Lending rates for USDT on the major decentralized lending platforms are more favorable than other stablecoins.

The lending rates are higher because lenders are paid a premium for owning a potentially worthless (USDT denominated) credit. The idiom that comes to mind is "picking up pennies in front of a steamroller".

It flips back and forth with USDC, which one is higher, at least on compound.finance. Right now USDC is higher, but it's been different. Here are the historical charts (click the "borrow" tab, doesn't seem to be a way to link it with that one selected):

https://compound.finance/markets/USDC

https://compound.finance/markets/USDT

For example, on October 7, it shows USDT at over (sorry, "north of") 13%, while USDC was (sorry, "clocked in at") ~5%.

The rates are mostly affected by sudden changes in demand.

The demand for Tether comes mostly from Binance and the other centralized Asian exchanges. The demand for Circle dollars comes from the DeFi ecosystem and FTX.

Basic question: why doesn't this affect the currency pair exchange rate? If lending rates reflect the (realistic!) idea that holding 1 USDT is less valuable than holding 1 USD, how does 1 USDT trade at par?

If the price is under $1, the backer can purchase the coins with reserves and pocket the difference. The price will only depart from the peg if selling forces the market price down and the backer doesn't have enough reserves to purchase tokens sold beneath the peg. This scenario is similar to a bank run and would require high selling volume to set if off.

The lending rates are determined by a separate mechanism and reflect the probability of a future departure from the peg.

The rumor is the backer is using the reserves to trade crypto. You won't ever see an attack on Teather during a crypto bull run as the reserves will be strong.

In the depths of a crash, the potential is definitely there. Last time Bitfinex bailed out Teather when its reserves came up short. So to really see Teather fail, we probably need a crypto crash and a weakened Bitfinex.

This is why people still use Teather. Even though it is risky, the current market dynamics make a failure unlikely.

IMHO failure due to embezzlement (Teather reserves stolen by an inside man) is a real possibility. The management team has already proven to be very shady...

Or doj freezing assets...

The platforms that deal in USDT have a very strongly vested interest in seeing its continuation. To the long term detriment of nearly everyone else.

Once the peg is broken it will collapse quickly. That means it's in their interest to keep the peg. If they have enough reserves (hard to imagine they have even 5% in cash but maybe they managed to buy enough BTC with their tokens to keep afloat for a while) they can keep the facade going for a very long time (until some kind of bank run is triggered).

Many people are also assuming that unlicensed unregulated offshore exchanges keep 100% of client funds in reserve. LOL.

The last few years of BTC, ETH, and DeFi all collapse quickly if the USDT peg fails.

How much crypto is borrowed on platforms like Compound against USDT? That collateral takes a 5% haircut, we’ll see painful liquidations. 10% or 20%? Fire sale everywhere.

> How much crypto is borrowed on platforms like Compound against USDT?

Close to zero. Compound, Aave, Maker - none of them allow folks to use USDT as collateral to borrow against. You can lend it for yield, and borrow it from others, but you can't use it as collateral.

There are some riskier protocol that allow it (rari, cream) but those are much smaller.

I'm assuming because a lot of people would lose a lot of money if it stops trading 1:1.

Manipulation by exchanges

This might not entirely accurate.

I would speculate that the premium is because of USDTs network effects -- the USDT/crypto trading pairs are the most liquid on centralized exchanges.

There is no reason that holding any "worthless" commodity by itself should incur any premium on the market.

Really? I've been using compound.finance, and it fluctuates, heavily -- sometimes a lot less than USDC, sometimes a lot more.

Edit: More details in my other comment: https://news.ycombinator.com/item?id=28882422

>I'm more surprised that anyone still holds Tether,

The price BTC shooting up right now (it is around $61k as I write this) is probably because lots of USDT holders are starting to realize what a bad idea that is.

If you were in their shoes ... what would you be doing right now?

For the past 3-4 years, this has happened time and time again whenever tether is in the news in bad light. It's beginning to sound like a broken record at this point "this event is finally going to do tether in!" Nothing will happen like it did before, cryptocurrency doesn't operate the same way international law expects it to abide by. It's all rigged.

