The most important point in this article is that whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. Nobody should be under the illusion that Tether is decentralized or anything other than a bet on Bitfinex.
> whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine
This is true for every pile of toxic crap that's ever been financially engineered.
The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)
Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.
Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.
“Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.”
LOL yes I am assuming some sarcasm here. Sticking ones finger up to the man by.. holding cash equivalents in forms not eligible for FDIC insurance, yes!!
Or potentially like putting money into British Pounds or Swedish Crowns in early nineties - just waiting for someone with a bigger wallet to come around and break the capitalization by shorting.
It depends on your jurisdiction, of course, but I (as an American) wouldn't feel confident in the legality of buying Venezuelan government securities given https://www.state.gov/venezuela-related-sanctions/
Even if buying a bond issued by an unfriendly nation isn't illegal at a given moment, you might find yourself forced to divest if relations between your country and the issuer sour. I'm sure a few people who held Russian sovereign bonds lost their shirts when sanctions were levied and they had no choice but to dump their assets.
In the absolute worst case (e.g., if you held Japanese sovereign debt in December 1941 or Afghan sovereign debt in 2001), holding a bond might be grounds for you to be charged with treason or sponsoring terrorism.
>This is true for every pile of toxic crap that's ever been financially engineered.
I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.
The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
> complete ban on all non-productive financial schemes
I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.
> "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more
Great example. In 1958, the Congress banned "the trading of futures contracts on onions" [1]. By the 2000s, increased price volatility--which had to be borne solely by farmers and distributors--prompted "the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading" [2].
There is a middle ground between banning and a free for all. In the former, useful financial products and innovation is suppressed. Finance is about allocating real resources in our economy. Bad finance is bad. But on the other end, everyone steals everything, and investor self-interest gives way to the animal spirits we saw leading up to the Panic of 1907, the Great Depression, the S&L crisis, the Financial Crisis and whatever we'll call crypto.
Right. I used to sit on a trading floor next to a commodities sales desk. If the GP's mental model is that people who are involved in futures are, by definition, involved in speculation, then that is a wrong model: a lot of "real economy" manufacturers hedge their exposure to price changes for their inputs or outputs through the futures market.
Precisely. A friend of mine trades futures for a non-profit made up of growers as members. It is more efficient insurance than the federal government offers them and saves them millions.
Exactly. The problem is that “good/useful” is in the eye of the beholder.
For example, bank prop trading bans went into effect but really how does one differentiate prop from “customer facilitation” or heding. Its a sliding scale of grays.
So instead of Citi having a trader going “I think I’ll buy some S&P calls today and bet on the index” he instead can only do that if 1) a client wants to sell some & he takes the other side, or 2) there is some other exposures accumulated do to customer facilitation such that he can justify buying S&P as a hedge.
The same risk is being put on, but for different reasons. Or you could say the only thing that is changed is who has initiated the risk - customer, instead of bank.
Futures of course exist for very good, historical reasons. How do people think their home heating oil company offers you fixed price contracts for the season, etc?
Reducing the number of players in a market usually only increases volatility, transaction costs and illiquidity.
> I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.
This is just the finance sector subset of the larger problem of bullshit jobs. We know a substantial fraction of jobs are bullshit (non-value-creating), but which ones? I have a strong suspicion this is unsolvable because any metric you start using to decide which jobs are bullshit will instantly be gamed. The system will work as hard as it can to prevent you from figuring it out, and since it's made of people it is at least as intelligent as you are.
The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession, but unfortunately that also takes a ton of fragile but very innovative and promising things down with it. Recession is a bit like extreme chemotherapy. It might kill some cancer cells but it also kills a shitload of healthy ones and sometimes the treatment ultimately fails because it doesn't kill enough of the former to justify the latter.
Similar principles exist in other areas like advertising. There's a saying in the ad business: "I know I'm wasting 80% of my ad spend. I just don't know which 80%."
>The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession,
That is a very convoluted way of implementing negative yields.
Because people want to avoid losses associated with negative interests they instead do the inflation thing and pretend there are no losses, the discrepancy between book value and real world value grows ever bigger as the book value is not representing losses in the real economy. The moment sentiment even dares to look at a downward trend poof reality has come back from its slumber. Negative yield is coming out of hiding, all at once.
> There is a middle ground between banning and a free for all.
Providing basic banking as a public utility so most deposits by individuals, local governments, and small businesses are not stored with investment banks engaged in speculation. Public banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel and prohibited from originating loans on security of state property such as money (which might be obtained via leveraged loan from another lender) or on security of common property such as excess real estate values attributable to land scarcity.
> banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel
The problem isn't getting loans on one's crops. It's transferring the price risk to someone better able to bear it.
Farmers want a guaranteed profit when they plant. Loans don't address that. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.) The only real alternative is government guarantees. Those bring their own host of problems.
futures don't guarantee a profit, only a price. it's up to the farmer to decide whether the price is worth the planting (regardless of profit). and the pricing function only works well in an uncorrupt market.
the problem isn't the existence of the futures markets, but the same kind of over-consolidation that corrupts every laissez faire market, making them inefficient and brittle in the long-run. if regulation encouraged primarily mid-sized firms, rather than a few large ones, we'd have better informed and more efficient markets, albeit less lucrative since the firms wouldn't have undue (read: corrupting) influence.
note that insurance is another alternative to futures or gov guarantees, though i'd question the need to externalize risk, which manifests a critical market-shaping signal.
You mean growth dependence. When you are forced to grow every year and you can't grow by getting new customers you must steal existing customers from other companies by acquiring them.
'growth dependence' is just a symptom of greed, which is also the root driver of over-consolidation/corruption in markets. that's why a thoughtful regulatory stance is essential to high-functioning markets (e.g., anti-trust, not price controls), rather than the slapdash shit we have now, where parts of markets are highly over-regulated to ensure regulatory capture, while other parts are highly under-regulated to externalize risk.
> The problem isn't getting loans on one's crops. It's transferring the price risk to someone else. When a farmer plants, they want a guaranteed profit. Loans don't address that problem. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.)
The problem is excess credit available to financial firms engaging in leveraged speculation and financial services investment, resulting in financial sector employment and compensation that is super-proportionate to any real savings generated for non-financial producers. This leverage is enhanced by the lack of free (zero-fee) public alternative for basic banking services. It is not necessary for public banks providing basic banking services to guarantee profits for farmers. Provide savings, transfers, and liquidity loans at present values at what an option to sell existing previously planted crops would be worth might be sufficient to reduce deposits held by banks engaging in leveraged speculation. Providing basic banking as a public utility is the middle way the parent commenter advocated because it does not require banning anything.
"The "futures trader" extracting value from the system buying/selling futures has done no "real" work"
Small farmers hedging next years crop would like a word with you ...
... and there are one hundred examples just like that.
Did you ever convert foreign currencies in advance of an international trip when you saw the currency pair move favorably ? Have you ever bought an ETF ? Do you have a mortgage in the United States ?
All of these things are possible because of a highly liquid, regulated market with diverse participants ...
... which brings us to the obligatory Margin Call[1] quote:
"Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big fuckin' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really fuckin' fair really fuckin' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from."
"The bank in Margin Call was packaging MBS out of mortgages, not speculating on the price of commodities using derivatives to gain leverage."
Correct. That's my point.
It's not merely that you can't have one without the other ... it's that you very likely wouldn't want to eliminate the (margin call guys) even if you could.
Speculating on futures and other derivatives is basically what those rich guy's sons are doing in their hedge funds. Most hedge funds get worse returns than the S&P 500.
As a non sarcastic response I would note that financial intermediation exists for the purposes of transforming types and durations of risks between people/firms trying to offload from / take on that risk.
This is how things like 30 year fixed rate mortgages, low fee index ETFs, target date retirement funds, fixed price home heating oil contracts, every form of insurance, etc can exist in the consumer space.
In the B2B space you have all the companies with needs to lock in prices for future inputs in order to control costs & plan their own output pricing, etc.
All of this has greatly reduced the boom-bust cycle of the pre-Fed economy. As bad as 2000 or 2008 may have felt, they were nothing like the great depression of numerous 19th century recessions & depressions.
I propose a ban on all non-productive trips by car. Only good people should be allowed to emit carbon unless for productive reasons that pass the carbon threshhold for the amount of carbon the trips will emit.
Good people as defined by a social credit system.
I will decide what is a productive reason & what is the carbon threshhold!
People totally have the option of living under this type of government - it exists in top down centralized places like China.
This is a great idea! We could break ones social credit down into units. What to call them ... Rallods, maybe? Everyone could earn Rallods for doing productive, pro-social things. People could even send some of the Rallods to each other, in exchange for taking on productive, pro-social task they'd prefer not to do. Rallods could even be exchanged for goods!
A lot of rich people want more money not because they need it but rather because they want money to act as social credit and therefore they want to maximize this number even though other people need the money more.
There are a class of people for which money is more of a scoreboard which I think is what you are getting at here.
I think for most rich people, having a lot of money means, as ironic as it sounds, not having to think about money.
Growing up fairly middle class and eventually making a lot of money once I made it out on my own, the types of tortured price comparison shopping & concerns that my parents made (and I did my first 5 years of career) are just not something I worry about.
Being able to just go to a grocery store and fill the basket/cart until I have everything I want (NOT need, and without checking every items price and cross checking every price option for every items competitors), and then pay whatever it rings up to.
Doing weird as it sounds things like - cross shopping a $40k & $120k car because, well, they both sort of hit different parts of my interest lists.. and maybe I just keep my current car + add the $40k, vs trading in towards the $120k.. or really.. who cares, just buy the $120k car anyway.
Being able to knowingly overpay for home repair/renovation contractors because they give you a much higher level of confidence, communication and convenience. We got 3 bids, the guy who was 2x the price of the other guys was just such a professional we decided to go with him. He was like dealing with a professional tech/bank project manager rather than a squirrel guy you can't get hold of.. He started on time, finished days early, went not a penny over budget and gave us start&end of day updates with plans of attack for the next day.
Meanwhile some of our friends who did not have budget to pick the highest bidder had contractors disappearing to do work on other houses, had to call their contractor daily to force him to show up, had guy starting the work day at 2pm and then taking an hour lunch break, and every other crazy home renovation story you hear where 2 weeks of work takes 3 months.
So for those outside the billionaire class, being rich mostly means not having to deal with the inconveniences of being on a budget.
This is one of the benefits of the federal / state divide in the US too.
If you are worried about the other side being crazy, you can live in a state that solidly on your side of the aisle, and be insulated from when the other side is in power at the federal level.
There is a counterparty to every financial transaction. Presumably, both sides are happy if they agree to trade with each other. All of what you call "unproductive financial schemes" are mostly about exchanging risks, just like insurance.
Any conman worth his salt can sell a lemon, a toxic financial product or snake oil.
In UK naive homebuyers bought leaseholds where service charge and ground rent increased EXPONENTIALLY every 10 years. They even had lawyers, and those greenlit the deal.
Or when banks handed loans to strippers and then sold the loan to 'investors' causing subprime mortgage loan crisis of 2008. S&P were meant to do due dilligence, the 'sophisticated investors' were meant to do due dilligence, but here we are
>The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
If I am a farmer and I want to lock in a price for my crops right now, who am I supposed to sell that future to?
Sure, a small percentage of the time, I can sell to someone who knows that they need my crops on exactly that date of delivery, but a lot of the time there simply won't be anyone who knows at that exact moment that they need exactly what I am selling.
Having traders in the system means that I always have a buyer when I want to sell (and similarly when a user of the item wants to buy).
>They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
So what? If, through the trader solely enriching themselves, we get something useful from it, why does their motivation matter?
A baker bakes solely to enrich themselves as well - this is the nature of capitalism. The end result is what I care about.
why stop there? lets ban all activity that doesn't produce tangible goods. the number of parasites, i.e. people who consume tangible goods but don't produce them, is probably higher than the number of people who do
fields, mines and factories. we don't need anything else
Material production still requires accounting, installation, transportation, delivery, disposition, optimization. Financial parasitism more clearly occurs when someone pledges something to lenders which they do not actually own. For example in the 19th century when JP Morgan lent to planters on security of chattel slaves, the planters pledged the bodies of other people as collateral. Arguably loans should only be issued on security of personal property which does not deny the personal property rights of others. This might exclude leveraged lending of money on security of money (arguably lending on security of state property) and excess real values due to land scarcity (arguably lending on security of common property).
One day, people who think like you will come to power and decide that under their administration, [activity your livelihood is based on] constitutes “extracting value from the system” and is no longer permitted.
Maybe you are a golfer, or a restaurateur. But “what you’re doing is solely about enriching yourself.” Your fine cuisine is not feeding the poor. It is immoral to play golf while children go hungry. You have clearly become wealthy while doing nothing for the greater good.
They will come to you holding guns and demand that you cease your activity, and hand over your “wealth” - maybe your house, your savings, the food in your pantry, the clothes on your bank, maybe your wife or your daughter.
“We will take back for the People what is theirs” they will say. If you refuse, you will starve in prison, and they will take your life anyway. If you accept, you will starve in the street.
This is like the Christian ban on charging interest in theory it is doing it for a worthy cause but in practice just banning something isn't the answer because it doesn't address the source of the problem.
In efficient markets profits trend toward zero so having more traders will accomplish that goal better than banning traders. It is the same with interest, interest goes to 0% if there is enough saved capital to fund all investments banning interest makes it harder for the interest rate to go down.
It would be better if we built an economy that can handle low amounts or even zero profit by eliminating the dependency on yearly growth.
I would really like to know what would happen if—in a wave of international solidarity between all the workers in the world—workers would take their profits in their own hands and away from any shareholder and overpaid non-contributing CEOs. What would happen to all these markets.
Would a company controlled by their own workers choice to funnel parts of their profits to wall street traders? Probably not. Would there be any money to be gained on the stock market in such an environment? Probably not.
So a natural question to ask then is. What value is there in the stock market which does not rely on money being siphoned away from workers?
Eventually most of those companies controlled by their own workers would need to raise capital again, and then we'd quickly end up back where we started. Plus employee control hasn't worked well in most of the companies where it was tried. Look what happened to United Airlines. They were majority employee owned for a while, but the different groups of employees never agreed on how to run the company.
As long as there are well-capitalized parties that want to prop up Tether
That's been my personal conclusion as well but it led me to the next question of what # is the breaking point for these well-capitalized parties?
I tried looking at the size of other well-known collapses like Enron, LTCM, Lehman Bros, etc. LB reportedly had $700B in assets and liabilities before the underlying asset devaluation precipitated their cave in. Tether survived the recent de-peg due to trading shops like Alameda absorbing the free 1-5% with their cash flow, which I believe is also responsible for the recent 11% drawdown in Market Cap (I assume due to redemptions). That said I'm not really experienced enough to know how these backroom overnight liquidity issues get resolved.
My hunch is given the true global reach of the crypto market Tether could easily get to $nnnB or $nT before we experience a black swan event that results in a liquidity crisis. Assuming they survive these short-term recessionary pressures, my long-term prediction is we're just setting ourselves up for another roaring '20s again, with crypto eventually learning all the same fundamental financial lessons we did back then.
I don't have the time, but I'd love to see someone rewrite "Reminiscences of a Stock Operator" as "Reminiscences of a Crypto Operator". I don't think you'd have to change any of the scams, only the context. Partner with a good illustrator and it would make a lovely coffee table book.
The majority of this scam is happening on unlicensed unregulated off shore exchanges. They don't keep client funds segregated either. When the bubble pops they all go down. The bag holders won't even realize it until the website domains stop resolving. It's musical chairs and the music stopped playing earlier this year when the audits of Tether's reserves came out. Now people that were listening are getting as much out as possible before the seats are all gone.
So Tether has become something like an international reserve cryptocurrency, which gives them an "exorbitant privilege"[0], meaning they can do pretty much whatever they want safe in the knowledge that everyone else will do everything they can to prevent them from failing because everyone else would have too much to lose if they did fail. That has kept it going for a long time, and might (or might not) keep it going for a lot longer, but ultimately a replacement reserve cryptocurrency will come.
By most measures, it appears that Tether is slowly going to die out and replaced by USDC. Among retail users, Tether has increasingly lost sway and is largely used only on exchanges (which is still massive, but not the only game in town anymore).
Roughly half of USDT is circulating on Tron, which is a dead chain. This TRC20 Tether is almost exclusively used for inter-exchange transfers (since fee is capped at $1/transaction)
On Ethereum, USDC is now bigger than Tether. Over a month, Tether on-chain supply has dropped nearly 12% [0]
The "exorbitant privilege" usually belongs to a government with a vast military, and/or substantial colonial possessions -- something that allows force to be used in an emergency. There is a reason why the US dollar, but not the Swiss franc, is an international reserve currency.
The UK Pound is still considered an international reserve currency by virtue of being incorporated into IMF special drawing rights, even though the UK no longer really has a vast military or substantial colonial possessions.
Beyond the nukes another comment mentioned, the UK is also a permanent UN Security Council member, a founding NATO member and a productive member of the Five Eyes and AUKUS [1]. And it still has the world's fifth most powerful navy [2].
> substantial colonial possessions
No, but they have overseas military installations in Gibraltar and on Cyprus, the Falkland Islands and Diego Garcia. Smaller installations at Ascension Island, in Singapore and Brunei "provide important staging posts and logistical support facilities for British and allied forces passing nearby" [3]. In terms of practical force projection radius, they're in a very small club of nations.
They still have the ability to put nuclear warheads anywhere on the globe, by virtue of their ballistic missile submarines and the nuclear warheads those ballistic missiles carry. The Trident D5 missiles have a range of more than 7,500 miles, and the submarines move.
That, in and of itself, is worth a lot -- potentially even more than having a large military.
I completely agree, I was just responding to the parent commenter's assertion that the UK didn't have the offensive power to have "exorbitant privilege"
I saw a trident missile launch once in 2017. Didn’t know it at the time. Everyone should know about those missiles—they are the reason we don’t have “real” war.
They are so unbelievably powerful it blows my mind.
Expenditures don't mean much. Look at purchasing power parity, and actual capabilities. The UK military lost the ability to conduct large-scale independent operations without US support decades ago. Capabilities are minimal in many crucial areas including logistics, aerial refueling, strategic bombing, amphibious lift, ballistic missile defense, and space dominance. Even their nuclear deterrent is completely dependent on the US military-industrial complex.
As an outsider this reads like someone in 2006 saying that these risky looking mortgage based products are fine because they'll be propped up by Fannie Mae and Freddie Mac.
They certainly weren't correct for the people who bought those Mortgage Backed Securities. Unless you were a huge institutional investor with the inside track you got skinned alive. Even the big boys got burned pretty badly. Lehman Brothers was the fourth largest investment bank at the start of 2008.
You have to predict what those well-capitalized parties will do during a market panic. Decision making seems to change quickly when half the money has just disappeared, to focus on salvaging as much as possible.
Exactly. It's not whether Bitfinex is able to prop it up, it's whether Bitfinex thinks Tether can be propped up without too much expense. At a certain point it no longer becomes worth propping up, and that number is very far from the current $74B market cap it's currently at.
>whether Tether is fully collateralized ultimately doesn't matter
There's a nuance here.
If Tether IS full collateralized, then it does not matter since a run on Tether is by definition impossible.
