In the short term, they have the reserves for sure.

In the short term, this is more of a classic bank-run. The Terra-coin + Luna scared a lot of cryptocoin holders, and now they're running away from another stablecoin.

Even if Bitfinex had the money, the amount of traders leaving USDT has to be a colossal amount. The amount of money Bitfinex can transfer at any given time is limited, so the peg will bend and buckle.

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The big question is: does Bitfinex have enough reserves to weather the storm? Not just this short-term storm, but the whole shebang that's about to happen? We will find out... eventually.

UST / Luna had substantial reserves. But it clearly wasn't enough. Probably because Anchor promised 20% gains and there was simply more UST in existence than the amount of USD put into that system.

> UST / Luna had substantial reserves.

Did they, or did they just claim to while minting stablecoin in order to pump the price of Bitcoin? Which these guys (Tether) would want to do because the owners of Tether are a massive exchange, and they depend on Bitcoin being high to attract customers to the market, and the first thing news customers so is bring the real objective with them: actual cash.

UST is Terra-coin, which collapsed 3 days ago.

USDT, Tether, is a completely different coin. the one we're discussing today.

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UST + Luna had substantial reserves. They proved it with their actions this past week. They weren't *enough* reserves mind you, but they were posting their BTC-wallets on Twitter and showing the movements.

Yes, sorry that wasn't clear, and I said Tether when I meant stablecoin in general. I meant that they didn't have the reserves they needed ("substantial" isn't good enough) and now Tether has an even bigger incentive to run uncollateralized because of who they are.

"stablecoins in general" doesn't really apply here since the two in question work radically different. Collateralized vs Algorithmic. Theoretically the Terra UST stable coin didn't need reserves to keep the peg at $1, unlike Tether USDT, which does.

how do algorithmic stable coins work?

The idea behind UST was that if it falls below $1, you can redeem it for $1 of Luna instead. The idea being that UST is "backed" by the activity on the terra Blockchain (fees are paid in Luna)

Of course, that means if UST is below $1 there is an arbitrage loop. buy UST at a discount, redeem it for Luna, sell Luna for USDC, repeat

This causes downward pressure on Luna's price. As Luna drops so does the faith in UST recovering, you end up with.... Luna dropping from $100 to $0.01, there's nothing backing UST effectively and it's still trading below peg (around $0.40)

Read any of the recent Matt Levine Money Stuff columns on Bloomberg that has "Stablecoin" in the title (rather than Musk/Twiter...)

poorly, it turns out

> In the short term, they have the reserves for sure.

Why for sure?

Their "audits" and other information provided that they have the reserves were rather unsubstantial, if not outright dodgy.

Short term, USDT kept enough reserves to hold the peg steady for years.

I'm not saying USDT was 100% backed. They probably could have accomplished all of this with just 20% backing, maybe even less. But in the short term, only 20% of people would ever "test" the reserves so to speak.

Now I don't know how much USDT was fraudulent... I do believe a lot of it was fraud. But there's clearly a nugget of truth, a nugget of backing that kept the price steady last year and the year before.

Once that "nugget" of stability runs out, its all over.

> In the short term, they have the reserves for sure.

They aren't even audited by a credible firm.

> UST / Luna had substantial reserves.

This alone suggests you don't know what you are talking about.

Compare to reserves backing Dai, or the reserves USDC claims to have. UST/Luna had nothing and they were also highly correlated. It was a stupid stablecoin to hold in, which is why I never did - despite having holdings in Dai & USDC.

"Substantial reserves" meaning that UST / Luna was able to keep the peg for 1.5 years.

That's a reserve for sure. Is it enough for this current storm that the cryptocoin community is having? Obviously not, it all collapsed. But it was substantial enough to perpetuate its own myth for over a year.

That's the thing. You have to admit that these things can last months, or years even if you want to be honest about discussing the nature of these cryptocoins.

You can't just string along two unrelated concepts with the phrase "meaning that." Not going to keep replying.

UST had like 10 cents of reserves in other cryptos for every UST. Is that substantial?

No. It means that they could fix things if the price dropped to 0.90, but not if the price dropped to 0.80.

> and now they're running away from another stablecoin.

From another not so stable coin. Fixed that for you.

They are actually redeeming them on their website for anyone that wants to.

