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