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Have you ever played arcade games? To play games hosted on an arcade, you must first exchange money for arcade tokens. These tokens act as the equivalent of dollars in the microeconomy of the arcade. When your time in the fantasy world of the arcade comes to an end, you can (sometimes) sell back your tokens for real money. Stablecoins are the encrypted equivalents of arcade tokens. In its simplest form, stablecoin issuers accept one unit of currency in exchange for a blockchain entry equivalent to that unit of currency. Therefore, 1 USD is equivalent to 1 USD Coin (USDC) or 1 Tether (USDT). Entities can then use these dollar equivalents to directly purchase other cryptocurrencies on the blockchain or engage in other transactions, loans, transfers, etc.
As a means of creating exchangeable dollar equivalents on the blockchain, stablecoin issuers can hold actual dollars and collect any interest earned on these assets. However, issuers explicitly commit to holding all these assets in safe and liquid assets to ensure the value of their reserve matches the value of the stablecoins they issue. In other words, stablecoin issuers are expected to operate like a simple money market fund.
There are three major stablecoins in the cryptocurrency market with a total market capitalization of approximately $130 billion, constituting around 14% of the total cryptocurrency market value. These three stablecoins collectively make up over 99% of the liquidity in the cryptocurrency market. Among these stablecoins, Tether (USDT) is the largest by scale, currently valued at $65 billion, followed by Circle's USDC ($43 billion) and BUSD ($22 billion). In terms of daily trading volume, Tether also often dominates the market, frequently surpassing the trading volumes of the other two stablecoins by several times.
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In other words, Tether is the primary source of US dollar liquidity in the cryptocurrency market.
Now, let's talk about the risks associated with USDT. Tether is the oldest and largest stablecoin in the market. It is owned by the same entity that operates the Bitfinex exchange, although Tether and Bitfinex appear to be independent entities on the surface. As we will demonstrate, the separation between these two companies is similar to the assumed separation between FTX exchange and Alameda Research. Unlike Circle and Paxos, both allowed to operate in the state of New York, Tether is explicitly prohibited from conducting business in New York. After lying about the reserves supporting USDT, Tether had to pay $18 million to settle with the NY Attorney General. It turns out that at several points in Tether's history, their promoted 1:1 USD support was a lie. Additionally, Tether and Bitfinex often commingle assets, sharing funds to prevent bankruptcy. In any case, let's forget those entirely unrelated past incidents. |
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Post time 8-2-2024 20:51:41