If Tether IS NOT fully collateralized then it may or may not matter depending on the size of the run and the ability of Bitfinex etc. to contribute capital.
Full collateralisation isn't enough to rule out a run on USDT, since the value of the collateral can vary depending on market conditions. We can be certain that one USDT will always be redeemable for one USD, as long as USDT is fully backed with USD, but we already know from the attestations this is not the case.
Right, I'm assuming collateralization by bank accounts, money market accounts, and short term Treasuries. Not commercial paper issued by Binance and Bitfinex.
If you just sit in Tether sure, but the ecosystem of stablecoins gives you access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries, so the bet is a little more sophisticated than dollar for dollar.
Actually the DeFi yield opportunities are not any better than Treasuries on a risk-adjusted basis. You might not be familiar with the actual risk level, including counterparty risk. Some of the cryptocurrency grifters have intentionally obscured that issue.
I’m confused. Banks and credit unions pay interest on savings because they can loan or invest that money with higher yields then the interest they pay to the customer/member.
How exactly do cryptocurrencies finance their DeFi yields to their investors? The only way I can think of is with the money of future investors, but that is a pretty blatant Ponzi scheme.
Yeah, that still doesn’t make sense. If that were to be sustainable you would have charge higher interest on the loans then you give to savings. That means a customer has the potential of getting a loan in an alien currency which they’d have to sell to USD, and then buy some more of that alien currency to pay it back with much higher interest then if they would have just gone to a bank/credit union/loan agency.
These DeFi yields must be funded in other ways than just loans.
> If that were to be sustainable you would have charge higher interest on the loans then you give to savings.
Which is exactly how protocols like Compound work, although 'governance tokens' are also issued simply for using the system.
> These DeFi yields must be funded in other ways than just loans.
Which? DeFi stands for Decentralized Finance, which pretty much means the rules are easily available - as long as you talk about a specific example, not spherical cows.
I’m sorry but I’m still confused. Who are the people taking these inconvenient, unoptimal and expensive loans, when they can get better and cheaper loans through traditional means? Something doesn’t smell right.
Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.
EDIT: I went on a little scouting mission on google (well DDG actually) to find out if I could borrow some USDT on the Compound and how much it would cost me. But I mostly came across articles explaining how you could make money by doing the opposite (buying Tether and lending it), and numerous dashboards with all sorts of hard to understand data with the prices of various cryptocurrencies and some rates I couldn’t understand. I suspect that the only people borrowing USDT are actually also speculators that are invested in the cryptocurrency market (perhaps they are trying to short it).
> Who are the people taking these inconvenient, unoptimal and expensive loans, when they can get better and cheaper loans through traditional means?
USDC is at 2.3% APR, USDT 3.78%. I think you'll find that most people cannot obtain unsecured loans that low, and the forms of collateral a bank will accept are much more limited. The biggest reason is also the reason why people like Elon Musk have massive loans: avoiding taxes on realized gains.
Looking at these rates they are all over they place, but I at least understand now that this probably isn’t a ponzi scheme. I see that the borrowing rate is always higher then the savings rate, and therefor the money people are making adds up.
That said GP’s claim was that these yields are “much better "passive" interest than bank deposits or treasuries” however that doesn’t seem to be the case for all but few of the currencies. I get better interest rates at my credit union. For those currencies that are actually yielding higher interest (USDT being one of them) are also being borrowed with higher interest then loans at my credit union. So I think GP’s claim is simply wrong. Yields are only higher if you offer your money in a lending scheme with abnormally high interest.
As for who takes these loans. I don’t see that though. You need up to 2× the loan amount as collateral in an asset that is already as liquid as the cryptocurrency you are getting. Normal people would just use the money they already have and pay 0% interest, not put it up as collateral so they can borrow half that amount. I don’t even see how this could even be used as a tax evasion scheme because the collateral is equally liquid to your lending amount and should be under the same tax clause. The only use case I can see are speculators. And the only way to make these higher yields, is if a speculator makes a financial blunder, which is not sustainable either.
Interest on lending, and trading fees from liquidity pools. During a bear market in crypto certainly these yields will decline.
The 2 sources I mentioned above are essentially flows that accrue during the bull markets. It's not magic, when people want to long assets they borrow stables. If you lend into these markets you'll get the yield. With liquidity pools you can get some transaction fees even during market volatility and draw-downs, in the short term at least.
When you hold Tether, you're taking a risk that your Tethers might not be redeemable in USD. As far as I know, this risk isn't compensated in any way, shape or form.
When you deposit your Tethers somewhere, you're taking an additional risk, namely the risk that you might not get the deposit back. The interest that you get on deposits is compensation for taking that risk, but not for the other risk.
For sure, holding tether (or any stablecoin) without investing it is pointless. It can't go up, but might go down. The only reason to hold it (longer than to do a transaction) is if you're making a return.
It matters deeply. Neither Bitfinex nor any other exchanges are required to rescue Tether. Additionally, these other exchanges may not have the collateral to rescue Tether in a simultaneous market and crypto downturn.
Yeah that's the whole point behind fractional banking. The government regulates how much money you need to hold to satisfy demand.
Oh wait, I'm just getting word that Tether isn't a bank. I wonder what ratio you can have if you aren't a bank?
Weird to think about because I thought that it was very illegal to have an unregulated bank. Oh well, I'm sure nothing bad ever happened before bank regulation.
For anything to work efficiently in crypto it always needs to be centralised e.g. OpenSea, Coinbase. Both of which hilariously are backed by a16z. As Scott G says... "meet the new boss... it's your old boss"
More examples: Metamask, Moralis, Blockchain.com, Kraken, Binance
It's remarkable that a stablecoin which was able to mostly maintain the peg for years at a time now needs to redefine what being pegged means, and that this state of affairs has continued for more than a week. That's why I mentioned it.
Peeking at the long term chart[1], I don't think 0.1% is notable. In Oct 2018, it bounced around ~1% under the peg for most of 2 months. Then in Dec 2018, it bounced around 1-2% over the peg for 2 months. A similar swing happened in Apr-Jun 2017. I'm actually surprised, I've never looked at this chart before and I didn't expect to see swings of several percentage points. But at any rate the current 0.1% is pretty tame in comparison and I'm sure it's just the cost of moving money to arbitrage.
If you zoom in to the first time period I mention (Oct 2018), and inspect visually, it was strictly under $1 for nearly two months. Right after that it was strictly over $1 for nearly two months. That's if you trust that site's data of course.
Remember this is the price on the secondary market, and these are just random people who see the price and then shuffle money around so they can buy a dollar for 99.9 cents. Anyone can do it (if you can stomach exposure to USDT of course). So if the system is working properly the price should generally hover within $1 plus or minus the cost to move money, but there's nothing keeping it at exactly $1.000000.
coinmarketcap/coingecko are generally not very reliable for evaluating the stability of stablecoin pegs
most liquidity tends to aggregate on dexes like Curve, which is also where you could have seen the whole LUNA/UST debacle play out in real time as large actors swapped out of UST into USDC/USDT/DAI
That's something different, though. Money market funds are meant to be safe interest bearing investments: they're expected to give a small positive return on investment in normal times, and to be safe enough that people will at least get their original investment back in bad times. That's why it's a big deal when something happens which causes them to return less than was invested by any amount: a safe investment, which gave lower returns in exchange for that supposed safety, wasn't.
The goal of Tether is a little different. One USDT is meant to be worth one USD. It's just as much a problem for the purposes people use it for if USDT is trading above one dollar as below, because they're paying more than its value. That is, the Tether peg is meant to be two-sided, both above and below, and all that's happened is that it's gone from trading at slightly above the nominal value to trading slightly below it. That's not really "breaking the peg" in any meaningful sense.
This is why in regulated markets you can inspect the ticker: to provide a audit record for proof that nobody is funding themselves or the asset by arbitrage.
> We take the 00:00Z price each day for 365 days and then average it
Take the average price at close of Lehman Brother's stock in 2008 and you get a positive number. That doesn't make it less broke.
> holds its price above a $0.98 average
When we say money market funds "broke the buck" in 2008, we are talking about one fund going to 97¢ [1]. Moving the goalpost to on average outperforming what counts as badly bust in real markets concedes a lost peg.
Suggest a better methodology crisscross, I'm happy to listen. The problem with $1 flat is that anyone can sign up and manipulate it over time, holding it a fraction of a cent under isn't hard for a moment each day. Constantly maintaining a few cents under each day is much, much harder, feel free to go look through historic charts of what it costs to sell tether for USD over the last few years.
All it takes is a few days of near zero in the next year to win the wager. Isn't that what patio11 has said would happen for what 4 years now?
I'm offering a chance to capitalise on such deep knowledge, surely that's a no-brainer choice for someone so convinced that Tether is done for?
> holding it a fraction of a cent under isn't hard for a moment each day
It shouldn't be. Not for a dollar-pegged asset. Fractions of a cent on billions of dollars, dollars easily lent and borrowed every day, every minute, is millions of dollars a year for an arbitrageur [1].
Hundreds of billions of dollars are deployed into funds exploiting smaller differentials on rates and futures curves.
> what patio11 has said would happen for what 4 years now?
Four years isn't long. At the first sign of tight markets, the damn thing fell apart to the tune of 5%.
> that's a no-brainer choice for someone so convinced that Tether is done for?
People are shorting Tether [2].
The problem is counterparty risk. When Tether busts, you want someone on the other side who isn't all in on crypto. That's not easy.
[1] Coinmarketcap shows $0.9989 for 1 Tether, an 11 bp spread. Call money is 2.75% [1], or around 75 bps per day; too expensive. But the repo rate is 80 bps [2]; less than a basis point a day. Borrow a billion against collateral, buy one billion Tether, redeem it for one dollar each and pay back the loan. You'll make, round trip, a $1mm profit [c]. In one day. Unless we're arguing there would be $1mm transaction costs for this trade, one must ask why nobody is doing it.
> Hundreds of billions of dollars are deployed into funds exploiting smaller differentials on rates and futures curves.
Legally, IRDs and futures trade/settle on a few centralized exchanges with maybe one CCP (at least going by clarusft numbers on monthly dv01 volumes [some products way trade more on different venues compared to others], esp compared to all the places USDT trades) with many times rehypothicated US treasuries or other gov bonds behind it all, scheme blows up occasionally (was fun watching 30 year UST's trade ~30 bps under 75% of SOFR txs for a month before sept 2019 'surprise' fireworks happened).
> … buy one billion Tether
With no slippage/spreads on dex's or cex's to be able to do this with any stablecoin? Pipe dream. Maybe you can market make over the course [unknown amount] of time and pick it up on cex/dex's at/under $0.9989, but good luck trying that everyday (esp on chain where you will need to split that over many address all the time or addr tracking algos will front run if the MEV bots dont get you on every tx).
Shit show all around, ones just more concealed from the public and "regulators" than the other…
> With no slippage/spreads on dex's or cex's to be able to do this with any stablecoin? Pipe dream.
Slippage for an arbitrageur is price correction to the market. I made a math error in my comment: call money at 2.75% is less than a basis point a day. The trade makes money with no collateral.
I--me!--could call my broker and borrow $10mm at 5.75% (call money + 300 bps, because I'm not a billionaire) by lying and saying it wasn't for trading, buy 10 million Tethers for 0.9987, redeem them and pay back the loan the next day to turn an $11,425 profit.
I'm not going to do this. Because in that interval between buying and redeeming, an interval I'm sure would be marred by unnecessary delays--with my borrowing cost the trade breaks even between days 8 and 9--there is more than a 1 in 875 chance that Tether blows up [a]. (In other words, I'm betting, by not doing this trade, that Tether has no more than a few years to its name.)
[1] 1 / (11,425 / $10mm), the 11,425 being about $10mm - [$10mm * 0.9987] - [$10mm * {(2.75% + 3%) / 365} * 1 day]
Is it not well known that the Lehman International (London) book turned the all history record yield when finally unwound by the liquidators, and made LB fundamentally solvent at the death?
Edit: solvent at crisis time. LBI wasn't linked to onshore information systems.
The problem wasn't solvency. It was liquidity. The point of bank regulation is to ensure that banks can survive small bouts of illiquidity and remain solvent through major ones.
> Are any of you willing to back up any of these bold sentiments with actual money? Or are you just like the rest? All words, no soul?
If you are so sure of this then let us make a Real bet. 50 million sounds good yes? And if you don't have 50 million we can simply bet your entire net worth.
It's a real offer and am willing to part with it if I'm wrong. Please don't make a mockery of it
I am happy enough with what was proposed and am not being facetious, was wagered directly to the person who wrote the article a few others after that.
Don't see anyone daring to take up the challenge, just low effort and frankly low-tier commentary that doesn't belong on this website in response. I will offer it to you as well since you seem keen. Any amount up to $5000 USD.
It's not much in the scheme of things to prove oneself right yes? I'm happy to have it all donated to charity which you can claim as tax deductible if that so pleases. Or are we not even talking about Tether anymore and just something else, something deeper that lurks within the unsettled anger of all these comments?
I'm happy to discuss terms. Over one year I don't see any risk to this bet at all. And it seems the people I'm offering to feel the same way, as they are running away terrified from it.
I offer you the same deal, $5000 USD 1:1 that Tether maintains the peg above $0.98 for the next year averaged at the UTC 00:00 USDT/USD price on Kraken everyday.
We both keep it with an intermediary who invests in something that attempts to maintain a semblance of keeping up with inflation.
One year from now we tally up the score and the correct person wins. You only need a few days of tether collapsing to win this bet.
It's a simple wager that surely makes sense for those with all these strong words and bravado in here.
Thats breaking the peg though! Tether says its 1 to 1 with the pegged fiat currency. It doesn’t say its .98-1.01. There are pegs that do this sort of range based pegging but Tether is not claiming that.
Tether's claim is that verified users can redeem USDT for USD 1:1 at https://tether.to/. Exchanges like Kraken are secondary markets and Tether does not claim anything about them.
"Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all."
Oh, and don't forget the fees:
"Fee per fiat withdrawal: The greater of $1,000 or 0.1%"
Given that the other crypto people offering “keep me honest” bets are offering 5:1, 10:1, and 25:1, on better terms, no, that’s not interesting, but I’ll write you a free option to laugh about me over the Internet if it turns you you’re right.
Why does it mean that? If I'm 50% sure an event will occur, but someone will offer me worse odds than that (I.e. better payout) why would I take 1:1 odds?
Because that is not what happened. Grimburger did not offer (from his point of view) worse odds than 1:1. And patio11 refused 1:1 because it was apparently not interesting to him.
Now one could take that as a salesmans tactic to try and extract better odds from Grimburger but at that point the monetary aspect would become the focus and not the wager itself. A wager between two people who are in it for the sport and both sure of their positions should carry 1:1 odds. One could ask for a lower amount or refuse completely on monetary grounds but not request odds in ones favor.
Yup exactly. But other bets (surely they are not betting on the exact same thing with just different odds and even if they were they) don't influence the chances of this bet. These are independent events. Either you think you are likely to win or not. To refuse 1:1 odds on the grounds that you could make more money somewhere else means either A: you do it for the money and not the sport or B: don't have enough money to wager on all these bets but then he should ask for a lower amount or refuse with that reasoning. Maybe I am missing some other possible explanation? The reason of refusal is very important to understanding the motivation behind it.
If there are two people offering you a bet:
Person A offers you 5:1 odds in your favor saying that a random dice throw will yield a number small than 3.
Person B offers you 1:1 odds in your favor saying that a random number chosen between 1 and 10 will yield a number bigger than 6.
Thinking about the wager with Person B is independent of the wager with Person A. When deciding which bet to engage in the answer is both because in both cases you should be convinced that your chances of winning are >50%. Refusing the second bet would lower your overall expected winnings.
25:1 is not _worse_ odds. He wants me to pay $125,000 if he wins the bet, yet if he loses he gives me $5,000. Surely you can see what that says about the level of confidence here.
The emperor is clearly not wearing any clothes.
There's lame horses that get better odds in races than what is being offered to me if Tether collapses (and even recovers in a few days after that) right now.
The peg just needs to collapse for a tiny fraction of the next year for them to win this wager. Why wouldn't anyone take such a guaranteed profit? :)
And to be fair I doubt it's the loss of money that scares Patrick, it's the USDT/USD price on May 21st 2023.
It's not the money, it's the principle. I'm over listening to Tether stuff after all these years on this website, personally don't think much of the people behind finex but am more than certain the peg will hold up just fine this decade.
You're American, I'm Australian, there really shouldn't be any problem here with finding a 3rd party intermediary, though I'm not sure about US laws on these sorts of p2p wagers.
You truly want to get $125,000 in return for my $5000 bet on tether maintaining the peg? Surely that says something about your faith in them asking 25:1 that they go under in the next year? I'm sort of tempted at the offer of 1/5th of that, as unfair as it seems.
Happy to do it if we each donate to the charity of the other's choice? 1:1? You can keep the tax benefit.
If it's about the principle, shouldn't you be rallying against a company that has not been able to prove that has the reserves that it claims to have?
Keeping the peg is the least of the problems. If they somehow showed up tomorrow and said "Listen, we finally ran an audit and we found out that we really have only $0.90 for every minted USDT. But given that the small print says that we are allowed to return whatever we want, whenever you want, we decided that everyone will get a 10% haircut, ok?", you would bet that the market would shake for a week or two, but most of them would just scream Finally! and continue gambling what was left on the next project.
The real problem is that all that comes with that lack of transparency: the market manipulation, the cop-out to become a unregulated central bank, the inability for others to make a true assessment of the health of the market.
Tether basically took all the work from the cypherpunks and turned into a Casino that can't even be properly audited. They can manage to keep the peg for 20 more years for all I care, but each day they are still around is another day wasted that could be used for more meaningful things.
I'd be interested in that bet for $1000 if it were simply a binary "USDT will be below $0.98 at midnight GMT one year from today", without the averaging part.
I very much don't understand how markets and order books work, but people who do understand those things tell me pretty consistently how big of a deal it is when a money market fund loses its peg, even by a tiny amount.
USDT maintains its peg by allowing certain entities to redeem USDT 1 to 1. How much USDT's price fluctuates depends on how well that mechanism works, and market conditions.
By claiming certain entities can redeem 1:1. No one has ever documented a Tether redemption. They have a very tiny number of clients and the terms say they don’t have to redeem at all.
No there was a $10 billion market cap reduction. The exchange rate on Tether’s owned exchange, Bitfinex was $1 most of the past week where it was less elsewhere. Likely Tether was using open market operations to trade dollars for Tethers and keep the rate up.
Documenting a redemption would involve using the official redemption mechanism where you redeem $100,000+ at a time, pay a $100-$1000 fee, get a wire transfer from Tether etc. If you can find anyone ever documenting having done that, let me know
Keep in mind that the relationship here is non-linear. A small de-peg signals a large imbalance of funds.
This non-linear relationship is literally programmatically hard coded in the case of money markets such as curve.fi
Currently the largest money market pool (https://curve.fi/3pool) it has a 5:1 USDT:USDC imbalance. In dollar amounts, the pool contains $1b USDT and $0.2b USDC.
This 5:1 imbalance only gives way to a 0.1% de-pegg.
In the past the balance used to be perfectly 1:1 USDT:USDC. The fact that a multi-million dollar arbitrage opportunity still exist is worrisome.
