Michaël van de Poppe - 12 May 2022
USDT FUD is exaggerated
There is an increasing amount of FUD going around with regards to the USDT (Tether) stablecoin with people worrying about whether or not it will significantly depeg from the US Dollar, dragging most of the crypto market down with it. In this blog, we will discuss these fears and why we believe that USDT should not be compared to UST.
It has been a very rough week for crypto. The already bearish sentiment in the market got an extra push when Terra Luna’s UST stablecoin broke its peg to the US dollar, causing panic among crypto investors and traders. The reason that one coin is able to have such a large effect on the entire crypto market is that it was the largest algorithmic stablecoin and third largest stablecoin in crypto. At peak it amassed to a circulating supply of over $18bln UST. In order to prevent catastrophic depeg, the foundation behind Terra Luna, Terraform Labs, had set up a non-profit organization called Luna Foundation Guard and a Bitcoin reserve of over $3bln to help maintain the peg. During the LUNA/UST crash of the last few days, these Bitcoin holdings had to be sold to take UST out of circulation. Unfortunately, this was not enough and both LUNA and UST lost significant value.
If you want to learn more about the LUNA/UST situation, you can read our blog post from the 10th of May which covered the depeg event of UST and the factors involved.
Fear spreading to USDT
Now, the uncertainty is spreading to other stablecoins as well as more people are starting to question whether they will suffer the same fate as the UST stablecoin. This is especially the case for USDT, the largest stablecoin on the market with a $82 bln market cap. Historically, Tether has been subject to FUD sparked by their shady and untransparant businesses with crypto exchange Bitfinex and their reserves backing the tokens. In the past this uncertainty has led to USDT losing its peg on numerous occasions. It seems that the depegging of USDT right now is not much different and mainly the consequence of the panic in the crypto markets.
The major difference between UST and USDT is that UST is an algorithmic stablecoin that uses arbitrage through burnign and minting another volatile crypto currency to maintain its peg whereas USDT is a centralized stablecoin by a company that guarantees a 1:1 backing for all the USDT in circulation. The company in question, Tether, holds an equal amount of dollars in their reserve to ensure this guarantee. This means that people are able to cash out their USDT on-chain for $1 via Tether's website, no matter the value of USDT on the secondary market.
UST was more experimental and had the risk of a bank run, which is exactly what happened.
The uncertainty regarding USDT was around the question whether the company was in custody of enough capital to pay for every USDT in circulation. After a settlement with the NYAG, Tether had to regularly release an audit report of its reserves conducted by auditor Moore Cayman.
According to tether.to, the backing of the stablecoin consists of the following;
Commercial Paper and Certificates of Deposit, which is worth about 30% of the total reserves, are the only uncertainty as it is not discussed with the public which ones these are exactly. However, this means that a massive amount of USDT would have to be redeemed before it even has to touch this. It seems unlikely that people would panic so much that this will happen as it is still just speculation.
In the midst of the FUD and USDT losing its peg, the CTO, Paolo Ardoino, has been vocal about the fact that it is indeed backed 1:1 and redemptions can be handled without an issue in a bid to minimize panic.
USDC and BUSD
The two other massive centralized stablecoins, USDC and BUSD, do not have the same reputation as USDT. Therefore, people clearly view them as the ultimate safe haven in this market with both coins rising around 10% in price as people flocked to the stablecoins. This rise is also temporary as people will look for arbitrage opportunities between the stablecoins they trust. USDC and BUSD will move towards $1 relatively quickly each time they move up.
USDT significantly losing its peg permanently would cause a lot of panic in the market as it is the largest stablecoin. However, we believe that this is merely temporary as it is being audited to make sure it has the right amount of reserves.
So, most likely, USDT’s loss of the peg with the US Dollar is merely temporary as it has been on numerous occasions in the past during times of high volatility and uncertainty in the market. Chances that USDT will cause mass panic in the market are slim, although it could take a while for the full peg to be completely stable again.