irreversible (e.g. a dividend) and thus the net assets on the books is lower than the amount of USDT. It's unknown which situation applies to USDT.
  - VirusNewbie 4y ago
    It’s not quite that simple, no? If I deposit 1M in the bank, that bank can loan you 900k. You then buy a Bugatti from me for 900k, which I then put into the same bank. Then the bank loans you 810k to buy an NFT from me…
    - simulate-me 4y ago
      If the bank has 1M deposits, its net assets are 0. It has 1M is cash and has 1M in liabilities to depositors. If the bank loans out 900K, then it still has 0 net assets. It has 1M in liabilities to depositors, 100K in cash, and an "IOU" worth 900K (ignoring interest). Tether is different. When it mints and sells 1M USDT, it gets 1M is cash, but doesn't have any liability to Tether holders other than the honor system. It could easily pay a 500K dividend to its owners and no one would know.
    - stephen_g 4y ago
      What you describe is called the “money multiplier model” and yes, it’s not how the actual economy or actual banks work. This document [1] from the Bank of England (UK’s central bank) is the best description I know of about how those ideas (“fractional reserve”, banks lending out deposits, “money multiplier” etc.) are wrong. 1. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - stephen_g 4y ago
    That’s not true. It’s not just that real-world banks don’t do that, they just plain aren’t allowed to “lend out deposits”. I guess you could say “fractional reserve banks” do, because “fractional reserve” is a textbook model and not something that happens in the real world. The problem is that deposits are a liability. Banks can only lever up assets to lend, so deposits are on the wrong side of the balance sheet to do that. What limits how much banks can lend is capital (and capital adequacy ratios), not deposits. Banks create new deposits when they lend, as well as creating an equal amount of private debt. The loan is an asset of the bank, which creates a corresponding liability. Customer deposits coming in as cash or transfers from other banks are useful as liquidity, but can never be lent. Some details if you’re interested: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
    - kgwgk 4y ago
      > The problem is that deposits are a liability. Banks can only lever up assets to lend, so deposits are on the wrong side of the balance sheet to do that. When someone makes a deposit in a bank it goes on both sides of the __balance__ sheet. On one side the "deposit" is a liability for the bank - who owes money to the depositor - but on the other side it increases the bank's "reserve" account.
- deleted 4y ago
  [deleted]
- initplus 4y ago
  Is it definitely backed? As far as I know there has never been satisfactory proof that USDT has ever been backed by anything. Yes fractional reserve banking is a real thing, but real banks must publish audited financial statements so that outside observers can asses the banks financial position. From small local banks to national reserve banks, the financial statements are out in the open for depositors and borrowers to scrutinize. This isn't possible with Tether because the fiat side of their books are closed. If everything is above board at Tether why not release the books? It's such an obvious PR win and would increase adoption of their currency. They haven't done so because they know the books are cooked.
  - vmception 4y ago
    NYAG, US DOJ and CFTC all found it was backed, from their own subpoenas. NYAG settlement with Tether forces them to keep updating disclosures. Its 2/3rd backed by dollars and 1/3rd a mixture of commercial paper, which we don't have further information about. Rumor mill always swirls about that paper, but its probably not that controversial and would only be 33% of Tether. Likely would result in a liquidity crisis if more than 70-80% of Tether's were redeemed at once. Although I wonder if that's even possible now given how much USDT is locked in DeFi apps and liquidity pools and burned. (Projects often lock assets in a liquidity pool share and then destroy their access to that share, to ensure to their community that there is always the ability to trade) So Tether will probably continue working for partially the dumbest reasons.
    - londons_explore 4y ago
      Tethers can't be burned. If anyone ever provably burns a tether, then the tether organisation will help 'recover' the tether to anyone holding keys to a previous address that held it, or just anyone with a reasonable story how they accidentally burned the tethers. This is their policy since some big players accidentally sent tether to addresses on the wrong Blockchain...
      - vmception 4y ago
        Thats pretty interesting. I don't think that would work for Tether stuck in a liquidity pool share that was burned by being sent to a contract or burn address. Traders can still shift that tether around, but it cannot be unbounded. Be a hard case to prove.
- mbesto 4y ago
  > This is the case with any fractional reserve banking system. That is insured by GOVERNMENTS...
- mrcartmeneses 4y ago
  So if $100m is backed by $1 then it’s backed? Give me a break!
- beefield 4y ago
  > I think what you meant to imply is that it’s not backed 1:1. This isn’t only an issue with Tether. This is the case with any fractional reserve banking system. There is a minor difference, though. On a typical fractional reserve bank the deposits are backed by assets worth more than what is the worth of the deposits.[1] Not only that, there are other liabilities that take the possible losses before the deposits are being hit. On a typical stablecoin, there is a reason to suspect that the coins are backed by assets worth less than the market cap of the stablecoin. The difference may seem subtle, but it is a difference of a legitimate business and a despicable scam. [1] In case you are interested, you can go and check the balance sheet of any bank you want. The part where the value of excess assets to back the liabilites of the bank (deposits etc) is listed under "Equity"
kristopolous 4y ago
Yeah but something happened when USDT was in the unpeg crisis 2 days ago. See, if it fails then the big exchanges become insolvent, full stop. Now here's the thing. With some exchange APIs you can see market order statuses, whether they're settled or not. You can use this to determine market latency. If I want a market buy, how long does it take to settle. So here's the thing, the latency on USDT buys was on the millisecond scale as best I could determine. The latency on USDT sells was near minute scale. It's a giant accusation so I'm not going to name-drop the exchanges I'm talking about and I'm just a single data point but if anyone else saw it contact me. It looks like they "narrowed the channel" and put their thumb on the scale to prefer buys and float the price, pushing it back up. Now this was at a time that the gas price was about 250/300gwe because of the massive UST exit and network delays were 15/20 minutes or so. So even if you wanted to arbitrage it wouldn't have been worth it because the network was going way slower then exchange latency. This started basically right when Tether tweeted about the billion in Avax and ran for about 12 hours or so Ultimately it doesn't matter. These are unregulated securities and the exchanges can run their markets as the please and, if what I'm saying is right, good job keeping the thing you need to stay in business afloat. Coinbase stock (which I'm using as proxy for general sentiment) climbed 50% after tether got repegged and contagion appears to have been averted I'm just wondering if anyone else saw this. It could be a coding defect on my part, a fluke because of the craziness of the market, me projecting and fooling myself, etc. Please don't go around repeating this as fact, it as of now, needs independent verification
- deleted 4y ago
  [deleted]
jcfrei 4y ago
Tether isn't backed by cash but by a combination of short and long term loans and potentially even crypto. Fiat deposits are likely a small allocation. Calling it a scam is still disingenuous, it is backed by reserves (the more pertinent question is how liquid they are). People have been waiting for Tether to "collapse" for over 5 years now.