Eh, that just comes down to the arbitrary definition of how much of a discount you consider "losing the peg".
Sidestepping the definitional issue, I certainly worry when a pegged asset trades at a persistent discount, even a small one, when it didn't before. A stablecoin should generally trade at a premium just as often as it trades at a discount. When one goes long periods without ever being above, that is a strong signal. And when everyone panics, that's exactly when it's too late to get out. You have to beat the rush.
Remember, even up until the morning of May 9th, the day of the real TerraUSD depeg, people made that exact objection. "Oh come, on being 0.1% off is normal for stablecoin." Indeed it is -- but not in a persistent fashion!
Disclaimer: I closed out my Tether longs last week.
I had invested in liquidity pools (which collect fees for you for facilitating trades between tokens that you contribute), and some such pools had Tether. One downside of such pools is that, if any one of the assets in it goes to zero, all your invested capital goes to zero (though you keep the fees). It was therefore a Tether long.
I had also held a small amount for online purchases.
More generally, the reason to hold a stablecoin rather than a "real" dollar is because you need the former in order to interface with smartcontracts on blockchains. Also, to buy from merchants who sell goods for stablecoins because they're in a grey market that banks don't want to touch.
Side note: I don't know why people keep asking that question -- it gets asked and answered each time this topic comes up e.g.
USDC has the exact same properties as USDT, but has no legal issue and is backed by an entity that is a infinitely more trustworthy.
There is Gemini USD - similar story.
There is DAI if you are long on ETH/BTC and still want/need liquidity.
Curve has a pool without USDT (cDAI/cUSDC).
Uniswap lets you make any type of pair. On its heyday (before v3), I was providing to DAI/USDC and I was getting 2% returns per month.
So my question is: why USDT, when there is a handful of better stabletokens that can be used for the exact same purpose? If it is common knowledge that Tether is not to be trusted, why would any honest person still use it?
My comment was answering a question about “why stablecoins at all”.
To answer your question, because some uniswap v3 pools with USDT offered competitive returns, like the 0.05% WETH/USDT one. That was one of many I used, which included those that paired DAI or USDC with ETH.
I considered the concerns overblown at the time and so was okay with making some the USDT pools a part of my LP portfolio.
I don’t consider being slightly undercollateralized a “gigantic evil scam” and the rhetoric around Tether is still definitely overblown, and if that were your primary concern (or am I not supposed to say that anymore?), you should have led with it rather than comparing it to similar defi returns.
And I wasn't comparing in terms of returns. I just pointed out that there is no real use-case for USDT that can't be served by the other tokens, including yield-farming in liquidity pools.
The problem here is that everyone in the crypto industry is taking George Soros's approach to bubbles: “When I see a bubble, I rush in to buy it.”
There is more money to be made on the gravy train of providing liquidity for trades, yield farming, etc. than in trying to short Tether and potentially bleeding out before it goes bust.
Its pretty frustrating that people are using these shady stablecoins where you can't see the code or assets backing them (eg USDT), when there are stablecoins that are fully open source and you can see the backing in real time (eg DAI)
Dai is an ERC20 token on top of Ethereum. It might be more accurate to say Dai is a stablecoin coupled to MKR (MakerDAO), a governance token. Dai is over-collaterlized.
Terra is a coin with ticker LUNA, and is coupled to a stablecoin UST. As I understand, LUNA/UST was under-collateralized and could not handle what was essentially a virtual bank run.
Tether is a centralized stablecoin that is also reported to be under-collateralized, but it has bridges and industry connections to the wider crypto market which has kept it from crashing and burning so far.
Your analogy doesn't make sense for a multitude of reasons. Terra is the blockchain that Luna and UST ran on, not the stablecoin on the ecosystem.
More importantly, DAI is overcollateralized using ETH and other coins. UST was algorithmically pegged to the USD with an implicit backing by Luna. DAI still technically has a depeg risk (e.g. if ETH has a flash crash of > 50% that it doesn't recover from) but the risks are much lower. It's _probably_ safe in the long term although my stablecoin of choice is USDC.
> As of this writing, on May 20th, it has yet to regain the peg.
Its trading at $0.99974 and has gone over $1 several times just today and over the last week. Which definition of peg matters here? Its not causing mass liquidations in Defi platforms because it trades so close to peg, it is still redeemable for $1.00 if you are non-US and have over 100,000 units.
This article has percentages for everything except when they don't reinforce the universally negative view of tether.
Is there another source that is less invested to corroborate everything more accurately?
Its kind of stupid to observe something different and be seen as “pro tether”, but lets just stick to accuracy.
It recently occurred to me, with the whole LUNA fiasco, that any "stablecoin" that is 1-1 backed by fiat can come under attack from leveraged traders, and get de-pegged. So it really doesn't matter what backing tether has, although more is obviously better. When the music stops it's anyone's guess what will happen.
Any stablecoin that is NOT backed 1-1 by fiat, correct? I.e., algorithmic stables. If you're 100% collateralized by USD in your bank account, how can it get de-pegged?
Are there any 1-1 fiat stablecoins that aren't just flat out lies? Like every new crypto coin minted requires a matching real dollar to be stashed away. My impression is that nobody does this because it would mean massive waits to buy the crypto coins when the real dollars run low and because the way to make real money is with leverage.
> In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’
> On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
An attestation tells you what the bank balance is. An audit tells you where it comes from, who has claim on it, etc.
The difference is that USDC is run by a US-based public corporation and its managers are US citizens that live in the US. If USDC is a fraud (or even just materially misrepresented), they go to jail.
Is that a guarantee? No, but I don't understand why anyone would use USDT instead of USDC.
Maybe! First, they have to get caught; Bernie Madoff managed to run his ponzi for decades, running the value up to $65B. Jail for misrepresentation is pretty rare; IIRC only one person in the entire 2009 financial crisis wound up with jail time.
> No, but I don't understand why anyone would use UST instead of USDC.
That's fair, I just don't understand using either.
Only one person in the US. He was sentenced for two and half years, about half a year less than the average US jail sentence for selling pot. Other countries, especially Iceland, actually did crack down on their bankers.
With leverage you can long or short more than the available supply of tethers. You are effectively creating fake tether with leverage, and then selling it (or buying it). This stuff also happens with equities, commodities, etc.
If there was no leverage, then yes, a 1:1 backed stablecoin would hold it's value.
EDIT: I mean the story here is far from clear, you also need to consider arbitrage bots that act between exchanges, etc. etc.
Even with leverage one would assume that a 1:1 backed asset would survive intact with the people loaning out their coins taking the losses in the case of a run.
If they engage in fractional reserve issuance (which it appears they do) then all holders of the coin will be subject to losses if they can’t cash out before the reserves run out. Pretty much guaranteed run by that point.
Let’s imagine that I have 1000 cans of beer in my warehouse and I give out 1000 tickets to exchange for a beer.
Let’s further imagine you have infinity dollars to “break the peg”. So you buy tickets, trade tickets, give them away for free after re-buying them… doesn’t matter. As many times as you want.
Everyone who has a ticket at the end can still visit my warehouse to claim a beer — no matter the financial manipulations you engaged in.
If I start with 1000 tokens I distribute and 1000 dollars in my vault, no matter what you do with the tokens, I can exchange a token for a dollar — because your manipulation of the tokens doesn’t remove dollars from the vault. Those only change when: 1. I receive a new dollar, so issue a token; or 2. I destroy a token and release a dollar.
“Shorting” doesn’t impact that: if you borrow someone’s ticket, then sell it for $0.85, that doesn’t create a new ticket — there is still one ticket and one beer… and one IOU. What happens to the original owner is either the borrower buys a ticket back and returns that (canceling out the IOU) or else that original owner no longer has a ticket — they’re owed the value of a ticket by the borrower.
In the case of tokens/dollars, that value is easy to assess: the person borrowing your stable coin token who fails to return it owes you $1… but that doesn’t come out of my vault, because you don’t own a token. You’ll have to get that $1 by suing the borrower over failure to deliver.
you can't make a profit like that. banks (and tether) make profit by miniting news tickets out of thin air, lending the newly minted tickets at a certain rate, once the credit is reimbursed they usually destroy the minted tickets and keep the profit.
That’s one approach to profit, called “fractional reserve”.
Typically, people who want a 1-1 backed coin are uncomfortable with that model… so you instead take profit on the issuance: you charge $1.05 to issue $1 in tokens (while keeping $1 in the vault) — a process called seigniorage.
If Tether is fully collateralized, then if you sell Tether below 1, the buyer can redeem it for $1 and make an arbitrage profit.
The usual expectation is that arbitrage opportunities vanish as the rush of risk-free profit takers closes the price gap. As such, it doesn't matter what other participants are in the market; the arbitrage buyer is always going to be the best bid below 1.
You might see temporary breaks from the arbitrage-free price due to liquidity (e.g. in a thin market, there might not be enough buyers initially).
If you keep selling, you'll eventually get to a situation where no Tether are in circulation, but every last Tether will sell for ~1.
How do you get the idea that leverage matters here?
If you're long on an asset and are not lending it out, neither short selling nor leverage can hurt you with a fully backed stablecoin – you can always just go to its issuer and redeem it.
As an analogy, consider owning shares of some publicly traded corporation. No matter what happens on the stock market, this doesn't impact your ownership of the actual, physicaly corporation, which entitles you to dividend payments, a proportional share of its assets when liquidated etc.
> I am materially wrong about the most consequential thing I've had to have a view on in 15 years. You should probably degrade your estimate of my ability to think through complex problems.
> Japan will face a national health crisis within a month.
Of course, he then edited it with a framing in which he claims:
> The core result was correct.
> ...
> This prediction was correct.
So not only was he wrong, he refuses to acknowledge or understand how and why he was wrong. And continues to tweet hashes as though we should give anything he says any merit whatsoever.
How was he wrong? I remember this dust up but only now having actually read the whitepaper I see he was extremely alarmed by covid-19, which was entirely correct.
Further, it's apparently a very common thing in cybersecurity circles (though I've worked in cybersecurity for a decade and don't recognize the idiom, but my experience is more in software dev than research), so I don't really get why he'd stop even if he got a prediction wrong.
Wait, so on March 25, 2020 he predicted that there was going to be a coronavirus pandemic (and that Japan would be impacted)? The WHO had already declared a global pandemic on March 12, 2020 and there was no reason to believe that Japan or any other country would be spared.
There's a lot of doomsaying around it, but after seeing the crypto market shrug off the loss of Terra Luna without contagion or bailout ala GFC crisis, the fear may be overblown. Terra was backed entirely by hot air, whereas Tether is mostly backed. Wouldn't the net loss be similar or even less?
1. Anyone holding Tether tries to cash out. Whales and important customers are allowed to redeem USDT for USD at a 1:1 ratio. Tether sells its crypto and other assets to cover redemptions, driving down the price of those assets.
2. Eventually Tether limits the withdrawals.
3. You're stuck with Tether you can't withdraw. What do you do? Try to exchange it for BTC or ETH ("blue-chip" crypto), which you can then hold or cash out on an exchange that is USD- or USDC-denominated.
4. Any exchange with Tether-denominated crypto prices are going to see those prices EXPLODE as there will be no sellers of the crypto. So you'll see some sort of weird market where BTC on Bitfinex costs $500k but BTC on Coinbase costs $10k.
5. If you're still stuck with Tether, you lose all your money or everything gets tied up in court a la Mt. Gox.
EDIT:
Fun potential #6 - if you're holding crypto on an exchange with Tether exposure, they may not allow withdrawals. The holder of the private keys may seize your assets to cover their debts.
You say the price will explode. But is that explosion just the relative price of bitcoin and tether? Tether is dropping to 0 and so bitcoin price "explodes" because you are still comparing it to tether.
Correct. Price of BTC denominated in Tether goes up, price of BTC denominated in USD likely goes down, as a) Tether liquidates crypto assets to cover redemptions and b) people sell off their crypto assets due to uncertainty/fear in the market.
It is one step closer to shutting the doors on Bitcoin as an isolated financial ecosystem. Bitcoin-to-actual-USD is a trackable / taxable event. Whales avoid it like the plague.
By moving to a pseudo-dollar like Tether, market makers can hang out while they wait for a suspect better buy-in price in the future. Should pseudo-dollars go way, they actual-Dollar transactions get a taxable haircut. Additionally, the friction of going from actual-Dollar to Bitcoin increases.
Tether is effectively behaving as a crypto-clearing house with their pseudo-dollar.
I've not seem credible proof that Tether has even 50% backing, especially 50% backing in uncorrelated assets (since if the holdings are in other crypto, those holdings will likely all take a dive when Tether does).
In real engineering, you try to figure out what might happen if your system fails. In ‘financial engineering’ you assume failure won’t happen, and get caught with your pants down when it does.
" A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him." John Maynard Keynes
Isn't tether a way to redeem crypto that evades KYC (know your customer)? So if I am shady person getting paid in bitcoin, I can essentially bank in crypto and avoid the volatility of crypto assets without the institution I work with needing to check me out. It tether goes away (and presumably all other stable coins with them) wouldn't the utility of crypto be reduced for anyone avoiding the traditional banking system?
I don't pretend to know. I am asking if that might be the case.
It's almost impossible to say for sure. It could be anything from "the crypto market is shaken a bit, but quickly recovers" to "it leads to the downfall of the entire crypto ecosystem". Any more specific estimations are ultimately just a guess.
That being said, from an outside observer, the crypto market does not look healthy right now, and Tether is part of that. The safe guess is that the crypto market hasn't reached its low point yet, and its impossible to say if it will ever get back to November 2021 levels again.
When a market panics and people “sell” their crypto on most exchanges, what they are actually doing is trading them for tethers. If the tether then collapses they are entirely wiped out.
Tether is the de facto dollar. Hopefully most exchanges move off of it or at least have alternatives. I’m also wondering if it wouldn’t be the kind of catastrophe people were saying before
Are there verifiable numbers available on whether Tether has a net outflow of fiat? That's the real question. If they're under-reserved, and there's an ongoing net outflow, they will at some point run out of money.
There's definitely outflow. Tether's reported market cap peaked at $83 billion in early May, and now it's down to $74 billion. So at least 10% of Tether has already been redeemed. There are other major stablecoins now, so nobody has to use Tether.
This is one of those things that will look fine, until it doesn't. As has now been demonstrated several times, stablecoins have only two stable points: 1 and 0.
>"It is well-understood in the cryptocurrency community that Tether’s reserves are a polite fiction. If pushed on this, clueful members of the community, such as their co-conspirators, will (quietly) admit that Tether depends on a de facto guarantee of support from members of its consolidated group, such as Bitfinex, which can inject more equity at will.?
Can someone say what is meant but "its consolidated group"? Is this a loose alliance or something more formal?
While they were extremely cagey about it prior to suing Wells Fargo and then needing to come clean in court, they share ownership, executives, employees, IT/marketing/etc functions, etc. Bitfinex is Tether and Tether is Bitfinex.
silly question, being USDT "only" 80B, why does it matter if it collapses? considering cryptos market cap is more than 1T, and 100B's wipeouts routine, sometimes during crypto winters (where we observe -80% across the board) or collapses such as Luna recently (>50B? no idea)
Of course, panic would happen, but still. I think people would move on, forget, and continue believing whatever they want to
Market cap is not the sum of all injected capital, it’s the total supply multiplied by the most recent value of a unit. For example, if you paint 2 paintings and sell them to me for $100 each, and then I sell 1 of them for $1000 to a third-party, the market cap of your paintings is $2000 ($1000 x 2 paintings) despite there only being $1100 dollars spent.
It’s plausible that there’s less than $80bn of USD in the crypto market and so tether could well represent every single dollar available. I don’t know if I’d argue that is the case, but it’s certainly plausible — and so it’s easy to see how a collapsing tether could take down the entire market, or at least, represent a far greater threat than the ~5% it represents in market cap numbers.
De-fi doesn't _technically_ need it but it's highly preferable.
Let's say you want to actively trade ETH against the USD. If you think ETH will go down the you want to sell it. Now if it's in a non-custodial wallet that you control, you would need to send it to an exchange, sell it, then hold USD on the exchange (were you have no control of it and they can seize it for fraud investigations, etc. - basically your money is held by a 3rd party).
Instead you can "sell" your ETH by trading it for a stablecoin pegged to the dollar. This way the only risk is the contract for the trade (which can be publically audited) and your money stays in your control.
Or if you wanted to accept cryptocurrency as payment but still only wanted the USD because of it's stability - you could accept that (this isn't very common as gas fees are rather high).
tl;dr - With exchanges a 3rd party has your money and a IOU. Coinbase has already said user crypto could be at risk in the case of bankrupcy. De-Fi removes this risk while still allowing you to trade against the USD.
disclaimer - Whether you want to do this might be a different question, just giving the reason for wanting a stablecoin.
edit: For those saying taxes - the US IRS still counts this as a sale and it's still taxed the same as an exchange trade - other countries might differ. Given the KYC/AML requirements and lack of general public knowledge about anonymity of crypto - I think sooner then later we'll see a crackdown.
Can somebody explain why the NYAG required that they publish quarterly attestations given how little reliable information they actually provide? What was the point?
I think Tether is the ultimate "Fake it till you make it" organization in crypto. Its kind of a joke now but everyone is in on the joke but it will probably end up being the defacto crypto parking place once things get real in crypto (e.g. you can buy a house with it) and the adults come in and shake out the current management.
No kidding. Crypto is deeply unpopular with a significant portion of the public - myself included. This is not the same as the early era of smartphones where you either had one or didn't really know much about them (i.e. were neutral). Many people have made up their minds on the utility (or lack thereof) of crypto and want nothing to do with it. Some of the recent incidents of backlash around NFTs in games come to mind.
It doesn't even make sense in many cases. Bitcoin for example will never be useful as a medium of general exchange, the transaction volume is way too low to support it. Plus its deflationary nature makes it at odds with a healthy economy, where you want gradual inflation to at least exceed the birthrate so there is a hope of lifting people out of poverty.
The workaround is to put everything on exchanges, but then you've lost the decentralized nature of Bitcoin and you are back to just a central database owned by a company, AKA a bank.
More centralized digital currencies with regulations backed by central banks have a pretty big potential to disrupt basic banking services. Most problems of cryptocurrencies can be solved with a trusted third party. The question is only how long banks can lobby against that.
And anyway, your cheap jab at Coinbase has no comparison with Tether. Circuit breakers are not an invention from crypto exchanges. Besides, they also are one of the investors in Uniswap, which lets you trade without any middlemen.
> This essay makes some confident claims about the future and I wish to have cryptographic proof that I did not edit those claims between now and when they inevitably come to pass.
The only unconditional claim I saw was that Tether will lie again. Am I missing something?
This one is a bit more interesting:
> Tether originally promised to back the reserves with cash in a bank account. This was a lie. It was a well-chosen lie, because the value of cash does not routinely fluctuate. Backing a fixed liability with volatile assets and a wafer-thin equity cushion would have the predictable result of causing the liabilities to become unbacked in many stressful situations for any of the backing assets.
What's interesting is that I'm not sure many banks would want to hold the cash, regardless of the source.
When a bank receives cash deposits it has to do something with it. The money doesn't sit as bank notes in a vault.
