That makes some sense, since in normal banking you can bleed collateral until you're nearly dry without actually provoking a run, and when you're forced to start looking under your couch cushions for change and ask your depositors for patience, there's the trigger for your run. Tether doesn't have to worry about that...

But if "folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange" then surely the most desperate will be willing to take a haircut on their Tether to get out of it first, and then the Tether price collapses anyway, through some combination of the exchanges shutting down trading, drawing down their own collateral to maintain the peg (and then running out), and/or the exchange reluctantly allowing the price to float?

Like, the too-big-to-failness is definitely part of why it's still a thing, but that just means that the real buyer of last resort is other large crypto holders who don't want the ecosystem to collapse. That's great for Tether-the-company, and maybe good for Tether the coin, but it seems to me sort of distantly related to Tether allowing direct withdrawals.

There's an obvious mechanism for maintaining the peg if Tether allows large holders to redeem Tether: those holders buy any slightly discounted Tether, then hand it back to Tether and redeem it and keep the tiny profit. This will work but it's just Tether propping up the price with its capital with extra steps...

Assuming that the unlicensed exchanges have the capital to process withdrawals. In other unregulated industries the people operating the gray market platforms are almost always embezzling money and not keeping customer funds in segregated accounts. If the exchanges spend money propping up Tether they won't have it available for withdrawals.

Exchanges make money hand over fist, they keep non-trivial basis points from a nice simple MySQL transaction. The question is: is the net outflow from the USDT peg into USD more than the revenue they are bringing in?

Yeah but they're operating in a gray market that is going to almost certainly close or shrink with regulation and they're greedy so why not take as much as possible? It's not like the customers have any recourse when their sketchy offshore exchange disappears or closes without paying everyone.