This is, after all, how Bernie Madoff got caught, how bank runs generally start, and how most currency crises occur.
But why is everyone keeping their USD in USDT? For ponzis it makes sense because you're promised a rate of return, but for USDT you're essentially losing money every day due to inflation.
That doesn't really make any sense. Holders of USDT are people who sold their crypto, ie. people who aren't invested. Moreover, it's unclear how switching to a more reputable stablecoin would nuke their investment. At best it's a prisoners dilemma and I'm skeptical that everyone chose the "cooperate" option rather than the "defect" option.
Technically USDT is a cryptocurrency but I can't think of a real reason why someone who cashed out of BTC would keep it in USDT rather than cashing out for real USD (the FDIC insured and in a licensed bank kind). If you're only cashing out for a short period of time and are planning to buy back, then you're not really "out", and I doubt that all the tether that's out there is coming from people who wants out for only a week or two.
It was seeing these rates that made me believe the market was a ponzi. Somehow the system has created a strong incentive to hold USDT rather than USD in the form of divergent interest rates. And 12% is crazy high: Madoff claimed returns of 10%.
There could be a benign explanation but my bet would be that various market actors are propping up the system short run with unsustainable interest payoffs to stave off withdrawal attempts to maintain the Tether peg. Huge house of cards.
1. do the defi contracts not accept other stablecoins? Does USDT have a disproportionately higher interest rate than more reputable stablecoins?
2. This situation (large amount of USD being parked in USDT, people warning that it's a fraud) has existed since the last run-up (2017-2018), before defi got popular. So while there might be people parking their money in USDT to earn absurdly high interest rates, I don't think that's the whole story. It'll also be interesting to see how much USDT is locked in defi contracts vs that's issued.
The second actually isn’t compelling though. If you have a fraud with, say, 10% daily interest in will unwind in months. But a fraud with 10-20% annual interest will take years. Madoff kept his scheme going 20+ years.
I can't think of a good reason to keep it in USDT that sits on a centralized exchange, but maybe someone has one.
It's just an asset that a lot of crypto exchanges use, because it's more convenient to do so than usual (regulated) financial alternatives.
Tether will probably just evaporate in the face of alternative stablecoin competition, before volume decreases to a point that a sudden devaluation kills it off.
There is good stablecoin competition in USDC, or, my favourite, DAI. Unfortunately I think exchanges like Binance are somewhat in kahoots with USDT which is why they will not move off it.
Re: kahoots, it feels like the answer to "What's the easiest way to generate returns?" has one obvious answer: increase leverage.
And what prevents leverage? Regulation.
So wouldn't it be great if you could create an unregulated instrument via which you could balloon the amount of funds you had to play with?