The bank has a problem. The cash becomes its own liability. The depositor can withdraw the cash at any time and the bank needs to fulfill that obligation. And a lot of cash means a lot of obligation. So the bank desperately wants to turn the cash liability it faces with a deposit into an asset (i.e., somebody else's debt).
How do do that?
Banks are highly regulated on this point, especially post-GFC. There aren't a lot of options. What they'd like to do is issue loans to high-quality borrowers at profitable rates. But if the quality of borrow is going down the tubes (it is) and interest rates are at historic lows (they were), they would rather not do that.
Treasuries are an option. But the demand for short-term treasuries has been so intense that yields have been driven down to absurd levels relative to other instruments.
All of which is to say that the very idea of a US dollar-backed "stable" coin may not be possible for any entity other than the US Federal reserve or the Treasury.
And this defeats the entire purpose for Tether holders. They can already park cash at a bank. They hold tether to be out of the US banking system jurisdiction.
Claims have been circulating for years, now, about Tether's lack of adequate collateralization, and the lack of trustworthiness of their people.
And yet, users out there are holding a total of $73 billion worth of Tether.
Who are those users holding Tether? Who wants to hold Tether? What's the motive of Tether holders? What market need is Tether addressing, and how can that need be addressed while avoiding Tether's issues?
Doesn't DAI work toward basically the same market need as Tether, but in a way that's actually decentralized and actually has checkable reserves? Why don't people desert Tether for DAI?
I'd wish too but honestly I believe there are powerful enough whales behind it to back it with a superior to dollar peg, there's no possible price crash mechanism like there was for UST if I understand correctly and it is backed at more than 70%
I have nothing but respect for Patrick, and he has done great investigative Journalism (or at least curation of other peoples journalism) but I still feel like he is cherry picking facts (that there certainly is some shady stuff going on around Tether) here to support a predetermined conclusion(Tether is bad because crypto is bad because crypto's primary use case is money laundering) which seems to be an undercurrent of all of his writing on the topic.
If we held the industry that Patrick works in to the standards that Patrick wants to hold the crypto world to we would call all of them "scams". Basically every international bank has a long history of money laundering. Every single large bank is doing much more complicated and riskier things with their balance sheet than Tether.
I don't think they are scams but I don't think Tether is either.
In many ways this is just the crypto world leveling down to the level of sketchiness that the average large bank exists at. Which is really not a defense, I dislike those banks and I dislike and distrust Tether.
But I don't think the risks of some kind crypto solvency contagion event are even as high as what's going on in the traditional banking world right now and that is given that traditional banks balance sheets at least on the surface are in the best shape they've been in in a decade.
Any way tldr: I think Patrick is technically correct but framing the large picture according to a big double standard.
Awesome. You we're just making a joke, but for some reason that one simple statement had my brain looking at the dollar from a whole different perspective for a few seconds. "What is money, anyway????" Nice. It's like when you start to grapple with relativity... "What is time???"
There is a decent circular economy growing around bitcoin, at the very least you can purchase gift cards with them which hold dollar amounts to get whichever services you'd like!
Is there though? Where can I use Bitcoin to buy gift cards redeemable for: milk, underwear, dentist, train tickets, a visit to the barber? ( These being the five everyday purchases I last made.)
Don't think my dentist or barber want to be paid in GameStop gift cards and I feel giving some company with an intentionally obfuscated corporate structure non-refundable tokens in the hope they'll purchase a voucher which according to them may or may not pass Amazon's fraud detection Algo the same as "purchasing a gift card".
Ignoring that, it's still about the farthest thing from a "circular economy" imaginable...
I can't really imagine any motivation for buying milk in this fashion unless I'm seriously into tax evasion. So good luck buying day to day shit with gift cards once you've had to move to El Salvador to evade the IRS... Which is incidentally one of the jurisdictions bitrefill.com is incorporated in.
So Tether is doing something akin to fractional reserve banking? From what I understand, this shouldn’t cause a problem unless there is a massive run (everyone trying to convert their USDT into dollars at the same time).
Since most of the USDT is owned by big exchanges who need it to provide liquidity and have no interest in crashing the crypto market, I don’t think this is likely to happen.
These events ultimately lead to the creation of the Federal Reserve for banks to participate in a semi-cooperative system that didn't devolve into save-yourself during times of crises.
The story here is that "unless there is a massive run" is actually a fairly common event.
The big crypto exchanges are currently acting as a sort of unofficial federal reserve. None of the big players has an interest in seeing USDT collapse and will step in to bail it out at the first signs of trouble.
I'm not saying that Tether the company is not shady. They should definitely be more transparent about what assets they are holding and their collateralization, but I think the risks of total collapse are largely overblown.
> None of the big players has an interest in seeing USDT collapse and will step in to bail it out at the first signs of trouble.
As an exchange, if you keep some reserves in USDT and you think it might collapse soon, you might have an interest in dumping your positions before it completely loses value. Maybe exchanges would benefit from responding to such a situation collectively as you suggest, but I think it's likelier that they will just protect their own interests as individual entities.
Totally agree that it’s “unofficial”, which makes it a when-not-if scenario.
At some point, total collapse of Tether’s pseudo-dollar will happen when the revenue generating exchanges feel they are support bad-money with good. All it takes is one player signaling a lack of support, and others stop supporting as well.
It’s a human psychological problem that’s a old as time. Think crypto can win over human rational to preserve self-interest? (side note: manipulation of self-interest is the goal of “weak hands” / “diamond hands”)
A big issue with this type of support is that the risks are correlated. Sure there are multiple big supporters of Tether right now, but if the sky starts falling and one of them decides to rush for the exit the others will likely make the same decision around the same time.
No they are not. That rationale is a coping strategy at best and deliberately misleading at worst.
Tether is NOT a bank. They are not regulated and have no guarantee that depositors will be paid back. They promise a 1-1 backing and instead of people holding them to their promise their supporters desperately try to compare it to moderns banks.
No. Tether is not a bank. It is not doing fractional reserve banking. It is committing fraud. It’s that simple.
This, a million times this. Speaking as HN's resident web3 apologist, it's amazing how people keep trying to defend cryptocurrencies based on some anti-finance-system ideology, but throw it all out of the window when it comes to Tether.
Tether is not a bank. Not in the US, not in the Cayman Islands, not anywhere. Everyone holding or trading Tether could be using a test network, and the monetary value of the token should be the same.
Tether has the veneer of bank equity from the balance sheet "attestations" it publishes, but I think a better analogy would be that tether issues casino chips for the decentralized casino that encompasses the tether-based offshore exchanges and defi universe.
There isn't any real visibility into the balance sheet, but I'd guess most of the "collateral" boils down to margin loans issued at the exchanges, and since the house has the edge on those platforms, their ship stays afloat.
The problem is that 'unless there is a massive run' is nearly assured over a long enough time horizon. The fact that the major players know that they are reasonably safe unless there's a run is the thing that will cause a run in a panic. Also, if some well-capitalized hedge fund figures out how to attack it, they might also light the match on a run if there's money to be made in killing it.
These are very good points - in the long run the probability of a massive run is 100%, and the risks of it happening sooner rather than later are higher because of the incentive of attacking the peg intentionally. This can be said about a lot of financial products.
I think that at this point, these risks are priced in by the market (Tether is selling at a discount from USDC). If you disagree with the market, it is your speculation, and also an opportunity to get rich if you are right. For example, the FTX exchange offers Tether put options as well as the ability of shorting Tether, and there are many other similar products.
They claim to be doing FRB, but it looks like what they actually are is insolvent.
A FRB is a bank where deposits exceed liquid liabilities (cash), but do not exceed liquid plus illiquid liabilities (cash + investments).
When deposits exceed liquid and illiquid liabilities you can't operate as an FRB. Because you are insolvent.
But this is all irrelevant, because Tether isn't a bank. Your bank promises that you can withdraw your deposit. Tether does no such thing - it provides withdrawals as a courtesy. If Tether doesn't feel like letting you withdraw, it's not going to let you withdraw.
I assume that the USDT holding of the big exchanges are on behalf of their customers. I those customer begin asking to convert their USDT to USD, that could be a massive run.
I'm not a crypto participant, but my understanding is that technically Tether doesn't promise redemption in USD, just backing by USD. That still seems like it could precipitate a crash, but IDK if such a crash would be best described as a run or not.
Tether does offer redemption, but the minimum amount you can redeem is 100,000 USDT, and there is a fee that ranges from 0.1% to 1% depending on the size of the redemption:
So if a well-capitalized arbitrageur can buy a million USDT at a price less than 0.999, they can redeem them for a profit, as long as Tether keeps honoring redemptions.
Patrick is overindexing on the investments portion of the report – which is a little under 5% of backing. There are investment deals and crypto, but it's unknown if this represents the entirety of the amount fwiw.
If we take a step back and look at the key takeaway from the audit report is that amount of commercial paper was reduced and amount of T-bills (essentially cash) was increased by 5 bil. Good news if you think solvency is an issue, but of course they're all scoundrels eh?/s
Tether might have done shady things in the past as the article, but the scale to which Tether operates now (10s of bllns), in addition to scrutiny from SDNY, external audit, etc mean that Tether from before is much different from the Tether now, and it has pulled off the made it portion of "fake it till you make it".
Tether fud in 2022 is truly embarassing and slanderous. The only time they had real problems was when part of their money was stolen and confiscated with connection to Crypto Capital - which only happened because they were refused normal banking. The only way tether fails is if the situation repeats in some way - but it appears American government finally gave up on trying to destroy usdt.
As long as the US government itself doesn't try to destroy them again - in few years tether is going into hundreds of billions.
If Tether is telling the truth in their attestation, they held $5 billion in cryptocurrency a month and a half ago, and had only about $160 million in extra assets to cover their liabilities. Given the extent of the collapse of the cryptocurrency market (and markets in general, do note), by Tether's own words, Tether is either insolvent or required someone decently steep infusions of cash. As far as I'm aware Tether has not announced either, so either Tether is lying about its own solvency or... Tether is covering up its own insolvency.
Actually, come to think of it, Tether does claim to publish asset and liability totals (if not breakdowns) in near real time, so let's see how it's doing. And, surprise, Tether somehow still has just $160 million in extra assets over liabilities. In fact, between the attestation date of March 31, 2022 and the latest update as of last night, this buffer has changed by just $186. That kind of performance is... well, not credible.
> which only happened because they were refused normal banking
They gave nearly a billion dollars to someone without a contract. That's a higher level of stupidity than just "we used a shady banking partner because we had no alternative".
The most important point in this article is that whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. Nobody should be under the illusion that Tether is decentralized or anything other than a bet on Bitfinex.
> whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine
This is true for every pile of toxic crap that's ever been financially engineered.
The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)
Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.
Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.
“Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.”
LOL yes I am assuming some sarcasm here. Sticking ones finger up to the man by.. holding cash equivalents in forms not eligible for FDIC insurance, yes!!
Me sowing the wind: wow, this is so easy. I am going to reap so much. Can't believe everyone isn't already doing this.
Me reaping the whirlwind: this is not what I was told to expect! It's just what I put in, but more whirly! Huge disappointment.
Or potentially like putting money into British Pounds or Swedish Crowns in early nineties - just waiting for someone with a bigger wallet to come around and break the capitalization by shorting.
Not the same at all: those currencies went down a little, they didn't completely collapse.
> Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.
But tether only works if backed by well-capitalised entities, i.e. the Man, so you are sticking what?
Just like when we put it all into Anchor protocol via UST, that worked out great
Want to stick it to the man for real?
Buy Iranian government bonds, Venezuelan government bonds, Bolivian government bonds, etc
Will you get a return? Not all that likely (not unlikely either) , but you would indeed be sticking it to "the man"
Buying tether? Ha heck no
I'm pretty sure the man will stick it back to you if you follow this advice.
It's not illegal afaik
It depends on your jurisdiction, of course, but I (as an American) wouldn't feel confident in the legality of buying Venezuelan government securities given https://www.state.gov/venezuela-related-sanctions/
Even if buying a bond issued by an unfriendly nation isn't illegal at a given moment, you might find yourself forced to divest if relations between your country and the issuer sour. I'm sure a few people who held Russian sovereign bonds lost their shirts when sanctions were levied and they had no choice but to dump their assets.
In the absolute worst case (e.g., if you held Japanese sovereign debt in December 1941 or Afghan sovereign debt in 2001), holding a bond might be grounds for you to be charged with treason or sponsoring terrorism.
>This is true for every pile of toxic crap that's ever been financially engineered.
I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.
The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
> complete ban on all non-productive financial schemes
I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.
> "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more
Great example. In 1958, the Congress banned "the trading of futures contracts on onions" [1]. By the 2000s, increased price volatility--which had to be borne solely by farmers and distributors--prompted "the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading" [2].
There is a middle ground between banning and a free for all. In the former, useful financial products and innovation is suppressed. Finance is about allocating real resources in our economy. Bad finance is bad. But on the other end, everyone steals everything, and investor self-interest gives way to the animal spirits we saw leading up to the Panic of 1907, the Great Depression, the S&L crisis, the Financial Crisis and whatever we'll call crypto.
[1] https://en.wikipedia.org/wiki/Onion_Futures_Act#cite_note-fo...
[2] https://archive.fortune.com/2008/06/27/news/economy/The_onio...
Right. I used to sit on a trading floor next to a commodities sales desk. If the GP's mental model is that people who are involved in futures are, by definition, involved in speculation, then that is a wrong model: a lot of "real economy" manufacturers hedge their exposure to price changes for their inputs or outputs through the futures market.
Precisely. A friend of mine trades futures for a non-profit made up of growers as members. It is more efficient insurance than the federal government offers them and saves them millions.
Exactly. The problem is that “good/useful” is in the eye of the beholder.
For example, bank prop trading bans went into effect but really how does one differentiate prop from “customer facilitation” or heding. Its a sliding scale of grays.
So instead of Citi having a trader going “I think I’ll buy some S&P calls today and bet on the index” he instead can only do that if 1) a client wants to sell some & he takes the other side, or 2) there is some other exposures accumulated do to customer facilitation such that he can justify buying S&P as a hedge.
The same risk is being put on, but for different reasons. Or you could say the only thing that is changed is who has initiated the risk - customer, instead of bank.
Futures of course exist for very good, historical reasons. How do people think their home heating oil company offers you fixed price contracts for the season, etc?
Reducing the number of players in a market usually only increases volatility, transaction costs and illiquidity.
> I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.
This is just the finance sector subset of the larger problem of bullshit jobs. We know a substantial fraction of jobs are bullshit (non-value-creating), but which ones? I have a strong suspicion this is unsolvable because any metric you start using to decide which jobs are bullshit will instantly be gamed. The system will work as hard as it can to prevent you from figuring it out, and since it's made of people it is at least as intelligent as you are.
The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession, but unfortunately that also takes a ton of fragile but very innovative and promising things down with it. Recession is a bit like extreme chemotherapy. It might kill some cancer cells but it also kills a shitload of healthy ones and sometimes the treatment ultimately fails because it doesn't kill enough of the former to justify the latter.
Similar principles exist in other areas like advertising. There's a saying in the ad business: "I know I'm wasting 80% of my ad spend. I just don't know which 80%."
>The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession,
That is a very convoluted way of implementing negative yields.
Because people want to avoid losses associated with negative interests they instead do the inflation thing and pretend there are no losses, the discrepancy between book value and real world value grows ever bigger as the book value is not representing losses in the real economy. The moment sentiment even dares to look at a downward trend poof reality has come back from its slumber. Negative yield is coming out of hiding, all at once.
> There is a middle ground between banning and a free for all.
Providing basic banking as a public utility so most deposits by individuals, local governments, and small businesses are not stored with investment banks engaged in speculation. Public banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel and prohibited from originating loans on security of state property such as money (which might be obtained via leveraged loan from another lender) or on security of common property such as excess real estate values attributable to land scarcity.
> banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel
The problem isn't getting loans on one's crops. It's transferring the price risk to someone better able to bear it.
Farmers want a guaranteed profit when they plant. Loans don't address that. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.) The only real alternative is government guarantees. Those bring their own host of problems.
futures don't guarantee a profit, only a price. it's up to the farmer to decide whether the price is worth the planting (regardless of profit). and the pricing function only works well in an uncorrupt market.
the problem isn't the existence of the futures markets, but the same kind of over-consolidation that corrupts every laissez faire market, making them inefficient and brittle in the long-run. if regulation encouraged primarily mid-sized firms, rather than a few large ones, we'd have better informed and more efficient markets, albeit less lucrative since the firms wouldn't have undue (read: corrupting) influence.
note that insurance is another alternative to futures or gov guarantees, though i'd question the need to externalize risk, which manifests a critical market-shaping signal.
You mean growth dependence. When you are forced to grow every year and you can't grow by getting new customers you must steal existing customers from other companies by acquiring them.
'growth dependence' is just a symptom of greed, which is also the root driver of over-consolidation/corruption in markets. that's why a thoughtful regulatory stance is essential to high-functioning markets (e.g., anti-trust, not price controls), rather than the slapdash shit we have now, where parts of markets are highly over-regulated to ensure regulatory capture, while other parts are highly under-regulated to externalize risk.
> The problem isn't getting loans on one's crops. It's transferring the price risk to someone else. When a farmer plants, they want a guaranteed profit. Loans don't address that problem. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.)
The problem is excess credit available to financial firms engaging in leveraged speculation and financial services investment, resulting in financial sector employment and compensation that is super-proportionate to any real savings generated for non-financial producers. This leverage is enhanced by the lack of free (zero-fee) public alternative for basic banking services. It is not necessary for public banks providing basic banking services to guarantee profits for farmers. Provide savings, transfers, and liquidity loans at present values at what an option to sell existing previously planted crops would be worth might be sufficient to reduce deposits held by banks engaging in leveraged speculation. Providing basic banking as a public utility is the middle way the parent commenter advocated because it does not require banning anything.
"The "futures trader" extracting value from the system buying/selling futures has done no "real" work"
Small farmers hedging next years crop would like a word with you ...
... and there are one hundred examples just like that.
Did you ever convert foreign currencies in advance of an international trip when you saw the currency pair move favorably ? Have you ever bought an ETF ? Do you have a mortgage in the United States ?
All of these things are possible because of a highly liquid, regulated market with diverse participants ...
... which brings us to the obligatory Margin Call[1] quote:
"Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big fuckin' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really fuckin' fair really fuckin' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from."
[1] https://en.wikipedia.org/wiki/Margin_Call
Comparing sophisticated market makers trading using their own money to "hedge funds" run by some rich guy's son charging 2 and 20 are hardly the same.
The bank in Margin Call was packaging MBS out of mortgages, not speculating on the price of commodities using derivatives to gain leverage.
"The bank in Margin Call was packaging MBS out of mortgages, not speculating on the price of commodities using derivatives to gain leverage."
Correct. That's my point.
It's not merely that you can't have one without the other ... it's that you very likely wouldn't want to eliminate the (margin call guys) even if you could.
The person you're replying to was talking about futures traders. Where did you get a rich guy's son from?
Speculating on futures and other derivatives is basically what those rich guy's sons are doing in their hedge funds. Most hedge funds get worse returns than the S&P 500.
So... then let them? If they're losing money compared to what they could by doing nothing, I don't see the problem.