> @paoloardoino GM Reminder that tether is honouring USDt redemptions at 1$ via http://tether.to . >300M redeemed in last 24h without a sweat drop. 12:38 AM · May 12, 2022·

You need to show up with $100k to do the redemption. Granted if you did the round trip with only $10k you’re looking at peanuts in arbitrage but it _is_ a way for them to prevent real arbitrage that feeds into itself.

I bet the fact that people wanting to short don’t believe they have the funds doesn’t help. But hey if you are a millionaire short tether might be worth setting up the recurring trade out!

So wait, assuming I had a hundred k, and they were willing and able to pay out, I could buy 97k of tether and redeem it for 100k?

Just an instant 3% return? This seems like there's no way they are opening themselves up to arbitrage like this.

It's not "they" as in "the people behind Tether" who are paying the 3%. The 3% returns - assuming the exchange works out in the end and you get your 100k USD - are paid for by the random guys who owned the 100k USDT that you bought on the open market. Effectively those were people who assumed the peg would break and they would be better off selling their USDT while they still got 97k USD for it.

Right the idea here is that somebody paid 100k to Tether for the tokens, those got into the market, being sold around, in the end I buy for 97k, then I hand those back to Tether for 100k - transaction feels (which would be ~250 USD). So in theory at the end of this whole operation Tether is up 250 USD

Though I think the cynical view for Tether stuff is that they have not been doing things by the book here and either they have been siphoning deposits, or printing Tether on their end. But hey, if they still got big deposits no problem for your original trade right?

>This seems like there's no way they are opening themselves up to arbitrage like this.

That's what defending the peg means.

But they get to buy and sell tethers themselves, right? If a T costs less than a dollar, and Tether's owners know that it's perfectly backed by a liquid dollar, why don't THEY buy it?

If they don't, it suggests it's not, and they actually agree it's worth less than a dollar.

Maybe they are buying them? Just not at enough speed to avoid a decrease in price.

To buy them they would need to take their real USD, probably spread across investment instruments (e.g. in an ideal case where all they say is true, they would sell some government bonds they're holding), and bring it to an exchange where USDT is below 1 dollar. Then on that exchange they would go and buy, and make a small profit.

Based on the fact that they have managed to keep this thing around 1 USD for a long time, they have probably been doing this. But we don't know how fast they can do it (have to be faster than the others selling it), and we don't know how much cash they really have so they may have to stop doing it at some point if enough people try to sell.

There are rumours, for example, that quite some of Tether's reserves are in bonds (treasuries etc.) or commercial paper. There is secondary market for bonds and even commercial paper, but it is rather slow (OTC, not on an exchange), and if you need to sell bonds or paper in distress, guess what sort of price you're going to get...

Well the whole point of a "backed" stablecoin is that you can do this, and arbitrage should never be an issue because the currency is supposed to be pegged to the dollar. And if the mechanism for this peg is 1-to-1 backing then it's a non-issue.

Contrast this with UST which was an "algorithmic" stablecoin, where the peg is maintained by much more complex mechanisms.

The issue in this case is (of course) that USDT are not actually backed 1-to-1 with actual dollars in actual reserves but rather backed mostly by hopes and dreams.

It's $95k of tether now ;)

And why wouldn't they allow this arb?

By committing to that arbitrage you're pricing very low the risk of not actually being able to get your money once it has collapsed.

Isn't the point of pegging that you allow any arbitrage to keep the value from falling from about the nominal value?

Not in this case. With Tether, you can "always" (so long as they are willing the to shovel the cash) convert 100K USDT for 100K USD on tether.io. What we often see here in terms of the "price" fluctuating, actually has to do with Exchange prices, and not the tether.io price. Exchange prices are based on dozens of competing mechanics, most notably, the depth of their order book. Since its just people trading with people, you need buyers and sellers on both sides. But if market sentiment plummets, you might have more sellers than buyers who are looking to exit out of the market quick and are willing to take a 1-3% hit to do so, instead of going to tether.io and actually getting the full amount.

Until its "proven" that tether.io doens't have the assets (which they obvi dont), AND they stop allowing the 1:1 swap on their platform, UDST will always "be" pegged at $1USD.

Once you figure out the practicalities of buying $100K worth of Bitcoin for cash, securing it, exchanging it for Tether, requesting the redemption, getting paid out to a bank account, etc, you will see that it's not particularly free money.