If Tether holders were fleeing, they would be going into other stablecoins like USDC, not BTC.

> If Tether holders were fleeing, they would be going into other stablecoins like USDC, not BTC.

That's assuming other stablecoins are:

    a) actually backed up by non-risky assets, Quite a stretch.

    b) can easily be exchanged to USD in large quantities

    c) can be purchased with USDT

Neither of these are particularly guaranteed to actually exist.

If I was holding USDT right now (I am not, thank god), my preferred exit route would most definitely be BTC. And in very short order.

The BTC price increase is because of rumors of a US BTC ETF being approved. The Tether fine is a non-event in crypto social networks.

I haven't looked into it, but it looks like they lied about being backed by cash (or at least, somehow implied it).

Now they claim to be backed by cash and cash equivalents, namely a lot of "commercial paper" (short term debt obligations), which is widely believed to be in Chinese markets.

For some reason though, they won't reveal exactly what it is they hold. It could be that they think the market will not react kindly to the kind of assets they hold, or that they entered some kind of weird agreement no to reveal them.

I highly doubt they're not backed by assets whose face value adds up to the total UST distribution, because multiple auditors have said they were fully backed. But it is possibly that some of these assets are junk that won't (or have a high risk not to) redeem at face value.

Even in very bad scenarios, UST could fall to 0.8$ if 20% of Tether's asset default (and they burned through profits). Problematic but not quite such as a risk as it going to zero, which is why people still hold it.

No auditor audited tether.

Tether got few attestations from an unknown company a few times, but they have also been caught red handed by NYAG for moving funds a day before attestation snapshot is taken, and moved it the day after.

For the uninitiated, attestation verifies a single point in time, so it's easy to game it. And this is something tether has done.

It might indeed have been such an attestation.

The problem is worse than that. They also use their BTC holdings as part of their assets they hold, which allows them to pump the BTC/USDT rate (print USDT, use it to buy BTC, see prices of BTC going up because of artificial demand, say "BTC is up, our holdings have increased in value and we can print more", rinse and repeat.

Once they do circular dependency with BTC and tether, they might even go one step further and back 1000 tethers with 1000 tethers they hold themselves.

Isn't that just a pump and dump?

No. "Pump[ing]" by buying something is entirely legal. And the price should come down just as much when you are trying to cash in, so the mechanism doesn't really work, or anyone with enough money could just do it repeatedly using whatever traded asset they want.

"Pump and dump" refers to promoting some investment by other means, usually spreading some false news.

> "Pump[ing]" by buying something is entirely legal.

I beg to differ. The Securities and Exchanges Act of 1934 criminalizes all sorts of things that are deemed market manipulation, and inflating the price of a security by false trading, i.e. selling it to yourself or a conspirator, is one of the very things it was created to prohibit.

It can be still pump and dump because rising price induces fomo.

Market manipulation, yes. Pump and dump is a subset of it.

> multiple auditors have said they were fully backed.

Which auditors? The only ones I know of quit before making a statement (which is a very bad sign).

makes me wonder if they loaned Tethers to their buddies (or themselves) so they can buy cryptos then "backed" the Tethers with the loans. wouldn't surprise me given the kind of unscrupulous scumbags that are often found operating crypto related ventures.

Really any large reserve of stagnant cash is a flat out attractive nuisance for fraud and theft - while also failing to invest it properly. Of course their whole shtick is warmed over gold-bug fallacies.

Does anyone “hold” tether? As a stable coin isn’t it something you just use on the very short term?

You hold it if you want to use the money to trade crypto, because banks really don't like you moving around large amounts of money.

So you hold USDT in a wallet instead of transferring it back to the bank. It's also a lot faster to transfer money using stablecoins then it is with banks.

If your regular bank account is in USD that thinking is reasonable. But if your bank account is in another currency you might hold tether to protect yourself against hyperinflation or other things you can't control in your home currency.

Someone must be holding them unless they are popping in and out of existence.