Getting worse returns than the S&P 500 is still valuable, if those returns are uncorrelated.
As a non sarcastic response I would note that financial intermediation exists for the purposes of transforming types and durations of risks between people/firms trying to offload from / take on that risk.
This is how things like 30 year fixed rate mortgages, low fee index ETFs, target date retirement funds, fixed price home heating oil contracts, every form of insurance, etc can exist in the consumer space.
In the B2B space you have all the companies with needs to lock in prices for future inputs in order to control costs & plan their own output pricing, etc.
All of this has greatly reduced the boom-bust cycle of the pre-Fed economy. As bad as 2000 or 2008 may have felt, they were nothing like the great depression of numerous 19th century recessions & depressions.
I propose a ban on all non-productive trips by car. Only good people should be allowed to emit carbon unless for productive reasons that pass the carbon threshhold for the amount of carbon the trips will emit.
Good people as defined by a social credit system. I will decide what is a productive reason & what is the carbon threshhold!
People totally have the option of living under this type of government - it exists in top down centralized places like China.
This is a great idea! We could break ones social credit down into units. What to call them ... Rallods, maybe? Everyone could earn Rallods for doing productive, pro-social things. People could even send some of the Rallods to each other, in exchange for taking on productive, pro-social task they'd prefer not to do. Rallods could even be exchanged for goods!
Oh wait ...
A lot of rich people want more money not because they need it but rather because they want money to act as social credit and therefore they want to maximize this number even though other people need the money more.
There are a class of people for which money is more of a scoreboard which I think is what you are getting at here.
I think for most rich people, having a lot of money means, as ironic as it sounds, not having to think about money.
Growing up fairly middle class and eventually making a lot of money once I made it out on my own, the types of tortured price comparison shopping & concerns that my parents made (and I did my first 5 years of career) are just not something I worry about.
Being able to just go to a grocery store and fill the basket/cart until I have everything I want (NOT need, and without checking every items price and cross checking every price option for every items competitors), and then pay whatever it rings up to.
Doing weird as it sounds things like - cross shopping a $40k & $120k car because, well, they both sort of hit different parts of my interest lists.. and maybe I just keep my current car + add the $40k, vs trading in towards the $120k.. or really.. who cares, just buy the $120k car anyway.
Being able to knowingly overpay for home repair/renovation contractors because they give you a much higher level of confidence, communication and convenience. We got 3 bids, the guy who was 2x the price of the other guys was just such a professional we decided to go with him. He was like dealing with a professional tech/bank project manager rather than a squirrel guy you can't get hold of.. He started on time, finished days early, went not a penny over budget and gave us start&end of day updates with plans of attack for the next day.
Meanwhile some of our friends who did not have budget to pick the highest bidder had contractors disappearing to do work on other houses, had to call their contractor daily to force him to show up, had guy starting the work day at 2pm and then taking an hour lunch break, and every other crazy home renovation story you hear where 2 weeks of work takes 3 months.
So for those outside the billionaire class, being rich mostly means not having to deal with the inconveniences of being on a budget.
“People totally have the option of living under this type of government - it exists in top down centralized places like China.”
you’re right, i much prefer to live under a decentralized government like the United States.
This is one of the benefits of the federal / state divide in the US too. If you are worried about the other side being crazy, you can live in a state that solidly on your side of the aisle, and be insulated from when the other side is in power at the federal level.
There is a counterparty to every financial transaction. Presumably, both sides are happy if they agree to trade with each other. All of what you call "unproductive financial schemes" are mostly about exchanging risks, just like insurance.
Casino gambling is a form of "exchanging risk".
For example when people themselves into slavery
Any conman worth his salt can sell a lemon, a toxic financial product or snake oil.
In UK naive homebuyers bought leaseholds where service charge and ground rent increased EXPONENTIALLY every 10 years. They even had lawyers, and those greenlit the deal.
Or when banks handed loans to strippers and then sold the loan to 'investors' causing subprime mortgage loan crisis of 2008. S&P were meant to do due dilligence, the 'sophisticated investors' were meant to do due dilligence, but here we are
>The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
If I am a farmer and I want to lock in a price for my crops right now, who am I supposed to sell that future to?
Sure, a small percentage of the time, I can sell to someone who knows that they need my crops on exactly that date of delivery, but a lot of the time there simply won't be anyone who knows at that exact moment that they need exactly what I am selling.
Having traders in the system means that I always have a buyer when I want to sell (and similarly when a user of the item wants to buy).
>They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
So what? If, through the trader solely enriching themselves, we get something useful from it, why does their motivation matter?
A baker bakes solely to enrich themselves as well - this is the nature of capitalism. The end result is what I care about.
why stop there? lets ban all activity that doesn't produce tangible goods. the number of parasites, i.e. people who consume tangible goods but don't produce them, is probably higher than the number of people who do
fields, mines and factories. we don't need anything else
Material production still requires accounting, installation, transportation, delivery, disposition, optimization. Financial parasitism more clearly occurs when someone pledges something to lenders which they do not actually own. For example in the 19th century when JP Morgan lent to planters on security of chattel slaves, the planters pledged the bodies of other people as collateral. Arguably loans should only be issued on security of personal property which does not deny the personal property rights of others. This might exclude leveraged lending of money on security of money (arguably lending on security of state property) and excess real values due to land scarcity (arguably lending on security of common property).
That would eliminate most engineering jobs because engineering doesn't produce tangible goods, only manufacturable designs of tangible goods.
Eye of the beholder, as others have said.
I would point you to Stuart Banner's Speculation: A History of the Fine Line between Gambling and Investing
https://www.amazon.com/dp/0190623047/
Excellent coverage of the history of the attempt to make a distinction.
The problem is this:
One day, people who think like you will come to power and decide that under their administration, [activity your livelihood is based on] constitutes “extracting value from the system” and is no longer permitted.
Maybe you are a golfer, or a restaurateur. But “what you’re doing is solely about enriching yourself.” Your fine cuisine is not feeding the poor. It is immoral to play golf while children go hungry. You have clearly become wealthy while doing nothing for the greater good.
They will come to you holding guns and demand that you cease your activity, and hand over your “wealth” - maybe your house, your savings, the food in your pantry, the clothes on your bank, maybe your wife or your daughter.
“We will take back for the People what is theirs” they will say. If you refuse, you will starve in prison, and they will take your life anyway. If you accept, you will starve in the street.
This is like the Christian ban on charging interest in theory it is doing it for a worthy cause but in practice just banning something isn't the answer because it doesn't address the source of the problem.
In efficient markets profits trend toward zero so having more traders will accomplish that goal better than banning traders. It is the same with interest, interest goes to 0% if there is enough saved capital to fund all investments banning interest makes it harder for the interest rate to go down.
It would be better if we built an economy that can handle low amounts or even zero profit by eliminating the dependency on yearly growth.
I would really like to know what would happen if—in a wave of international solidarity between all the workers in the world—workers would take their profits in their own hands and away from any shareholder and overpaid non-contributing CEOs. What would happen to all these markets.
Would a company controlled by their own workers choice to funnel parts of their profits to wall street traders? Probably not. Would there be any money to be gained on the stock market in such an environment? Probably not.
So a natural question to ask then is. What value is there in the stock market which does not rely on money being siphoned away from workers?
Eventually most of those companies controlled by their own workers would need to raise capital again, and then we'd quickly end up back where we started. Plus employee control hasn't worked well in most of the companies where it was tried. Look what happened to United Airlines. They were majority employee owned for a while, but the different groups of employees never agreed on how to run the company.
> We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.
Measuring people by how much 'value' they bring to society is a real slippery slope, my friend
Yeah. Big “social credit system is good, actually” brain there..
Dude go look up why futures were even created. They fix a real problem.
what do you do sell us ads?
As long as there are well-capitalized parties that want to prop up Tether
That's been my personal conclusion as well but it led me to the next question of what # is the breaking point for these well-capitalized parties?
I tried looking at the size of other well-known collapses like Enron, LTCM, Lehman Bros, etc. LB reportedly had $700B in assets and liabilities before the underlying asset devaluation precipitated their cave in. Tether survived the recent de-peg due to trading shops like Alameda absorbing the free 1-5% with their cash flow, which I believe is also responsible for the recent 11% drawdown in Market Cap (I assume due to redemptions). That said I'm not really experienced enough to know how these backroom overnight liquidity issues get resolved.
My hunch is given the true global reach of the crypto market Tether could easily get to $nnnB or $nT before we experience a black swan event that results in a liquidity crisis. Assuming they survive these short-term recessionary pressures, my long-term prediction is we're just setting ourselves up for another roaring '20s again, with crypto eventually learning all the same fundamental financial lessons we did back then.
I don't have the time, but I'd love to see someone rewrite "Reminiscences of a Stock Operator" as "Reminiscences of a Crypto Operator". I don't think you'd have to change any of the scams, only the context. Partner with a good illustrator and it would make a lovely coffee table book.
https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera...
The majority of this scam is happening on unlicensed unregulated off shore exchanges. They don't keep client funds segregated either. When the bubble pops they all go down. The bag holders won't even realize it until the website domains stop resolving. It's musical chairs and the music stopped playing earlier this year when the audits of Tether's reserves came out. Now people that were listening are getting as much out as possible before the seats are all gone.
So Tether has become something like an international reserve cryptocurrency, which gives them an "exorbitant privilege"[0], meaning they can do pretty much whatever they want safe in the knowledge that everyone else will do everything they can to prevent them from failing because everyone else would have too much to lose if they did fail. That has kept it going for a long time, and might (or might not) keep it going for a lot longer, but ultimately a replacement reserve cryptocurrency will come.
[0] https://en.wikipedia.org/wiki/Exorbitant_privilege
By most measures, it appears that Tether is slowly going to die out and replaced by USDC. Among retail users, Tether has increasingly lost sway and is largely used only on exchanges (which is still massive, but not the only game in town anymore).
Roughly half of USDT is circulating on Tron, which is a dead chain. This TRC20 Tether is almost exclusively used for inter-exchange transfers (since fee is capped at $1/transaction)
On Ethereum, USDC is now bigger than Tether. Over a month, Tether on-chain supply has dropped nearly 12% [0]
[0] https://defillama.com/peggedassets/stablecoins
The "exorbitant privilege" usually belongs to a government with a vast military, and/or substantial colonial possessions -- something that allows force to be used in an emergency. There is a reason why the US dollar, but not the Swiss franc, is an international reserve currency.
The UK Pound is still considered an international reserve currency by virtue of being incorporated into IMF special drawing rights, even though the UK no longer really has a vast military or substantial colonial possessions.
> the UK no longer really has a vast military
Beyond the nukes another comment mentioned, the UK is also a permanent UN Security Council member, a founding NATO member and a productive member of the Five Eyes and AUKUS [1]. And it still has the world's fifth most powerful navy [2].
> substantial colonial possessions
No, but they have overseas military installations in Gibraltar and on Cyprus, the Falkland Islands and Diego Garcia. Smaller installations at Ascension Island, in Singapore and Brunei "provide important staging posts and logistical support facilities for British and allied forces passing nearby" [3]. In terms of practical force projection radius, they're in a very small club of nations.
[1] https://en.wikipedia.org/wiki/British_Armed_Forces#cite_note...
[2] https://worldpopulationreview.com/country-rankings/largest-n...
[3] https://www.europarl.europa.eu/meetdocs/2004_2009/documents/...
They still have the ability to put nuclear warheads anywhere on the globe, by virtue of their ballistic missile submarines and the nuclear warheads those ballistic missiles carry. The Trident D5 missiles have a range of more than 7,500 miles, and the submarines move.
That, in and of itself, is worth a lot -- potentially even more than having a large military.
'They still have the ability to put nuclear warheads anywhere on the globe'
I think most of UK public would consider that a prime minister that plans using nukes in offensive capacity belong in a padded cell.
I completely agree, I was just responding to the parent commenter's assertion that the UK didn't have the offensive power to have "exorbitant privilege"
I saw a trident missile launch once in 2017. Didn’t know it at the time. Everyone should know about those missiles—they are the reason we don’t have “real” war.
They are so unbelievably powerful it blows my mind.
> ... even though the UK no longer really has a vast military
https://worldpopulationreview.com/country-rankings/military-...
At #5 world-wide by expenditure this may be a bit over-stated. Or else "vast military" is just a standin for "US or China".
Expenditures don't mean much. Look at purchasing power parity, and actual capabilities. The UK military lost the ability to conduct large-scale independent operations without US support decades ago. Capabilities are minimal in many crucial areas including logistics, aerial refueling, strategic bombing, amphibious lift, ballistic missile defense, and space dominance. Even their nuclear deterrent is completely dependent on the US military-industrial complex.
You could save some time and keystrokes by just typing out "too big to fail."
As an outsider this reads like someone in 2006 saying that these risky looking mortgage based products are fine because they'll be propped up by Fannie Mae and Freddie Mac.
And they were pretty much correct. So probably not the same as that.
They certainly weren't correct for the people who bought those Mortgage Backed Securities. Unless you were a huge institutional investor with the inside track you got skinned alive. Even the big boys got burned pretty badly. Lehman Brothers was the fourth largest investment bank at the start of 2008.
We had an international financial crisis over it. That seems less than fine.
You have to predict what those well-capitalized parties will do during a market panic. Decision making seems to change quickly when half the money has just disappeared, to focus on salvaging as much as possible.
Exactly. It's not whether Bitfinex is able to prop it up, it's whether Bitfinex thinks Tether can be propped up without too much expense. At a certain point it no longer becomes worth propping up, and that number is very far from the current $74B market cap it's currently at.
>whether Tether is fully collateralized ultimately doesn't matter
There's a nuance here.
If Tether IS full collateralized, then it does not matter since a run on Tether is by definition impossible.
If Tether IS NOT fully collateralized then it may or may not matter depending on the size of the run and the ability of Bitfinex etc. to contribute capital.
Full collateralisation isn't enough to rule out a run on USDT, since the value of the collateral can vary depending on market conditions. We can be certain that one USDT will always be redeemable for one USD, as long as USDT is fully backed with USD, but we already know from the attestations this is not the case.
Right, I'm assuming collateralization by bank accounts, money market accounts, and short term Treasuries. Not commercial paper issued by Binance and Bitfinex.
It's such a weird "bet", though. Pay $1, get back $1 if you win, get back $0 if you lose.
If you just sit in Tether sure, but the ecosystem of stablecoins gives you access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries, so the bet is a little more sophisticated than dollar for dollar.
Terra Luna offered some great DeFi yield opportunities.
Unrealistic yield is one of the hallmarks of a ponzi scheme. The DeFi yield opportunities require more money to flow in than to flow out.
Apple stock, for example, pays a dividend that is not dependent on more people buying Apple stock but on the company profits for the next quarter.
>The DeFi yield opportunities require more money to flow in than to flow out.
Not exactly. In DeFi they just give you newly printed tokens. That's the "yield". Why wait for money to flow in when you can instead print it at will.
Actually the DeFi yield opportunities are not any better than Treasuries on a risk-adjusted basis. You might not be familiar with the actual risk level, including counterparty risk. Some of the cryptocurrency grifters have intentionally obscured that issue.
Treasuries pay negative real yields, so I'm not sure there's any opportunity there. More of a guaranteed loss.
Luna had a real negative yield as well
I’m confused. Banks and credit unions pay interest on savings because they can loan or invest that money with higher yields then the interest they pay to the customer/member.
How exactly do cryptocurrencies finance their DeFi yields to their investors? The only way I can think of is with the money of future investors, but that is a pretty blatant Ponzi scheme.
Loans.
Yeah, that still doesn’t make sense. If that were to be sustainable you would have charge higher interest on the loans then you give to savings. That means a customer has the potential of getting a loan in an alien currency which they’d have to sell to USD, and then buy some more of that alien currency to pay it back with much higher interest then if they would have just gone to a bank/credit union/loan agency.
These DeFi yields must be funded in other ways than just loans.
> If that were to be sustainable you would have charge higher interest on the loans then you give to savings.
Which is exactly how protocols like Compound work, although 'governance tokens' are also issued simply for using the system.
> These DeFi yields must be funded in other ways than just loans.
Which? DeFi stands for Decentralized Finance, which pretty much means the rules are easily available - as long as you talk about a specific example, not spherical cows.
I’m sorry but I’m still confused. Who are the people taking these inconvenient, unoptimal and expensive loans, when they can get better and cheaper loans through traditional means? Something doesn’t smell right.
Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.
EDIT: I went on a little scouting mission on google (well DDG actually) to find out if I could borrow some USDT on the Compound and how much it would cost me. But I mostly came across articles explaining how you could make money by doing the opposite (buying Tether and lending it), and numerous dashboards with all sorts of hard to understand data with the prices of various cryptocurrencies and some rates I couldn’t understand. I suspect that the only people borrowing USDT are actually also speculators that are invested in the cryptocurrency market (perhaps they are trying to short it).
> Who are the people taking these inconvenient, unoptimal and expensive loans, when they can get better and cheaper loans through traditional means?
USDC is at 2.3% APR, USDT 3.78%. I think you'll find that most people cannot obtain unsecured loans that low, and the forms of collateral a bank will accept are much more limited. The biggest reason is also the reason why people like Elon Musk have massive loans: avoiding taxes on realized gains.
https://compound.finance/markets
> Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.
Sure, just like how "startups" are actually Ponzi schemes with early investors preying on the later ones. Same people owning it, too!
Looking at these rates they are all over they place, but I at least understand now that this probably isn’t a ponzi scheme. I see that the borrowing rate is always higher then the savings rate, and therefor the money people are making adds up.
That said GP’s claim was that these yields are “much better "passive" interest than bank deposits or treasuries” however that doesn’t seem to be the case for all but few of the currencies. I get better interest rates at my credit union. For those currencies that are actually yielding higher interest (USDT being one of them) are also being borrowed with higher interest then loans at my credit union. So I think GP’s claim is simply wrong. Yields are only higher if you offer your money in a lending scheme with abnormally high interest.
As for who takes these loans. I don’t see that though. You need up to 2× the loan amount as collateral in an asset that is already as liquid as the cryptocurrency you are getting. Normal people would just use the money they already have and pay 0% interest, not put it up as collateral so they can borrow half that amount. I don’t even see how this could even be used as a tax evasion scheme because the collateral is equally liquid to your lending amount and should be under the same tax clause. The only use case I can see are speculators. And the only way to make these higher yields, is if a speculator makes a financial blunder, which is not sustainable either.
Why would anyone pay 30% interest on a loan, in an environment of negative interest rates?
Can you explain where the 30% number comes from?
> sophisticated
aka obfuscated
does the yield come from anywhere other than funds deposited by new users?
Interest on lending, and trading fees from liquidity pools. During a bear market in crypto certainly these yields will decline.
The 2 sources I mentioned above are essentially flows that accrue during the bull markets. It's not magic, when people want to long assets they borrow stables. If you lend into these markets you'll get the yield. With liquidity pools you can get some transaction fees even during market volatility and draw-downs, in the short term at least.
Am I to believe people are paying > 20% interest to borrow crypto ?
I hope not, or else I'm missing out on a lucrative counter-position.
No
> ecosystem of stablecoins
"stable" coins... yes, that's been an interesting ecosystem lately.
> access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries
Not to mention much greater risk of losing everything.