People who are already set up with crypto accounts, exchange accounts, bank accounts which won't be closed down or frozen, will do this trade all day for 3%. For a regular punter it's not a no-brainer at that level.

Perhaps they want arbitrage in this case, because once people see this opportunity, it will make folks want to buy USDT in the market, which will bring the price back up (and remove the opportunity)?

Yes, until they run out of cash and you sit on worthless tether.

AKA bank run.

No. Banks have the problem that they can’t liquidate assets fast enough to pay people in a bank run. Stablecoins simply don’t have enough assets to pay out people.

Playing an arbitrage like that is the ELI5 version of how George Soros made a billion dollars

https://historyofyesterday.com/the-day-george-soros-broke-th...

That’s at least what the CTO of Tether is suggesting: https://twitter.com/paoloardoino/status/1524413029898719234

Yes. It's priced this way because people don't trust Tether, but it is a massive opportunity for profit if you want to take the risk.

USDT is now <$0.95, so the arbitrage opportunity is getting more exciting by the minute. It will be very interesting to see how long they can hold out against that.

Someone just put a couple monster buys on FTX right at 0.97 so I’m guessing 3% is juicy enough for somebody.

Where are you seeing this? It's above $0.97

07:31:58 UTC Thursday, May 12, 2022

It was down to .949 then bounced again.

https://coinmarketcap.com/currencies/tether/

There was a dip down to about $0.95 at 07:15 UTC but there seems to be generally quite a lot of "support" at around $0.975.

Only for amounts > $100k. And they’re definitely fractional reserve banking and don’t have $80b in cash

IDK, according to the graph on CoinMarketCap it has been down to mid-to-low 90s several times in the past, e.g. in early 2020.

Sure it's been really stable for a long time now, but might this just be another "bump"?

"Elsewhere on the website, there’s a letter from an accounting firm stating that Tether has the reserves to back its coins, along with a pie chart showing that about $30 billion of its dollar holdings are invested in commercial paper—short-term loans to corporations. That would make Tether the seventh-largest holder of such debt, right up there with Charles Schwab and Vanguard Group."

Commercial paper is not dollars, so tether effectively admits it is not backed. The risk of default on commercial paper is huge compared to dollars held in reputable banks' accounts.

It's actually much better for tether to be invested in CP and similar paper. You can't leave $80bn in the bank, cos then you have gigantic concentrated credit risk to the bank. It's actually imperative you invest in CP, and preferably, government bills, to diversify your risk.

They don't have to stick the entire $80bn in one bank.

It is the lack of transparency around the CP that is raising eyebrows. Why can't Tether list the papers they are invested in? It is such a simple thing to do.

Could be all their CP holdings are in one company :)

> Commercial paper is not dollars, so tether effectively admits it is not backed.

What do you think backs bank deposits?

Banks don’t claim otherwise for years while providing misleading non-audit “audits”, and they have the FDIC to fix things for anyone under $250k if they collapse.

Tether in all probability is a scam. My comment was in response to a very specific claim about what it means for a security to be backed.

Something backed by commercial paper is by definition backed.

The government via FDIC.

FDIC is insurance, it's not a backing asset. And it's limited to 250k USD.

And without it you get occasional massive runs on banks since they don't have actual full backing. Moreover the government will bail banks out if needed providing another but non-guaranteed layer of protection.

Maybe a better way to say it would have been that banks are safer because they're backed by the government including FDIC, bailouts, regulations, oversight, etc.

> And without it you get occasional massive runs on banks

FDIC doesn't prevent runs on banks. It only pays out after a bank is declared insolvent and there's nobody willing to buy the bank.

Banks are regulated for good reasons which make them safer. But at the end of the day banks are in the business of transmuting unsafe long term debt into safe demand deposits.

It’s substantially better than nothing.

I don't think they are backed. Too many signs suggesting otherwise.

Are the people in charge of Tether currently moving towards an airport? If so you're probably right

The principals disappeared long ago. The remaining visible faces can claim they did not know what the boss was doing ("I'm just a dev/lawyer").

Technically, i guess they could "have a little trouble acting so fast", buying everything at $0.9 and back up to $1, and pocket the difference, scolding people for their lack of faith.

Practically? Yeah, it's goner.

Acting shifty and buying into a de-peg could have been the business plan all along. They could be waiting for it to fall more so they can pocket more money.

They really do have the money, but would rather spend it on Lamborghinis and coke.