It's absolutely true of other algorithmic stablecoins. When it comes to "backed" stablecoins like USDT the scam is even simpler: you just say it's backed by cash when it's not.

ryanSrich 4y ago

> When it comes to "backed" stablecoins like USDT the scam is even simpler: you just say it's backed by cash when it's not. This is such a silly argument. USDT is definitely backed by USD. To claim that it isn’t is just a lie. I think what you meant to imply is that it’s not backed 1:1. This isn’t only an issue with Tether. This is the case with any fractional reserve banking system.

simulate-me 4y ago
Fractional reserve banking lends out deposits. This creates risk, but the net assets on the books remain the same (actually assets increase due to interest). With USDT, they may have bought something like commercial paper, which would be similar to fractional reserve banking, or they could have spent it on something irreversible (e.g. a dividend) and thus the net assets on the books is lower than the amount of USDT. It's unknown which situation applies to USDT.
- VirusNewbie 4y ago
  It’s not quite that simple, no? If I deposit 1M in the bank, that bank can loan you 900k. You then buy a Bugatti from me for 900k, which I then put into the same bank. Then the bank loans you 810k to buy an NFT from me…
  - simulate-me 4y ago
    If the bank has 1M deposits, its net assets are 0. It has 1M is cash and has 1M in liabilities to depositors. If the bank loans out 900K, then it still has 0 net assets. It has 1M in liabilities to depositors, 100K in cash, and an "IOU" worth 900K (ignoring interest). Tether is different. When it mints and sells 1M USDT, it gets 1M is cash, but doesn't have any liability to Tether holders other than the honor system. It could easily pay a 500K dividend to its owners and no one would know.
  - stephen_g 4y ago
    What you describe is called the “money multiplier model” and yes, it’s not how the actual economy or actual banks work. This document [1] from the Bank of England (UK’s central bank) is the best description I know of about how those ideas (“fractional reserve”, banks lending out deposits, “money multiplier” etc.) are wrong. 1. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- stephen_g 4y ago
  That’s not true. It’s not just that real-world banks don’t do that, they just plain aren’t allowed to “lend out deposits”. I guess you could say “fractional reserve banks” do, because “fractional reserve” is a textbook model and not something that happens in the real world. The problem is that deposits are a liability. Banks can only lever up assets to lend, so deposits are on the wrong side of the balance sheet to do that. What limits how much banks can lend is capital (and capital adequacy ratios), not deposits. Banks create new deposits when they lend, as well as creating an equal amount of private debt. The loan is an asset of the bank, which creates a corresponding liability. Customer deposits coming in as cash or transfers from other banks are useful as liquidity, but can never be lent. Some details if you’re interested: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - kgwgk 4y ago
    > The problem is that deposits are a liability. Banks can only lever up assets to lend, so deposits are on the wrong side of the balance sheet to do that. When someone makes a deposit in a bank it goes on both sides of the __balance__ sheet. On one side the "deposit" is a liability for the bank - who owes money to the depositor - but on the other side it increases the bank's "reserve" account.
deleted 4y ago
[deleted]
initplus 4y ago
Is it definitely backed? As far as I know there has never been satisfactory proof that USDT has ever been backed by anything. Yes fractional reserve banking is a real thing, but real banks must publish audited financial statements so that outside observers can asses the banks financial position. From small local banks to national reserve banks, the financial statements are out in the open for depositors and borrowers to scrutinize. This isn't possible with Tether because the fiat side of their books are closed. If everything is above board at Tether why not release the books? It's such an obvious PR win and would increase adoption of their currency. They haven't done so because they know the books are cooked.
- vmception 4y ago