The "DeFi yield opportunities" of today were the HYIP ponzis of years past.
Have you ever thought where that yield comes from?
You can make 30% interest on deposits. It's better than picking up pennies in front of the proverbial steamroller. More like quarters.
When you hold Tether, you're taking a risk that your Tethers might not be redeemable in USD. As far as I know, this risk isn't compensated in any way, shape or form.
When you deposit your Tethers somewhere, you're taking an additional risk, namely the risk that you might not get the deposit back. The interest that you get on deposits is compensation for taking that risk, but not for the other risk.
For sure, holding tether (or any stablecoin) without investing it is pointless. It can't go up, but might go down. The only reason to hold it (longer than to do a transaction) is if you're making a return.
It matters deeply. Neither Bitfinex nor any other exchanges are required to rescue Tether. Additionally, these other exchanges may not have the collateral to rescue Tether in a simultaneous market and crypto downturn.
This is a ticking bomb.
Yeah that's the whole point behind fractional banking. The government regulates how much money you need to hold to satisfy demand.
Oh wait, I'm just getting word that Tether isn't a bank. I wonder what ratio you can have if you aren't a bank?
Weird to think about because I thought that it was very illegal to have an unregulated bank. Oh well, I'm sure nothing bad ever happened before bank regulation.
Backed by the full faith and credit of Bitfinex
“that want to prop up Tether” AND are able to do so.
Crypto risks are highly correlated. The ability to bail out Tether is not a given.
> As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine.
This reads like the honest description of a Ponzi scheme.
As long as the originating parties, or newbie rubes, continue to prop up this sham it will not collapse.
For anything to work efficiently in crypto it always needs to be centralised e.g. OpenSea, Coinbase. Both of which hilariously are backed by a16z. As Scott G says... "meet the new boss... it's your old boss"
More examples: Metamask, Moralis, Blockchain.com, Kraken, Binance
> As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine.
Doesn't that make Tether a fiat currency?
As long as there are well-capitalized parties that want to prop up the UK Pound, it will be fine. Whoops.
https://www.investopedia.com/ask/answers/08/george-soros-ban...
They want to prop up Tether until they don't want any longer.
Nothing lasts forever, especially in cryptoland.
> As of this writing, on May 20th, it has yet to regain the peg
This is misleading. Tether has consistently traded between $0.998 and $0.999 between May 13th and May 20th. See https://coinmarketcap.com/currencies/tether/
Is it trading at 0.1% lower than it was before the Terra USD collapse? Yes. Has it "lost its peg"? No.
It's remarkable that a stablecoin which was able to mostly maintain the peg for years at a time now needs to redefine what being pegged means, and that this state of affairs has continued for more than a week. That's why I mentioned it.
Peeking at the long term chart[1], I don't think 0.1% is notable. In Oct 2018, it bounced around ~1% under the peg for most of 2 months. Then in Dec 2018, it bounced around 1-2% over the peg for 2 months. A similar swing happened in Apr-Jun 2017. I'm actually surprised, I've never looked at this chart before and I didn't expect to see swings of several percentage points. But at any rate the current 0.1% is pretty tame in comparison and I'm sure it's just the cost of moving money to arbitrage.
[1]: https://coinmarketcap.com/currencies/tether/
On https://coinmarketcap.com/currencies/tether/historical-data/ you can see that all the highs for the past 7 days have been strictly under $1, has this ever happened before?
If you zoom in to the first time period I mention (Oct 2018), and inspect visually, it was strictly under $1 for nearly two months. Right after that it was strictly over $1 for nearly two months. That's if you trust that site's data of course.
Remember this is the price on the secondary market, and these are just random people who see the price and then shuffle money around so they can buy a dollar for 99.9 cents. Anyone can do it (if you can stomach exposure to USDT of course). So if the system is working properly the price should generally hover within $1 plus or minus the cost to move money, but there's nothing keeping it at exactly $1.000000.
coinmarketcap/coingecko are generally not very reliable for evaluating the stability of stablecoin pegs
most liquidity tends to aggregate on dexes like Curve, which is also where you could have seen the whole LUNA/UST debacle play out in real time as large actors swapped out of UST into USDC/USDT/DAI
> now needs to redefine what being pegged means
Completely. For context, "the Reserve Primary Fund broke the buck when its net asset value (NAV) fell to $0.97 cents per share" [1].
[1] https://www.investopedia.com/articles/economics/09/money-mar...
That's something different, though. Money market funds are meant to be safe interest bearing investments: they're expected to give a small positive return on investment in normal times, and to be safe enough that people will at least get their original investment back in bad times. That's why it's a big deal when something happens which causes them to return less than was invested by any amount: a safe investment, which gave lower returns in exchange for that supposed safety, wasn't.
The goal of Tether is a little different. One USDT is meant to be worth one USD. It's just as much a problem for the purposes people use it for if USDT is trading above one dollar as below, because they're paying more than its value. That is, the Tether peg is meant to be two-sided, both above and below, and all that's happened is that it's gone from trading at slightly above the nominal value to trading slightly below it. That's not really "breaking the peg" in any meaningful sense.
> money market funds are meant to be safe interest bearing investments
Tether is supposed to be a safe non-interest bearing instrument. (Its promoters just keep the interest.)
On the other hand DAI fluctuates between 0.999 and 1.001 all the time. Is it not "stable".
I am no fan of tether, but small fluctuations like this have always been normal for "stable coins".
DAI has been designed to be soft-pegged. It is meant to fluctuate around the $1 mark, but it never guarantees any kind of parity.
This is why in regulated markets you can inspect the ticker: to provide a audit record for proof that nobody is funding themselves or the asset by arbitrage.
That’s the point. Dai goes below and above $1. Tether has stuck below $1. That’s an important difference.
Longer comment: https://news.ycombinator.com/item?id=31449400
This might be fine in a open regulated market. See my above comment.
> We take the 00:00Z price each day for 365 days and then average it
Take the average price at close of Lehman Brother's stock in 2008 and you get a positive number. That doesn't make it less broke.
> holds its price above a $0.98 average
When we say money market funds "broke the buck" in 2008, we are talking about one fund going to 97¢ [1]. Moving the goalpost to on average outperforming what counts as badly bust in real markets concedes a lost peg.
[1] https://www.investopedia.com/articles/economics/09/money-mar...
Suggest a better methodology crisscross, I'm happy to listen. The problem with $1 flat is that anyone can sign up and manipulate it over time, holding it a fraction of a cent under isn't hard for a moment each day. Constantly maintaining a few cents under each day is much, much harder, feel free to go look through historic charts of what it costs to sell tether for USD over the last few years.
All it takes is a few days of near zero in the next year to win the wager. Isn't that what patio11 has said would happen for what 4 years now?
I'm offering a chance to capitalise on such deep knowledge, surely that's a no-brainer choice for someone so convinced that Tether is done for?
> holding it a fraction of a cent under isn't hard for a moment each day
It shouldn't be. Not for a dollar-pegged asset. Fractions of a cent on billions of dollars, dollars easily lent and borrowed every day, every minute, is millions of dollars a year for an arbitrageur [1].
Hundreds of billions of dollars are deployed into funds exploiting smaller differentials on rates and futures curves.
> what patio11 has said would happen for what 4 years now?
Four years isn't long. At the first sign of tight markets, the damn thing fell apart to the tune of 5%.
> that's a no-brainer choice for someone so convinced that Tether is done for?
People are shorting Tether [2].
The problem is counterparty risk. When Tether busts, you want someone on the other side who isn't all in on crypto. That's not easy.
[1] Coinmarketcap shows $0.9989 for 1 Tether, an 11 bp spread. Call money is 2.75% [1], or around 75 bps per day; too expensive. But the repo rate is 80 bps [2]; less than a basis point a day. Borrow a billion against collateral, buy one billion Tether, redeem it for one dollar each and pay back the loan. You'll make, round trip, a $1mm profit [c]. In one day. Unless we're arguing there would be $1mm transaction costs for this trade, one must ask why nobody is doing it.
[a] https://www.bankrate.com/rates/interest-rates/call-money/
[b] https://www.newyorkfed.org/markets/reference-rates/tgcr
[c] [$1bn - $1bn * 0.9989] - [$1bn * (0.8% / 365)]
[2] https://www.wsj.com/articles/short-sellers-bet-tether-crypto...
>The problem is counterparty risk. When Tether busts, you want someone on the other side who isn't all in on crypto.
Or indeed shitty Chinese commercial paper. Whatever Tether calls its treasury desk must be approximately the most stressful seat in the universe.
> Hundreds of billions of dollars are deployed into funds exploiting smaller differentials on rates and futures curves.
Legally, IRDs and futures trade/settle on a few centralized exchanges with maybe one CCP (at least going by clarusft numbers on monthly dv01 volumes [some products way trade more on different venues compared to others], esp compared to all the places USDT trades) with many times rehypothicated US treasuries or other gov bonds behind it all, scheme blows up occasionally (was fun watching 30 year UST's trade ~30 bps under 75% of SOFR txs for a month before sept 2019 'surprise' fireworks happened).
> … buy one billion Tether
With no slippage/spreads on dex's or cex's to be able to do this with any stablecoin? Pipe dream. Maybe you can market make over the course [unknown amount] of time and pick it up on cex/dex's at/under $0.9989, but good luck trying that everyday (esp on chain where you will need to split that over many address all the time or addr tracking algos will front run if the MEV bots dont get you on every tx).
Shit show all around, ones just more concealed from the public and "regulators" than the other…
> With no slippage/spreads on dex's or cex's to be able to do this with any stablecoin? Pipe dream.
Slippage for an arbitrageur is price correction to the market. I made a math error in my comment: call money at 2.75% is less than a basis point a day. The trade makes money with no collateral.
I--me!--could call my broker and borrow $10mm at 5.75% (call money + 300 bps, because I'm not a billionaire) by lying and saying it wasn't for trading, buy 10 million Tethers for 0.9987, redeem them and pay back the loan the next day to turn an $11,425 profit.
I'm not going to do this. Because in that interval between buying and redeeming, an interval I'm sure would be marred by unnecessary delays--with my borrowing cost the trade breaks even between days 8 and 9--there is more than a 1 in 875 chance that Tether blows up [a]. (In other words, I'm betting, by not doing this trade, that Tether has no more than a few years to its name.)
[1] 1 / (11,425 / $10mm), the 11,425 being about $10mm - [$10mm * 0.9987] - [$10mm * {(2.75% + 3%) / 365} * 1 day]
Is it not well known that the Lehman International (London) book turned the all history record yield when finally unwound by the liquidators, and made LB fundamentally solvent at the death?
Edit: solvent at crisis time. LBI wasn't linked to onshore information systems.
> made LB fundamentally solvent at the death?
The problem wasn't solvency. It was liquidity. The point of bank regulation is to ensure that banks can survive small bouts of illiquidity and remain solvent through major ones.
I'll take that bet. But you need to put up the $5,000 first.
So you don't think you're just losing money, I'll issue you $5,000 worth of my personal stablecoin that you can redeem 1:1.
If you win, I'll give you another $5,000 of my personal stablecoin to pay the bet.
You can redeem them whenever you want, I'll be good for it. /s
> Are any of you willing to back up any of these bold sentiments with actual money? Or are you just like the rest? All words, no soul?
If you are so sure of this then let us make a Real bet. 50 million sounds good yes? And if you don't have 50 million we can simply bet your entire net worth.
It's a real offer and am willing to part with it if I'm wrong. Please don't make a mockery of it
I am happy enough with what was proposed and am not being facetious, was wagered directly to the person who wrote the article a few others after that.
Don't see anyone daring to take up the challenge, just low effort and frankly low-tier commentary that doesn't belong on this website in response. I will offer it to you as well since you seem keen. Any amount up to $5000 USD.
It's not much in the scheme of things to prove oneself right yes? I'm happy to have it all donated to charity which you can claim as tax deductible if that so pleases. Or are we not even talking about Tether anymore and just something else, something deeper that lurks within the unsettled anger of all these comments?
I'll take $20 of this action.
I'll pay you $20 simply so I don't have to dox myself to the angry masses :)
Let's put a $1k minimum caveat.
> I will bet you $5,000 that [...]
Sure, buddy...
Course in a good market you'd lay that risk on the order book not come fishing for suckers here...
I'm happy to discuss terms. Over one year I don't see any risk to this bet at all. And it seems the people I'm offering to feel the same way, as they are running away terrified from it.
I offer you the same deal, $5000 USD 1:1 that Tether maintains the peg above $0.98 for the next year averaged at the UTC 00:00 USDT/USD price on Kraken everyday.
We both keep it with an intermediary who invests in something that attempts to maintain a semblance of keeping up with inflation.
One year from now we tally up the score and the correct person wins. You only need a few days of tether collapsing to win this bet.
It's a simple wager that surely makes sense for those with all these strong words and bravado in here.
Thats breaking the peg though! Tether says its 1 to 1 with the pegged fiat currency. It doesn’t say its .98-1.01. There are pegs that do this sort of range based pegging but Tether is not claiming that.
Tether's claim is that verified users can redeem USDT for USD 1:1 at https://tether.to/. Exchanges like Kraken are secondary markets and Tether does not claim anything about them.
> verified users can redeem USDT for USD 1:1
Or maybe not, who knows:
"Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all."
Oh, and don't forget the fees:
"Fee per fiat withdrawal: The greater of $1,000 or 0.1%"
> verified users can redeem USDT for USD 1:1 at https://tether.to
This has been debunked for a while already, nobody believes that anymore.
… At what odds?
1:1
Given that the other crypto people offering “keep me honest” bets are offering 5:1, 10:1, and 25:1, on better terms, no, that’s not interesting, but I’ll write you a free option to laugh about me over the Internet if it turns you you’re right.
Asking for 5, 10 or 25 to 1 odds in your favor means you are expecting at least 20%, 10% or 4% chance that you are right.
The fact that you don't want to engage in 1:1 odds means you are less sure of your own position than he is. Just sayin' :)
Why does it mean that? If I'm 50% sure an event will occur, but someone will offer me worse odds than that (I.e. better payout) why would I take 1:1 odds?
Because that is not what happened. Grimburger did not offer (from his point of view) worse odds than 1:1. And patio11 refused 1:1 because it was apparently not interesting to him.
Now one could take that as a salesmans tactic to try and extract better odds from Grimburger but at that point the monetary aspect would become the focus and not the wager itself. A wager between two people who are in it for the sport and both sure of their positions should carry 1:1 odds. One could ask for a lower amount or refuse completely on monetary grounds but not request odds in ones favor.
Patrick refused because other people were offering worse odds...
Yup exactly. But other bets (surely they are not betting on the exact same thing with just different odds and even if they were they) don't influence the chances of this bet. These are independent events. Either you think you are likely to win or not. To refuse 1:1 odds on the grounds that you could make more money somewhere else means either A: you do it for the money and not the sport or B: don't have enough money to wager on all these bets but then he should ask for a lower amount or refuse with that reasoning. Maybe I am missing some other possible explanation? The reason of refusal is very important to understanding the motivation behind it.
If there are two people offering you a bet:
Person A offers you 5:1 odds in your favor saying that a random dice throw will yield a number small than 3.
Person B offers you 1:1 odds in your favor saying that a random number chosen between 1 and 10 will yield a number bigger than 6.
Thinking about the wager with Person B is independent of the wager with Person A. When deciding which bet to engage in the answer is both because in both cases you should be convinced that your chances of winning are >50%. Refusing the second bet would lower your overall expected winnings.
25:1 is not _worse_ odds. He wants me to pay $125,000 if he wins the bet, yet if he loses he gives me $5,000. Surely you can see what that says about the level of confidence here.
The emperor is clearly not wearing any clothes.
There's lame horses that get better odds in races than what is being offered to me if Tether collapses (and even recovers in a few days after that) right now.
The peg just needs to collapse for a tiny fraction of the next year for them to win this wager. Why wouldn't anyone take such a guaranteed profit? :)
And to be fair I doubt it's the loss of money that scares Patrick, it's the USDT/USD price on May 21st 2023.
So how confident you are that you are right? Sounds like less than 4%. Is it less than 1%?
It's not the money, it's the principle. I'm over listening to Tether stuff after all these years on this website, personally don't think much of the people behind finex but am more than certain the peg will hold up just fine this decade.
You're American, I'm Australian, there really shouldn't be any problem here with finding a 3rd party intermediary, though I'm not sure about US laws on these sorts of p2p wagers.
You truly want to get $125,000 in return for my $5000 bet on tether maintaining the peg? Surely that says something about your faith in them asking 25:1 that they go under in the next year? I'm sort of tempted at the offer of 1/5th of that, as unfair as it seems.
Happy to do it if we each donate to the charity of the other's choice? 1:1? You can keep the tax benefit.
If it's about the principle, shouldn't you be rallying against a company that has not been able to prove that has the reserves that it claims to have?
Keeping the peg is the least of the problems. If they somehow showed up tomorrow and said "Listen, we finally ran an audit and we found out that we really have only $0.90 for every minted USDT. But given that the small print says that we are allowed to return whatever we want, whenever you want, we decided that everyone will get a 10% haircut, ok?", you would bet that the market would shake for a week or two, but most of them would just scream Finally! and continue gambling what was left on the next project.
The real problem is that all that comes with that lack of transparency: the market manipulation, the cop-out to become a unregulated central bank, the inability for others to make a true assessment of the health of the market.
Tether basically took all the work from the cypherpunks and turned into a Casino that can't even be properly audited. They can manage to keep the peg for 20 more years for all I care, but each day they are still around is another day wasted that could be used for more meaningful things.
I'd be interested in that bet for $1000 if it were simply a binary "USDT will be below $0.98 at midnight GMT one year from today", without the averaging part.
I'm not an expert by any means on this topic, but for non-crypto assets that are pegged, going even 0.1% below the peg is a huge deal.
A peg is a peg, it's supposed to be more or less certain.
No it's not, if you think pegs are supposed to stay forever at the same price you don't understand how markets and order books work.
I very much don't understand how markets and order books work, but people who do understand those things tell me pretty consistently how big of a deal it is when a money market fund loses its peg, even by a tiny amount.
Define "tiny". Is 0.1% tiny? 0.01%? 0.001%?
USDT maintains its peg by allowing certain entities to redeem USDT 1 to 1. How much USDT's price fluctuates depends on how well that mechanism works, and market conditions.
By claiming certain entities can redeem 1:1. No one has ever documented a Tether redemption. They have a very tiny number of clients and the terms say they don’t have to redeem at all.
> No one has ever documented a Tether redemption
Are you just making stuff up? There were $10B worth of redemptions only last week.
No there was a $10 billion market cap reduction. The exchange rate on Tether’s owned exchange, Bitfinex was $1 most of the past week where it was less elsewhere. Likely Tether was using open market operations to trade dollars for Tethers and keep the rate up.
Documenting a redemption would involve using the official redemption mechanism where you redeem $100,000+ at a time, pay a $100-$1000 fee, get a wire transfer from Tether etc. If you can find anyone ever documenting having done that, let me know
How about the CEO of FTX who says they are doing it every day ? https://www.bloomberg.com/news/articles/2022-04-25/odd-lots-...
Sam Bankman Fried would be among those most likely to be co-defendants in a trial.
But, what I said was it’s never been documented.
* Does he buy Tether at par or at a discount?
