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If a stablecoin allows redemptions, and it isn't completely backed, everyone trying to redeem at once can lead to a bank run and spiral as no one wants to be th
by mhluongo 4y ago
If a stablecoin allows redemptions, and it isn't completely backed, everyone trying to redeem at once can lead to a bank run and spiral as no one wants to be the last holder. The hope, of course, is that it is completely backed. It's also quite hard / expensive to redeem Tether, I've heard.
For arb, I think the trade here is: can I buy USDT and redeem fast enough that I make a low-risk spread, or am I further exposing my funds to risk over that redemption period? Versus selling USDT for USDC, for example, which I can do immediately if I trust USDC. I imagine the latter is what's happening on-chain.
EDIT: Clarified my lazy language around low-risk arb versus peg speculation.
- lottin 4y agoThe arbitrageurs buy USDT at a discount and redeem it, pocketing the difference. This creates a buying pressure, that tends to bring the price back up to $1. Buying USDT and hoping that it repegs is not arbitrage. If tether fails to redeem USDT arbitrage will stop and nothing will prevent USDT from falling more.
- solumunus 4y ago> I think you've got it backwards. The arb would be people buying it at $0.97 and hoping it repegs to $1, not redeeming That's not an arb, that's just buying low and selling high at a later date. The arb is buying something for $0.97 but then getting $1 back, minus fees. The more people doing that the closer the peg stays to $1 through supply/demand. That's the whole basis of how a peg is maintained, arbitrage players provide huge amounts of liquidity and make small margins for doing so.
- mhluongo 4y agoAh, true, apologies for the lazy early-morning comment. Editing.
- jfk13 4y agoIndeed; see https://tether.to/en/fees https://tether.to/en/fees.