  NYAG, US DOJ and CFTC all found it was backed, from their own subpoenas. NYAG settlement with Tether forces them to keep updating disclosures. Its 2/3rd backed by dollars and 1/3rd a mixture of commercial paper, which we don't have further information about. Rumor mill always swirls about that paper, but its probably not that controversial and would only be 33% of Tether. Likely would result in a liquidity crisis if more than 70-80% of Tether's were redeemed at once. Although I wonder if that's even possible now given how much USDT is locked in DeFi apps and liquidity pools and burned. (Projects often lock assets in a liquidity pool share and then destroy their access to that share, to ensure to their community that there is always the ability to trade) So Tether will probably continue working for partially the dumbest reasons.
  - londons_explore 4y ago
    Tethers can't be burned. If anyone ever provably burns a tether, then the tether organisation will help 'recover' the tether to anyone holding keys to a previous address that held it, or just anyone with a reasonable story how they accidentally burned the tethers. This is their policy since some big players accidentally sent tether to addresses on the wrong Blockchain...
    - vmception 4y ago
      Thats pretty interesting. I don't think that would work for Tether stuck in a liquidity pool share that was burned by being sent to a contract or burn address. Traders can still shift that tether around, but it cannot be unbounded. Be a hard case to prove.
mbesto 4y ago
> This is the case with any fractional reserve banking system. That is insured by GOVERNMENTS...
mrcartmeneses 4y ago
So if $100m is backed by $1 then it’s backed? Give me a break!
beefield 4y ago
> I think what you meant to imply is that it’s not backed 1:1. This isn’t only an issue with Tether. This is the case with any fractional reserve banking system. There is a minor difference, though. On a typical fractional reserve bank the deposits are backed by assets worth more than what is the worth of the deposits.[1] Not only that, there are other liabilities that take the possible losses before the deposits are being hit. On a typical stablecoin, there is a reason to suspect that the coins are backed by assets worth less than the market cap of the stablecoin. The difference may seem subtle, but it is a difference of a legitimate business and a despicable scam. [1] In case you are interested, you can go and check the balance sheet of any bank you want. The part where the value of excess assets to back the liabilites of the bank (deposits etc) is listed under "Equity"

kristopolous 4y ago

Yeah but something happened when USDT was in the unpeg crisis 2 days ago. See, if it fails then the big exchanges become insolvent, full stop. Now here's the thing. With some exchange APIs you can see market order statuses, whether they're settled or not. You can use this to determine market latency. If I want a market buy, how long does it take to settle. So here's the thing, the latency on USDT buys was on the millisecond scale as best I could determine. The latency on USDT sells was near minute scale. It's a giant accusation so I'm not going to name-drop the exchanges I'm talking about and I'm just a single data point but if anyone else saw it contact me. It looks like they "narrowed the channel" and put their thumb on the scale to prefer buys and float the price, pushing it back up. Now this was at a time that the gas price was about 250/300gwe because of the massive UST exit and network delays were 15/20 minutes or so. So even if you wanted to arbitrage it wouldn't have been worth it because the network was going way slower then exchange latency. This started basically right when Tether tweeted about the billion in Avax and ran for about 12 hours or so Ultimately it doesn't matter. These are unregulated securities and the exchanges can run their markets as the please and, if what I'm saying is right, good job keeping the thing you need to stay in business afloat. Coinbase stock (which I'm using as proxy for general sentiment) climbed 50% after tether got repegged and contagion appears to have been averted I'm just wondering if anyone else saw this. It could be a coding defect on my part, a fluke because of the craziness of the market, me projecting and fooling myself, etc. Please don't go around repeating this as fact, it as of now, needs independent verification

deleted 4y ago
[deleted]

jcfrei 4y ago

Tether isn't backed by cash but by a combination of short and long term loans and potentially even crypto. Fiat deposits are likely a small allocation. Calling it a scam is still disingenuous, it is backed by reserves (the more pertinent question is how liquid they are). People have been waiting for Tether to "collapse" for over 5 years now.