USDT vs BTCT
I wrote about my concerns with Tether last year. Today there is terrific news regarding this scheme! It looks like Tether is about to be subpoenaed. It’s super great news for four important reasons.
Tether promises that they hold US Dollars in balance to the tokens that they issue. This promise has successfully and consistently pegged their token to the US Dollar. It seems to me that this token is either worth $1 or $0. It’s very much like Schrödinger’s cat. It’s in super-position until you open the box.
Tether lacks transparency. It refuses to open the box and demonstrate that they are holding their stated US Dollar position. They say they hold Dollars to back their tokens, but aren’t doing a great job providing evidence.
Because Tether is used on so many exchanges it can inflate the value of other coins. Tether can artificially issue their USDT token, (without putting real dollars in the box) then traders can use it to buy Bitcoin or Ethereum (thus increasing the price). Meanwhile, once the box is opened, all that USDT could be instantly worth zero.
Why is this great news?
- Tether represents a small portion of blockchain value. Tether is attempting to do something very useful, but they are doing it in a terrible way. The sooner we open their box and determine if their cat is dead or not, the better.
- U.S. Regulators are going after the worst blockchain organizations. Organizations that lack transparency and could hurt Blockchains enthusiasts. They aren’t going after systems like Bitcoin or Ethereum, but organizations that could be offering something great through lying. I get the feeling that they are really working to protect business, investors and their own Dollar, which is fantastic. (pay your taxes!).
- News of this will reach investors and exchanges. This will force people to understand the value of transparency and better scrutinize blockchain technology. (sigh, lets hope so!)
- If the regulators find that Tether is actually holding 2.5 Billion US Dollars we now have a token that we can trust a bit better. Legitimacy has been established and the US Government itself is endorsing a blockchain dollar. This would be the most amazing outcome!
What is the bad news?
I need to share some bad news. If Tether is bad, then exchanges like Coinbase and Poloniex also have serious issues. Tether says they hold a dollar for every token. However, exchanges like Coinbase don’t even claim to hold your Bitcoin or Ethereum. It’s the exact same situation…but worse. They show a balance for you, but do not provide proof (or even a promise) that there is actually Bitcoin in the box. Because they are a US company their requirements are to work towards a profit…this decreases their ability to hold Bitcoin 1:1.
Holding your Bitcoin isn’t required or promised (check their website). Coinbase’s US Dollar balances are regulated like a bank. They’re insured and fall under all the useful regulation that has been made to protect us. However, there is no reason they need to hold the Bitcoin they show in your balances.
The tragic part is that it would be relativity trivial for exchanges like Coinbase to prove that they are holding balances. This is one of the blockchains major innovations… I’ll quote Vitalik on this one.
In general, signalling theory says that if you have a good way of proving something and a noisy way of proving something, and you choose the noisy way, that means chances are it’s because you couldn’t do the good way in the first place.
The noisy way of proving in this case is a fancy iPhone App.
Exchanges like Coinbase don’t attempt to prove your balances, and their incentives do not align with actually holding them. If you have Bitcoin on Coinbase you should think of it as BTCT. Another Tether, but worse. Tether at least is regulated by the US government (as of today!).
In 2018 lets ask Coinbase to validate our balances. If they already do this, please let me know. If not, lets ask them too. I think Coinbase provides a valuable service. However, we should ask them to verify our balances and bolster the blockchain. If they have interest in bitcoin they should either state that they do not hold a full balance, or prove that they do.
…and there is more. If you are in interested in the future of blockchain based exchange and transparency check out our Ethereum DAPP ethex.market. We have built a great fully transparent exchange.
