5 ms·

How is $0 even possible? It seems to me it must be at least partially backed.

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diab0lic 4y ago
Everyone withdrawing when they have money gets $1, everyone trying to withdraw after insolvency hits gets $0. If this were to occur the secondary market would bear some small but nonzero value representing the off chance that it is a liquidity issue and not a solvency issue.
dragontamer 4y ago
Let's say there is 60 Billion total Tether, but only $30 Billion backing it. As soon as people realize the issue, they will trade USDT for USD. Tether will defend the peg, spending $30 Billion to hold it's value at 1 USDT for $1. Thirty Billion later, the overall situation is 30 Billion USDT remaining, but the bank vaults are empty nothing left over to defend the peg. At this point, USDT snaps to $0 very quickly.
ericd 4y ago
I imagine that if it's partially backed, and everyone tries to redeem, and they try to defend the peg in order to not admit that it's insolvent, then they'll redeem at $1 until they can't, at which point it will be worth ~$0.
- Galanwe 4y ago
  Just trying to be picky: The most likely scenario is that Tether is _overall_ solvent, though not in liquid assets. What would likely happen in case of a bank run is: 1) Tether will defend the peg and redeem at $1 2) Tether will freeze redeems because of limited liquidity 3) Tether will fill face huge pressure and regulatory threats 4) Some people will want to exit USDT immediately at a discounted price (say $0.5), while some others will buy discounted USDT hoping once Tether solves its liquidity issues or bankrupt they could get more than $0.5 per USDT. TLDR: USDT will most likely not go to $0 in case of default. Most likely there will be speculation on Tether's illiquid assets value that could be sold back to pay creditors.
  - Nursie 4y ago
    > The most likely scenario is that Tether is _overall_ solvent, though not in liquid assets. What makes you believe this?
    - eaurouge 4y ago
      By the numbers: - 66B in liabilities - 17B in redemptions over a 2 month period (proof of some liquidity) - 8 years of operation - 100s of millions in annual revenue How many billions are they short? What redemption rate would it take? Which catalyst? At this point, the question should be: what makes you believe they are insolvent? Edit: assets -> liabilities
      - Nursie 4y ago
        > 66B in assets We don't really know this, and a lot of their assets seem to be things like "corporate paper", which may simply be IOUs from exchanges they've given Tethers to. > At this point, the question should be: what makes you believe they are insolvent? A history of lies about audits, for a start. Admissions that they weren't fully backed in court at various points in the past (73% was bandied around by their own people at some point). Plus if the 'corporate paper' situation is anything like described, in any sort of crunch situation it could prove to be worthless.
        eaurouge 4y ago
        > We don't really know this Yes, I should have said 66B in liabilities. We don't know how much they have backing these liabilities. > A history of lies about audits, for a start ... Indeed. So we're free to come up with our various estimates. None more correct than the other.
        Nursie 4y ago
        > So we're free to come up with our various estimates. None more correct than the other. Doesn’t this seem like a massive, systemic threat in itself, that an audit-dodging, opaque institution underpins the ecosystem? Even if it is all present and correct (for some definition of present and correct) shouldn’t we be highly suspicious purely because of this evasive behaviour?
- eaurouge 4y ago
  > and they try to defend the peg in order to not admit that it's insolvent What do you think this means? Tether is not an algorithmic stablecoin.
  - ivalm 4y ago
    They will continue redemption until they run out of money, at which point the remaining tether will be fully unbacked/worth 0.
    - eaurouge 4y ago
      Right. As I suggested in another comment, this belief is more of an article of faith than one based on actual facts. But, my point to GP is that USDT redemption is offchain, and peg defense (for algorithmic stablecoins) or price discovery (for Tether) is onchain. So the market determines the onchain rate. If it goes to 70c, for example, arbitrageurs will likely step in to pick up cheap USDT and take on the redemption risk. Of course if the market loses complete faith and no party is willing to take on the redemption risk (an unlikely scenario imo), the onchain rate could fall to zero.
      - lmm 4y ago
        > If it goes to 70c, for example, arbitrageurs will likely step in to pick up cheap USDT and take on the redemption risk. Only if Tether is visibly doing redemptions. If they freeze redemptions then you'd be dumb to pay 70c for their magic beans. So there's a tight linkage between the onchain price and redemptions.
  - rhaway84773 4y ago
    If it’s 70% backed for example, not being algorithmic is exactly why they will first redeem at $1 for the first 70% withdrawals, and then declare bankruptcy and the last 30% are worth $0. In practice if this is the case they will probably redeem the first 50%, and then run and hide with the remaining 20% USD they have.
- zztop44 4y ago
  I think by working so hard to remain off-radar this whole time, they’ve been setting themselves up for a rug pull if the music truly stops. I mean yeah I think they’ll try to defend the peg for a while but if it’s clear it’s over, the incentives are pretty damn strong for them to cut and run with whatever they can carry.
albntomat0 4y ago
If a run on a theoretically partially backed Tether, the initial folks trying to redeem would get fully paid out from the reserves. This would be done in an effort to make Tether seem stable, with the hope that people regain confidence, and not everyone tries to redeem. This continues until the reserves are depleted.
HWR_14 4y ago
Tether could be worth $0.50 if the company said "We lost half the money and need to reset the peg". They would have to then redeem all the outstanding Tether, as no one will trust them. Therefore, this is unlikely to happen, as it will end the company.
deleted 4y ago
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deleted 4y ago