* Can he redeem when he wants, in any quantity, or do they have arrangements?
* Is he redeeming for dollars or in kind? Terms allow for latter
* Does he buy with dollars or with commercial paper?
I do not believe he has shown material which would let us answer any of these questions
from https://tether.to/en/fees/
the 'fee per fiat withdrawal' is 'The greater of $1,000 or 0.1%'
so it would theoretically make sense for the peg to be 0.1% off as there is no more profit from redemptions at that level.
Keep in mind that the relationship here is non-linear. A small de-peg signals a large imbalance of funds.
This non-linear relationship is literally programmatically hard coded in the case of money markets such as curve.fi
Currently the largest money market pool (https://curve.fi/3pool) it has a 5:1 USDT:USDC imbalance. In dollar amounts, the pool contains $1b USDT and $0.2b USDC.
This 5:1 imbalance only gives way to a 0.1% de-pegg.
In the past the balance used to be perfectly 1:1 USDT:USDC. The fact that a multi-million dollar arbitrage opportunity still exist is worrisome.
Eh, that just comes down to the arbitrary definition of how much of a discount you consider "losing the peg".
Sidestepping the definitional issue, I certainly worry when a pegged asset trades at a persistent discount, even a small one, when it didn't before. A stablecoin should generally trade at a premium just as often as it trades at a discount. When one goes long periods without ever being above, that is a strong signal. And when everyone panics, that's exactly when it's too late to get out. You have to beat the rush.
Remember, even up until the morning of May 9th, the day of the real TerraUSD depeg, people made that exact objection. "Oh come, on being 0.1% off is normal for stablecoin." Indeed it is -- but not in a persistent fashion!
Disclaimer: I closed out my Tether longs last week.
Before you thought Tether was unable to hold a peg why would you be long Tether? Isn’t it better to just be long the USD?
I had invested in liquidity pools (which collect fees for you for facilitating trades between tokens that you contribute), and some such pools had Tether. One downside of such pools is that, if any one of the assets in it goes to zero, all your invested capital goes to zero (though you keep the fees). It was therefore a Tether long.
I had also held a small amount for online purchases.
More generally, the reason to hold a stablecoin rather than a "real" dollar is because you need the former in order to interface with smartcontracts on blockchains. Also, to buy from merchants who sell goods for stablecoins because they're in a grey market that banks don't want to touch.
Side note: I don't know why people keep asking that question -- it gets asked and answered each time this topic comes up e.g.
https://news.ycombinator.com/item?id=31352262
USDC has the exact same properties as USDT, but has no legal issue and is backed by an entity that is a infinitely more trustworthy.
There is Gemini USD - similar story.
There is DAI if you are long on ETH/BTC and still want/need liquidity.
Curve has a pool without USDT (cDAI/cUSDC).
Uniswap lets you make any type of pair. On its heyday (before v3), I was providing to DAI/USDC and I was getting 2% returns per month.
So my question is: why USDT, when there is a handful of better stabletokens that can be used for the exact same purpose? If it is common knowledge that Tether is not to be trusted, why would any honest person still use it?
I’m familiar with the others and use them as well.
https://news.ycombinator.com/item?id=31422545
https://news.ycombinator.com/item?id=31417134
https://news.ycombinator.com/item?id=31412835
My comment was answering a question about “why stablecoins at all”.
To answer your question, because some uniswap v3 pools with USDT offered competitive returns, like the 0.05% WETH/USDT one. That was one of many I used, which included those that paired DAI or USDC with ETH.
I considered the concerns overblown at the time and so was okay with making some the USDT pools a part of my LP portfolio.
I’m honest.
It's not about the "concerns" that we should be worried about. We should also be worried about not perpetuating a gigantic scam.
Honesty is not just about "I wasn't the one profiting from the bad thing". It's also "I'm willing to call evil/immoral for what it is".
I don’t consider being slightly undercollateralized a “gigantic evil scam” and the rhetoric around Tether is still definitely overblown, and if that were your primary concern (or am I not supposed to say that anymore?), you should have led with it rather than comparing it to similar defi returns.
No. USDT undercollaterization is not my primary concern: https://news.ycombinator.com/item?id=31451820
And I wasn't comparing in terms of returns. I just pointed out that there is no real use-case for USDT that can't be served by the other tokens, including yield-farming in liquidity pools.
It’s not just 0.1% off the peg. It’s 0.1% off and facing large redemptions.
That makes the peg loss seem significant
The large redemptions are what is causing them to be 0.1% off the peg...
Or is being 0.1% below peg causing large redemptions? People buying USDT at a discount and redeeming at face value.
Thats why breaking the peg is so bad. Its a visious cycle so both are correct.
No it's not..people buying in order to redeem brings the price closer to the peg, not further away.
Definitely. But a lot of people have looked at the small depeg and said “it’s not big, and they’ve depegged in the past. What’s the issue?”
It’s seeing the redemptions that show it is significant
Why hasn't anyone pegged a stable coin to $0.99 before?
The $0.99 Only Store could do stable coin. You could even redeem your coins for items in the store!
Anything less than 1.00 might as well be 0.
The problem here is that everyone in the crypto industry is taking George Soros's approach to bubbles: “When I see a bubble, I rush in to buy it.”
There is more money to be made on the gravy train of providing liquidity for trades, yield farming, etc. than in trying to short Tether and potentially bleeding out before it goes bust.
Its pretty frustrating that people are using these shady stablecoins where you can't see the code or assets backing them (eg USDT), when there are stablecoins that are fully open source and you can see the backing in real time (eg DAI)
Ask yourself why that might be, I think you might find the answer rather illuminating
DAI is to Ether as Terra was to Luna?
Not quite.
Dai is an ERC20 token on top of Ethereum. It might be more accurate to say Dai is a stablecoin coupled to MKR (MakerDAO), a governance token. Dai is over-collaterlized.
https://makerdao.com/en/ https://developer.makerdao.com/dai/1/
Terra is a coin with ticker LUNA, and is coupled to a stablecoin UST. As I understand, LUNA/UST was under-collateralized and could not handle what was essentially a virtual bank run.
Tether is a centralized stablecoin that is also reported to be under-collateralized, but it has bridges and industry connections to the wider crypto market which has kept it from crashing and burning so far.
Your analogy doesn't make sense for a multitude of reasons. Terra is the blockchain that Luna and UST ran on, not the stablecoin on the ecosystem.
More importantly, DAI is overcollateralized using ETH and other coins. UST was algorithmically pegged to the USD with an implicit backing by Luna. DAI still technically has a depeg risk (e.g. if ETH has a flash crash of > 50% that it doesn't recover from) but the risks are much lower. It's _probably_ safe in the long term although my stablecoin of choice is USDC.
> As of this writing, on May 20th, it has yet to regain the peg.
Its trading at $0.99974 and has gone over $1 several times just today and over the last week. Which definition of peg matters here? Its not causing mass liquidations in Defi platforms because it trades so close to peg, it is still redeemable for $1.00 if you are non-US and have over 100,000 units.
This article has percentages for everything except when they don't reinforce the universally negative view of tether.
Is there another source that is less invested to corroborate everything more accurately?
Its kind of stupid to observe something different and be seen as “pro tether”, but lets just stick to accuracy.
It recently occurred to me, with the whole LUNA fiasco, that any "stablecoin" that is 1-1 backed by fiat can come under attack from leveraged traders, and get de-pegged. So it really doesn't matter what backing tether has, although more is obviously better. When the music stops it's anyone's guess what will happen.
Any stablecoin that is NOT backed 1-1 by fiat, correct? I.e., algorithmic stables. If you're 100% collateralized by USD in your bank account, how can it get de-pegged?
Are there any 1-1 fiat stablecoins that aren't just flat out lies? Like every new crypto coin minted requires a matching real dollar to be stashed away. My impression is that nobody does this because it would mean massive waits to buy the crypto coins when the real dollars run low and because the way to make real money is with leverage.
Since Gemini is actually compliant - I imagine GUSD is close.
It's only ~$0.2B of a ~$160B market, though.
USDC is legit: https://www.centre.io/usdc-transparency
Tether has attestations, too. They're not audits; Tether got caught moving money in right before an attestation check, and moving it out right after.
https://ag.ny.gov/press-release/2021/attorney-general-james-...
> In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’
> On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
An attestation tells you what the bank balance is. An audit tells you where it comes from, who has claim on it, etc.
The difference is that USDC is run by a US-based public corporation and its managers are US citizens that live in the US. If USDC is a fraud (or even just materially misrepresented), they go to jail.
Is that a guarantee? No, but I don't understand why anyone would use USDT instead of USDC.
[edit: s/UST/USDT]
Maybe! First, they have to get caught; Bernie Madoff managed to run his ponzi for decades, running the value up to $65B. Jail for misrepresentation is pretty rare; IIRC only one person in the entire 2009 financial crisis wound up with jail time.
> No, but I don't understand why anyone would use UST instead of USDC.
That's fair, I just don't understand using either.
Only one person in the US. He was sentenced for two and half years, about half a year less than the average US jail sentence for selling pot. Other countries, especially Iceland, actually did crack down on their bankers.
Current market cap is 52 billion. Just where is that money?
Apparently with BlackRock and BNY Mellon: https://decrypt.co/97795/blackrock-handle-circle-usdc-cash-r...
With treasuries paying 1.6% x $50B, that’s $66M per month of interest.
Held by Circle and Coinbase in T bills I believe.
edit: more likely held by some holding company controlled by those two companies.
USDC.
With leverage you can long or short more than the available supply of tethers. You are effectively creating fake tether with leverage, and then selling it (or buying it). This stuff also happens with equities, commodities, etc.
If there was no leverage, then yes, a 1:1 backed stablecoin would hold it's value.
EDIT: I mean the story here is far from clear, you also need to consider arbitrage bots that act between exchanges, etc. etc.
This isn’t even remotely true. You’re conflating 3 or 4 things with this mistaken understanding.
Even with leverage one would assume that a 1:1 backed asset would survive intact with the people loaning out their coins taking the losses in the case of a run.
If they engage in fractional reserve issuance (which it appears they do) then all holders of the coin will be subject to losses if they can’t cash out before the reserves run out. Pretty much guaranteed run by that point.
No, 1-1 backing prevents this.
Let’s imagine that I have 1000 cans of beer in my warehouse and I give out 1000 tickets to exchange for a beer.
Let’s further imagine you have infinity dollars to “break the peg”. So you buy tickets, trade tickets, give them away for free after re-buying them… doesn’t matter. As many times as you want.
Everyone who has a ticket at the end can still visit my warehouse to claim a beer — no matter the financial manipulations you engaged in.
For a USD backed stablecoin what are “tickets” vs what are dollars in your analogy?
Tickets are crypto tokens; beers are USD.
If I start with 1000 tokens I distribute and 1000 dollars in my vault, no matter what you do with the tokens, I can exchange a token for a dollar — because your manipulation of the tokens doesn’t remove dollars from the vault. Those only change when: 1. I receive a new dollar, so issue a token; or 2. I destroy a token and release a dollar.
“Shorting” doesn’t impact that: if you borrow someone’s ticket, then sell it for $0.85, that doesn’t create a new ticket — there is still one ticket and one beer… and one IOU. What happens to the original owner is either the borrower buys a ticket back and returns that (canceling out the IOU) or else that original owner no longer has a ticket — they’re owed the value of a ticket by the borrower.
In the case of tokens/dollars, that value is easy to assess: the person borrowing your stable coin token who fails to return it owes you $1… but that doesn’t come out of my vault, because you don’t own a token. You’ll have to get that $1 by suing the borrower over failure to deliver.
you can't make a profit like that. banks (and tether) make profit by miniting news tickets out of thin air, lending the newly minted tickets at a certain rate, once the credit is reimbursed they usually destroy the minted tickets and keep the profit.
That’s one approach to profit, called “fractional reserve”.
Typically, people who want a 1-1 backed coin are uncomfortable with that model… so you instead take profit on the issuance: you charge $1.05 to issue $1 in tokens (while keeping $1 in the vault) — a process called seigniorage.
https://en.wikipedia.org/wiki/Seigniorage
$1 buys one tether. One tether redeems for $0.999. Then there's also interest on T-bills and stuff.
You mean any stable coin that is _not_ 1-1 backed?
No, once you have leverage the ratio doesn't matter anymore. It's just whoever has deeper pockets wins.
If Tether is fully collateralized, then if you sell Tether below 1, the buyer can redeem it for $1 and make an arbitrage profit.
The usual expectation is that arbitrage opportunities vanish as the rush of risk-free profit takers closes the price gap. As such, it doesn't matter what other participants are in the market; the arbitrage buyer is always going to be the best bid below 1.
You might see temporary breaks from the arbitrage-free price due to liquidity (e.g. in a thin market, there might not be enough buyers initially).
If you keep selling, you'll eventually get to a situation where no Tether are in circulation, but every last Tether will sell for ~1.
How do you get the idea that leverage matters here?
That's not how leverage works.
If you're long on an asset and are not lending it out, neither short selling nor leverage can hurt you with a fully backed stablecoin – you can always just go to its issuer and redeem it.
As an analogy, consider owning shares of some publicly traded corporation. No matter what happens on the stock market, this doesn't impact your ownership of the actual, physicaly corporation, which entitles you to dividend payments, a proportional share of its assets when liquidated etc.
Would the downvotes care to explain how it works instead?
Is this what the earlier "hash drop" tweet [0] was about?
[0] https://twitter.com/patio11/status/1527616238586716160
Hah, good catch. Kind of can't believe he's still doing that after the last time [0]
0: The tweet: https://twitter.com/patio11/status/1241551327743770624
The, ah, assertion: https://twitter.com/patio11/status/1241553311024603140
> I am materially wrong about the most consequential thing I've had to have a view on in 15 years. You should probably degrade your estimate of my ability to think through complex problems.
The prediction: https://twitter.com/patio11/status/1252584289486565377
which is a link to https://www.kalzumeus.com/2020/04/21/japan-coronavirus/ , which states, on April 4 2020:
> Japan will face a national health crisis within a month.
Of course, he then edited it with a framing in which he claims:
> The core result was correct.
> ...
> This prediction was correct.
So not only was he wrong, he refuses to acknowledge or understand how and why he was wrong. And continues to tweet hashes as though we should give anything he says any merit whatsoever.
How was he wrong? I remember this dust up but only now having actually read the whitepaper I see he was extremely alarmed by covid-19, which was entirely correct.
Further, it's apparently a very common thing in cybersecurity circles (though I've worked in cybersecurity for a decade and don't recognize the idiom, but my experience is more in software dev than research), so I don't really get why he'd stop even if he got a prediction wrong.
Wait, so on March 25, 2020 he predicted that there was going to be a coronavirus pandemic (and that Japan would be impacted)? The WHO had already declared a global pandemic on March 12, 2020 and there was no reason to believe that Japan or any other country would be spared.
> Japan will face a national health crisis within a month.
(spoiler: they didn't)
You have a strange definition of national health crisis. Almost every modern economy faced a national health crisis in 2020.
...yes they did.
https://nitter.net/patio11/status/1527616238586716160
Yes.
What happens if Tether fails, realistically?
There's a lot of doomsaying around it, but after seeing the crypto market shrug off the loss of Terra Luna without contagion or bailout ala GFC crisis, the fear may be overblown. Terra was backed entirely by hot air, whereas Tether is mostly backed. Wouldn't the net loss be similar or even less?
So assume Tether loses its peg. Worst-case:
1. Anyone holding Tether tries to cash out. Whales and important customers are allowed to redeem USDT for USD at a 1:1 ratio. Tether sells its crypto and other assets to cover redemptions, driving down the price of those assets.
2. Eventually Tether limits the withdrawals.
3. You're stuck with Tether you can't withdraw. What do you do? Try to exchange it for BTC or ETH ("blue-chip" crypto), which you can then hold or cash out on an exchange that is USD- or USDC-denominated.
4. Any exchange with Tether-denominated crypto prices are going to see those prices EXPLODE as there will be no sellers of the crypto. So you'll see some sort of weird market where BTC on Bitfinex costs $500k but BTC on Coinbase costs $10k.
5. If you're still stuck with Tether, you lose all your money or everything gets tied up in court a la Mt. Gox.
EDIT:
Fun potential #6 - if you're holding crypto on an exchange with Tether exposure, they may not allow withdrawals. The holder of the private keys may seize your assets to cover their debts.
Not sure how likely this scenario is, but even Coinbase (about as regulated as it gets in crypto) recently admitted that its bankruptcy could wipe out user funds: https://fortune.com/2022/05/11/coinbase-bankruptcy-crypto-as...
You say the price will explode. But is that explosion just the relative price of bitcoin and tether? Tether is dropping to 0 and so bitcoin price "explodes" because you are still comparing it to tether.
Correct. Price of BTC denominated in Tether goes up, price of BTC denominated in USD likely goes down, as a) Tether liquidates crypto assets to cover redemptions and b) people sell off their crypto assets due to uncertainty/fear in the market.
It is one step closer to shutting the doors on Bitcoin as an isolated financial ecosystem. Bitcoin-to-actual-USD is a trackable / taxable event. Whales avoid it like the plague.
By moving to a pseudo-dollar like Tether, market makers can hang out while they wait for a suspect better buy-in price in the future. Should pseudo-dollars go way, they actual-Dollar transactions get a taxable haircut. Additionally, the friction of going from actual-Dollar to Bitcoin increases.
Tether is effectively behaving as a crypto-clearing house with their pseudo-dollar.
Aren't sales of Bitcoin for Tether taxable anyway?
> Aren't sales of Bitcoin for Tether taxable anyway?
Maybe in US, but not everywhere. For example in Poland where I live crypto to crypto transactions are not taxable.
In Germany selling crypto for fiat after year should be tax free. https://www.coindesk.com/policy/2022/05/11/germany-publishes...
Decentralized exchanges probably don’t give you the reports you need to do taxes even if you wanted to do them.
Can't speak for other countries but for Australians, yes, it's a taxable capital gains event.
You are assuming traders are being makpid about IRS compliance and reporting.
>whereas Tether is mostly backed
I've not seem credible proof that Tether has even 50% backing, especially 50% backing in uncorrelated assets (since if the holdings are in other crypto, those holdings will likely all take a dive when Tether does).
In real engineering, you try to figure out what might happen if your system fails. In ‘financial engineering’ you assume failure won’t happen, and get caught with your pants down when it does.
" A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him." John Maynard Keynes
Nobody ever got fired for buying IBM / AWS / Microsoft
Isn't tether a way to redeem crypto that evades KYC (know your customer)? So if I am shady person getting paid in bitcoin, I can essentially bank in crypto and avoid the volatility of crypto assets without the institution I work with needing to check me out. It tether goes away (and presumably all other stable coins with them) wouldn't the utility of crypto be reduced for anyone avoiding the traditional banking system?
I don't pretend to know. I am asking if that might be the case.
It's almost impossible to say for sure. It could be anything from "the crypto market is shaken a bit, but quickly recovers" to "it leads to the downfall of the entire crypto ecosystem". Any more specific estimations are ultimately just a guess.
That being said, from an outside observer, the crypto market does not look healthy right now, and Tether is part of that. The safe guess is that the crypto market hasn't reached its low point yet, and its impossible to say if it will ever get back to November 2021 levels again.
