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People say USDT is not backed, therefore a time bomb waiting to explode.

I don’t think so.

There are many things Tether can do to protect its peg, even if underlining fiat assets are not fully liquid, or not there at all. What are those things?👇

1. Grow user base as fast as possible.

More users, bigger volumes, more dispersed ownership help with price volatility. When you have so many people trading in and out of your coin, they arbitrage the volatility away without you having to do anything.

Put another way, more and dispersed users reduce the likelihood that everyone acts in unison. Fiat redemption size / total balance sheet ratio drops as you grow.

That’s what Tether has done. It grew 16x the past 2 years, and still accounts for 60% of all stablecoin market cap even though new comers are catching up.

Sure enough, price volatility has dropped. Issuing on Ethereum in 2019 helped a lot, as it gave Tether access to a lot more users.

Some people say Tether has grown so much because they gave USDT away for free to get adoption (read: magic money not backed by USD).

I don’t doubt there is some of that going on. Every startup gave away their product for free. It’s marketing expense. This is not different.

But it’s against the interest of Tether to do this at scale, for it to become the primary reason that USDT isn’t fully backed.

After new USDTs are issued in exchange for USD, then the issuer has the incentive to invest that USD elsewhere instead of having it sit at the treasury. I think that’s the main reason of the less-than-full backing.

I wrote another piece about the incentives, also how a stablecoin like Tether can bootstrap its growth. Check it out here.

2. Set thresholds for withdrawals.

Once you get big enough, you can set limits on withdrawals so that you only directly interact with your primary dealers and larger users.

This reduces your admin cost, while still allows you to claim the token is fully convertible. Also it shields you from the smaller retails who tend to be more fickle and susceptible to FUD.

Tether is only allowing fiat withdrawals for at least $100k. You would think this makes USDT less “liquid” and investors would want to be compensated for that by pricing USDT lower than $1.

But in fact USDT has traded at a premium much of the time. This is telling you the product has a strong demand that compensates for other factors.

That’s what the conspiracy theorists somehow missed: Tether is an outstanding product that has real traction. That’s something hard to manufacture with conspiracy and gimmick alone.

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3. Block the offenders.

Although USDT is big by crypto standard, $60 billion market cap is nothing in the TradFi world.

Lyons & Natraj (2020) estimated that $40 million change in net trading causes 100 basis point move in the $ price of USDT. If you assume price elasticity is linear, then it takes $4 billion to bring USDT to zero.

Obviously the price elasticity is not linear. For a stablecoin it’s probably much easier to cause price volatility at around $1 than around, say, $0.8.

Still, it’s a much higher elasticity than in traditional currency markets. For example, in the Deutschemark/USD market in 1995, if you wanted to cause 100 basis point price move, you needed $2 billion (Evans & Lyons, 2002).

All to show that the bigger you are, the safer you get.

In 1992 George Soros amassed $10 billion short position and brought down the British pound. What if someone wants to pick a fight with USDT like that?

The good thing is all activities on the blockchain is open for viewing. I’d be surprised if Tether is not closely monitoring transactions in and out of USDT.

If there are activities that smell malicious, they can ban the address outright. And that’s what they have been doing.

To conclude, even though USDT may not be fully backed:

  1. Tether is not simply sitting still waiting to be shot. They have tools to defend the peg and likely more in the arsenal.
  2. The biggest defender at the end of day is size. I’d reassess the situation if Tether stops growing or growth reverses. The month of June 2021 has been flat. That’s something that needs to be watched.


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