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Everyone withdrawing when they have money gets $1, everyone trying to withdraw after insolvency hits gets $0. If this were to occur the secondary market would bear some small but nonzero value representing the off chance that it is a liquidity issue and not a solvency issue.

dragontamer 4y ago

Let's say there is 60 Billion total Tether, but only $30 Billion backing it. As soon as people realize the issue, they will trade USDT for USD. Tether will defend the peg, spending $30 Billion to hold it's value at 1 USDT for $1. Thirty Billion later, the overall situation is 30 Billion USDT remaining, but the bank vaults are empty nothing left over to defend the peg. At this point, USDT snaps to $0 very quickly.

ericd 4y ago

I imagine that if it's partially backed, and everyone tries to redeem, and they try to defend the peg in order to not admit that it's insolvent, then they'll redeem at $1 until they can't, at which point it will be worth ~$0.

Galanwe 4y ago
Just trying to be picky: The most likely scenario is that Tether is _overall_ solvent, though not in liquid assets. What would likely happen in case of a bank run is: 1) Tether will defend the peg and redeem at $1 2) Tether will freeze redeems because of limited liquidity 3) Tether will fill face huge pressure and regulatory threats 4) Some people will want to exit USDT immediately at a discounted price (say $0.5), while some others will buy discounted USDT hoping once Tether solves its liquidity issues or bankrupt they could get more than $0.5 per USDT. TLDR: USDT will most likely not go to $0 in case of default. Most likely there will be speculation on Tether's illiquid assets value that could be sold back to pay creditors.
- Nursie 4y ago
  > The most likely scenario is that Tether is _overall_ solvent, though not in liquid assets. What makes you believe this?
  - eaurouge 4y ago
    By the numbers: - 66B in liabilities - 17B in redemptions over a 2 month period (proof of some liquidity) - 8 years of operation - 100s of millions in annual revenue How many billions are they short? What redemption rate would it take? Which catalyst? At this point, the question should be: what makes you believe they are insolvent? Edit: assets -> liabilities
    - Nursie 4y ago
      > 66B in assets We don't really know this, and a lot of their assets seem to be things like "corporate paper", which may simply be IOUs from exchanges they've given Tethers to. > At this point, the question should be: what makes you believe they are insolvent? A history of lies about audits, for a start. Admissions that they weren't fully backed in court at various points in the past (73% was bandied around by their own people at some point). Plus if the 'corporate paper' situation is anything like described, in any sort of crunch situation it could prove to be worthless.
      - eaurouge 4y ago
        > We don't really know this Yes, I should have said 66B in liabilities. We don't know how much they have backing these liabilities. > A history of lies about audits, for a start ... Indeed. So we're free to come up with our various estimates. None more correct than the other.
        Nursie 4y ago
        > So we're free to come up with our various estimates. None more correct than the other. Doesn’t this seem like a massive, systemic threat in itself, that an audit-dodging, opaque institution underpins the ecosystem? Even if it is all present and correct (for some definition of present and correct) shouldn’t we be highly suspicious purely because of this evasive behaviour?
eaurouge 4y ago
> and they try to defend the peg in order to not admit that it's insolvent What do you think this means? Tether is not an algorithmic stablecoin.
- ivalm 4y ago
  They will continue redemption until they run out of money, at which point the remaining tether will be fully unbacked/worth 0.
  - eaurouge 4y ago
    Right. As I suggested in another comment, this belief is more of an article of faith than one based on actual facts. But, my point to GP is that USDT redemption is offchain, and peg defense (for algorithmic stablecoins) or price discovery (for Tether) is onchain. So the market determines the onchain rate. If it goes to 70c, for example, arbitrageurs will likely step in to pick up cheap USDT and take on the redemption risk. Of course if the market loses complete faith and no party is willing to take on the redemption risk (an unlikely scenario imo), the onchain rate could fall to zero.
    - lmm 4y ago
      > If it goes to 70c, for example, arbitrageurs will likely step in to pick up cheap USDT and take on the redemption risk. Only if Tether is visibly doing redemptions. If they freeze redemptions then you'd be dumb to pay 70c for their magic beans. So there's a tight linkage between the onchain price and redemptions.
- rhaway84773 4y ago
  If it’s 70% backed for example, not being algorithmic is exactly why they will first redeem at $1 for the first 70% withdrawals, and then declare bankruptcy and the last 30% are worth $0. In practice if this is the case they will probably redeem the first 50%, and then run and hide with the remaining 20% USD they have.
zztop44 4y ago
I think by working so hard to remain off-radar this whole time, they’ve been setting themselves up for a rug pull if the music truly stops. I mean yeah I think they’ll try to defend the peg for a while but if it’s clear it’s over, the incentives are pretty damn strong for them to cut and run with whatever they can carry.

albntomat0 4y ago

If a run on a theoretically partially backed Tether, the initial folks trying to redeem would get fully paid out from the reserves. This would be done in an effort to make Tether seem stable, with the hope that people regain confidence, and not everyone tries to redeem. This continues until the reserves are depleted.

HWR_14 4y ago

Tether could be worth $0.50 if the company said "We lost half the money and need to reset the peg". They would have to then redeem all the outstanding Tether, as no one will trust them. Therefore, this is unlikely to happen, as it will end the company.

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