When a market panics and people “sell” their crypto on most exchanges, what they are actually doing is trading them for tethers. If the tether then collapses they are entirely wiped out.
Tether is the de facto dollar. Hopefully most exchanges move off of it or at least have alternatives. I’m also wondering if it wouldn’t be the kind of catastrophe people were saying before
> What happens if Tether fails, realistically?
Well that would not be good for Bitcoin and the entire cryptocurrency market would it?
Your casino chips are fine until the casino blows up
https://en.wikipedia.org/wiki/Harvey%27s_Resort_Hotel_bombin...
Wow that's a great story!
Are there verifiable numbers available on whether Tether has a net outflow of fiat? That's the real question. If they're under-reserved, and there's an ongoing net outflow, they will at some point run out of money.
There's definitely outflow. Tether's reported market cap peaked at $83 billion in early May, and now it's down to $74 billion. So at least 10% of Tether has already been redeemed. There are other major stablecoins now, so nobody has to use Tether.
This is one of those things that will look fine, until it doesn't. As has now been demonstrated several times, stablecoins have only two stable points: 1 and 0.
The post states:
>"It is well-understood in the cryptocurrency community that Tether’s reserves are a polite fiction. If pushed on this, clueful members of the community, such as their co-conspirators, will (quietly) admit that Tether depends on a de facto guarantee of support from members of its consolidated group, such as Bitfinex, which can inject more equity at will.?
Can someone say what is meant but "its consolidated group"? Is this a loose alliance or something more formal?
While they were extremely cagey about it prior to suing Wells Fargo and then needing to come clean in court, they share ownership, executives, employees, IT/marketing/etc functions, etc. Bitfinex is Tether and Tether is Bitfinex.
silly question, being USDT "only" 80B, why does it matter if it collapses? considering cryptos market cap is more than 1T, and 100B's wipeouts routine, sometimes during crypto winters (where we observe -80% across the board) or collapses such as Luna recently (>50B? no idea)
Of course, panic would happen, but still. I think people would move on, forget, and continue believing whatever they want to
just curious to read counterarguments
Market cap is not the sum of all injected capital, it’s the total supply multiplied by the most recent value of a unit. For example, if you paint 2 paintings and sell them to me for $100 each, and then I sell 1 of them for $1000 to a third-party, the market cap of your paintings is $2000 ($1000 x 2 paintings) despite there only being $1100 dollars spent.
It’s plausible that there’s less than $80bn of USD in the crypto market and so tether could well represent every single dollar available. I don’t know if I’d argue that is the case, but it’s certainly plausible — and so it’s easy to see how a collapsing tether could take down the entire market, or at least, represent a far greater threat than the ~5% it represents in market cap numbers.
Even though the actual figure is unknown it still a fair argument, thanks
People need tether to avoid going all the way off chain when they sell.
Genuinely curious: why do people need that?
Going off-chain means transferring actual money, which means large transactions get reported, which means authorities get wind of unpaid taxes.
De-fi doesn't _technically_ need it but it's highly preferable.
Let's say you want to actively trade ETH against the USD. If you think ETH will go down the you want to sell it. Now if it's in a non-custodial wallet that you control, you would need to send it to an exchange, sell it, then hold USD on the exchange (were you have no control of it and they can seize it for fraud investigations, etc. - basically your money is held by a 3rd party).
Instead you can "sell" your ETH by trading it for a stablecoin pegged to the dollar. This way the only risk is the contract for the trade (which can be publically audited) and your money stays in your control.
Or if you wanted to accept cryptocurrency as payment but still only wanted the USD because of it's stability - you could accept that (this isn't very common as gas fees are rather high).
tl;dr - With exchanges a 3rd party has your money and a IOU. Coinbase has already said user crypto could be at risk in the case of bankrupcy. De-Fi removes this risk while still allowing you to trade against the USD.
disclaimer - Whether you want to do this might be a different question, just giving the reason for wanting a stablecoin.
edit: For those saying taxes - the US IRS still counts this as a sale and it's still taxed the same as an exchange trade - other countries might differ. Given the KYC/AML requirements and lack of general public knowledge about anonymity of crypto - I think sooner then later we'll see a crackdown.
Taxes
Can somebody explain why the NYAG required that they publish quarterly attestations given how little reliable information they actually provide? What was the point?
I think Tether is the ultimate "Fake it till you make it" organization in crypto. Its kind of a joke now but everyone is in on the joke but it will probably end up being the defacto crypto parking place once things get real in crypto (e.g. you can buy a house with it) and the adults come in and shake out the current management.
> once things get real in crypto (e.g. you can buy a house with it)
it feels odd to speak about this scenario like it's a foregone conclusion.
No kidding. Crypto is deeply unpopular with a significant portion of the public - myself included. This is not the same as the early era of smartphones where you either had one or didn't really know much about them (i.e. were neutral). Many people have made up their minds on the utility (or lack thereof) of crypto and want nothing to do with it. Some of the recent incidents of backlash around NFTs in games come to mind.
It’s just money. It’s a commodity. If I can get a better deal on a house if I pay with crypto, I’ll do it—don’t need your approval, really.
If you want to buy my house, you kind of do. Everybody accepts money as payment. Most people don't accept crypto as payment.
> It’s just money.
Not really.
> I’ll do it—don’t need your approval, really
Mine? No. You want a title to go with that house ? Well then, yeah, there are some third parties whose opinions matter.
It doesn't even make sense in many cases. Bitcoin for example will never be useful as a medium of general exchange, the transaction volume is way too low to support it. Plus its deflationary nature makes it at odds with a healthy economy, where you want gradual inflation to at least exceed the birthrate so there is a hope of lifting people out of poverty.
The workaround is to put everything on exchanges, but then you've lost the decentralized nature of Bitcoin and you are back to just a central database owned by a company, AKA a bank.
More centralized digital currencies with regulations backed by central banks have a pretty big potential to disrupt basic banking services. Most problems of cryptocurrencies can be solved with a trusted third party. The question is only how long banks can lobby against that.
That is far from the only question.
Literally never gonna happen
Why wouldn't something like USDC be a better "crypto parking place"?
It's not a matter of being a joke. It's a matter of being criminals.
Besides, Coinbase/Circle is already miles ahead in this race for institutional credibility.
Coinbase, the company that freezes accounts whenever the market gets more volatile?
Almost. Circle is more than just Coinbase.
And anyway, your cheap jab at Coinbase has no comparison with Tether. Circuit breakers are not an invention from crypto exchanges. Besides, they also are one of the investors in Uniswap, which lets you trade without any middlemen.
You can buy a house with cryptocurrency. Not sure if that's a good idea, but it's happening.
https://www.cnbc.com/2022/05/02/greenwich-mansion-for-sale-w...
Legally though, the transaction still has to be recorded and taxed in USD.
> This essay makes some confident claims about the future and I wish to have cryptographic proof that I did not edit those claims between now and when they inevitably come to pass.
The only unconditional claim I saw was that Tether will lie again. Am I missing something?
This one is a bit more interesting:
> Tether originally promised to back the reserves with cash in a bank account. This was a lie. It was a well-chosen lie, because the value of cash does not routinely fluctuate. Backing a fixed liability with volatile assets and a wafer-thin equity cushion would have the predictable result of causing the liabilities to become unbacked in many stressful situations for any of the backing assets.
What's interesting is that I'm not sure many banks would want to hold the cash, regardless of the source.
When a bank receives cash deposits it has to do something with it. The money doesn't sit as bank notes in a vault.
The bank has a problem. The cash becomes its own liability. The depositor can withdraw the cash at any time and the bank needs to fulfill that obligation. And a lot of cash means a lot of obligation. So the bank desperately wants to turn the cash liability it faces with a deposit into an asset (i.e., somebody else's debt).
How do do that?
Banks are highly regulated on this point, especially post-GFC. There aren't a lot of options. What they'd like to do is issue loans to high-quality borrowers at profitable rates. But if the quality of borrow is going down the tubes (it is) and interest rates are at historic lows (they were), they would rather not do that.
Treasuries are an option. But the demand for short-term treasuries has been so intense that yields have been driven down to absurd levels relative to other instruments.
All of which is to say that the very idea of a US dollar-backed "stable" coin may not be possible for any entity other than the US Federal reserve or the Treasury.
And this defeats the entire purpose for Tether holders. They can already park cash at a bank. They hold tether to be out of the US banking system jurisdiction.
Claims have been circulating for years, now, about Tether's lack of adequate collateralization, and the lack of trustworthiness of their people.
And yet, users out there are holding a total of $73 billion worth of Tether.
Who are those users holding Tether? Who wants to hold Tether? What's the motive of Tether holders? What market need is Tether addressing, and how can that need be addressed while avoiding Tether's issues?
Doesn't DAI work toward basically the same market need as Tether, but in a way that's actually decentralized and actually has checkable reserves? Why don't people desert Tether for DAI?
Shouldn't the title be "likely required recapitalization"?
I cannot wait seeing it going down soon enough.
I'd wish too but honestly I believe there are powerful enough whales behind it to back it with a superior to dollar peg, there's no possible price crash mechanism like there was for UST if I understand correctly and it is backed at more than 70%
so what happens to the bitfinex gang? giancarlo, ardoino, "frog", CZ, Justin Sun and Marc Andreesen?
I have nothing but respect for Patrick, and he has done great investigative Journalism (or at least curation of other peoples journalism) but I still feel like he is cherry picking facts (that there certainly is some shady stuff going on around Tether) here to support a predetermined conclusion(Tether is bad because crypto is bad because crypto's primary use case is money laundering) which seems to be an undercurrent of all of his writing on the topic.
If we held the industry that Patrick works in to the standards that Patrick wants to hold the crypto world to we would call all of them "scams". Basically every international bank has a long history of money laundering. Every single large bank is doing much more complicated and riskier things with their balance sheet than Tether.
I don't think they are scams but I don't think Tether is either.
In many ways this is just the crypto world leveling down to the level of sketchiness that the average large bank exists at. Which is really not a defense, I dislike those banks and I dislike and distrust Tether.
But I don't think the risks of some kind crypto solvency contagion event are even as high as what's going on in the traditional banking world right now and that is given that traditional banks balance sheets at least on the surface are in the best shape they've been in in a decade.
Any way tldr: I think Patrick is technically correct but framing the large picture according to a big double standard.
Bitcoin is the real stable coin. Everything else is fluctuating in price discovery until hyperbitcoinization completes.
The Dollar is the real stable coin, thanks to its unbreakable peg to the dollar.
It's losing its peg to real world things at a rate of 8.5% a year.
Awesome. You we're just making a joke, but for some reason that one simple statement had my brain looking at the dollar from a whole different perspective for a few seconds. "What is money, anyway????" Nice. It's like when you start to grapple with relativity... "What is time???"
Sometimes collectible coins trade for more than face value.
1 BTC = 1 BTC, just like 1 Monopoly dollar = 1 Monopoly dollar. Too bad I can't trade either for most goods/services/taxes.
There is a decent circular economy growing around bitcoin, at the very least you can purchase gift cards with them which hold dollar amounts to get whichever services you'd like!
Is there though? Where can I use Bitcoin to buy gift cards redeemable for: milk, underwear, dentist, train tickets, a visit to the barber? ( These being the five everyday purchases I last made.)
bitrefill.com
Don't think my dentist or barber want to be paid in GameStop gift cards and I feel giving some company with an intentionally obfuscated corporate structure non-refundable tokens in the hope they'll purchase a voucher which according to them may or may not pass Amazon's fraud detection Algo the same as "purchasing a gift card".
Ignoring that, it's still about the farthest thing from a "circular economy" imaginable...
I can't really imagine any motivation for buying milk in this fashion unless I'm seriously into tax evasion. So good luck buying day to day shit with gift cards once you've had to move to El Salvador to evade the IRS... Which is incidentally one of the jurisdictions bitrefill.com is incorporated in.
It's only stable at gowing downward
Was just going to say that about the purchasing power of USD.
The dollar lately is way up against EUR and GBP. It's a good time to buy things from Europe.
So Tether is doing something akin to fractional reserve banking? From what I understand, this shouldn’t cause a problem unless there is a massive run (everyone trying to convert their USDT into dollars at the same time).
Since most of the USDT is owned by big exchanges who need it to provide liquidity and have no interest in crashing the crypto market, I don’t think this is likely to happen.
Cryptocurrency has recreated the wild-cat banking crises of the late-1800s / early-1900s. Go read about the Knickerbocker Trust Company: https://en.wikipedia.org/wiki/Knickerbocker_Trust_Company
These events ultimately lead to the creation of the Federal Reserve for banks to participate in a semi-cooperative system that didn't devolve into save-yourself during times of crises.
The story here is that "unless there is a massive run" is actually a fairly common event.
The big crypto exchanges are currently acting as a sort of unofficial federal reserve. None of the big players has an interest in seeing USDT collapse and will step in to bail it out at the first signs of trouble.
I'm not saying that Tether the company is not shady. They should definitely be more transparent about what assets they are holding and their collateralization, but I think the risks of total collapse are largely overblown.
> None of the big players has an interest in seeing USDT collapse and will step in to bail it out at the first signs of trouble.
As an exchange, if you keep some reserves in USDT and you think it might collapse soon, you might have an interest in dumping your positions before it completely loses value. Maybe exchanges would benefit from responding to such a situation collectively as you suggest, but I think it's likelier that they will just protect their own interests as individual entities.
Totally agree that it’s “unofficial”, which makes it a when-not-if scenario.
At some point, total collapse of Tether’s pseudo-dollar will happen when the revenue generating exchanges feel they are support bad-money with good. All it takes is one player signaling a lack of support, and others stop supporting as well.
It’s a human psychological problem that’s a old as time. Think crypto can win over human rational to preserve self-interest? (side note: manipulation of self-interest is the goal of “weak hands” / “diamond hands”)
A big issue with this type of support is that the risks are correlated. Sure there are multiple big supporters of Tether right now, but if the sky starts falling and one of them decides to rush for the exit the others will likely make the same decision around the same time.
No they are not. That rationale is a coping strategy at best and deliberately misleading at worst.
Tether is NOT a bank. They are not regulated and have no guarantee that depositors will be paid back. They promise a 1-1 backing and instead of people holding them to their promise their supporters desperately try to compare it to moderns banks.
No. Tether is not a bank. It is not doing fractional reserve banking. It is committing fraud. It’s that simple.
This, a million times this. Speaking as HN's resident web3 apologist, it's amazing how people keep trying to defend cryptocurrencies based on some anti-finance-system ideology, but throw it all out of the window when it comes to Tether.
Tether is not a bank. Not in the US, not in the Cayman Islands, not anywhere. Everyone holding or trading Tether could be using a test network, and the monetary value of the token should be the same.
Tether has the veneer of bank equity from the balance sheet "attestations" it publishes, but I think a better analogy would be that tether issues casino chips for the decentralized casino that encompasses the tether-based offshore exchanges and defi universe.
There isn't any real visibility into the balance sheet, but I'd guess most of the "collateral" boils down to margin loans issued at the exchanges, and since the house has the edge on those platforms, their ship stays afloat.
The problem is that 'unless there is a massive run' is nearly assured over a long enough time horizon. The fact that the major players know that they are reasonably safe unless there's a run is the thing that will cause a run in a panic. Also, if some well-capitalized hedge fund figures out how to attack it, they might also light the match on a run if there's money to be made in killing it.
These are very good points - in the long run the probability of a massive run is 100%, and the risks of it happening sooner rather than later are higher because of the incentive of attacking the peg intentionally. This can be said about a lot of financial products.
I think that at this point, these risks are priced in by the market (Tether is selling at a discount from USDC). If you disagree with the market, it is your speculation, and also an opportunity to get rich if you are right. For example, the FTX exchange offers Tether put options as well as the ability of shorting Tether, and there are many other similar products.
They claim to be doing FRB, but it looks like what they actually are is insolvent.
A FRB is a bank where deposits exceed liquid liabilities (cash), but do not exceed liquid plus illiquid liabilities (cash + investments).
When deposits exceed liquid and illiquid liabilities you can't operate as an FRB. Because you are insolvent.
But this is all irrelevant, because Tether isn't a bank. Your bank promises that you can withdraw your deposit. Tether does no such thing - it provides withdrawals as a courtesy. If Tether doesn't feel like letting you withdraw, it's not going to let you withdraw.
I assume that the USDT holding of the big exchanges are on behalf of their customers. I those customer begin asking to convert their USDT to USD, that could be a massive run.
I'm not a crypto participant, but my understanding is that technically Tether doesn't promise redemption in USD, just backing by USD. That still seems like it could precipitate a crash, but IDK if such a crash would be best described as a run or not.
Tether does offer redemption, but the minimum amount you can redeem is 100,000 USDT, and there is a fee that ranges from 0.1% to 1% depending on the size of the redemption:
https://tether.to/en/fees
So if a well-capitalized arbitrageur can buy a million USDT at a price less than 0.999, they can redeem them for a profit, as long as Tether keeps honoring redemptions.
What is the point of being backed by USD if you can't redeem it?
"So you have this Monopoly money backed with a real dollar?"
"Yes"
"Can I see the dollar?"
"No"
Patrick is overindexing on the investments portion of the report – which is a little under 5% of backing. There are investment deals and crypto, but it's unknown if this represents the entirety of the amount fwiw.
If we take a step back and look at the key takeaway from the audit report is that amount of commercial paper was reduced and amount of T-bills (essentially cash) was increased by 5 bil. Good news if you think solvency is an issue, but of course they're all scoundrels eh?/s
Tether might have done shady things in the past as the article, but the scale to which Tether operates now (10s of bllns), in addition to scrutiny from SDNY, external audit, etc mean that Tether from before is much different from the Tether now, and it has pulled off the made it portion of "fake it till you make it".
The question is, why would you hold tether if there is even a 1% chance of collapse?
Remember, there is literally no upside, it's not as if USDT will go to the moon.
So why not dump it for the time being in either Bitcoin or USD?
There is still no audit, only attestations.
Tether fud in 2022 is truly embarassing and slanderous. The only time they had real problems was when part of their money was stolen and confiscated with connection to Crypto Capital - which only happened because they were refused normal banking. The only way tether fails is if the situation repeats in some way - but it appears American government finally gave up on trying to destroy usdt.
As long as the US government itself doesn't try to destroy them again - in few years tether is going into hundreds of billions.
If Tether is telling the truth in their attestation, they held $5 billion in cryptocurrency a month and a half ago, and had only about $160 million in extra assets to cover their liabilities. Given the extent of the collapse of the cryptocurrency market (and markets in general, do note), by Tether's own words, Tether is either insolvent or required someone decently steep infusions of cash. As far as I'm aware Tether has not announced either, so either Tether is lying about its own solvency or... Tether is covering up its own insolvency.
Actually, come to think of it, Tether does claim to publish asset and liability totals (if not breakdowns) in near real time, so let's see how it's doing. And, surprise, Tether somehow still has just $160 million in extra assets over liabilities. In fact, between the attestation date of March 31, 2022 and the latest update as of last night, this buffer has changed by just $186. That kind of performance is... well, not credible.
> which only happened because they were refused normal banking
They gave nearly a billion dollars to someone without a contract. That's a higher level of stupidity than just "we used a shady banking partner because we had no alternative".