A Look at Tether’s Growth
The Crypto Dollar industry has hit an inflection point in growth, with Tether the biggest beneficiary
Since launching in 2014, Tether has been a highly debated project within the crypto industry. Naysayers have given it a fair bit of criticism — from questions about the collateral backing to regulatory uncertainty. It also has faced increasing competition from numerous stablecoin projects that have launched over the past 3 years and seemed poised to eat into Tether’s market share.
Now, years later, Tether has withstood these attacks and uncertainty and exceeded all expectations around its growth. Over the past 12 months, Tether issuance has tripled to $10B, and now accounts for >85% of all outstanding stablecoin issuance. While the stablecoin category as a whole has become increasingly relevant, Tether has benefited the most from the increased attention and usage.
For Tether, the past year’s growth represents a maturation in which it has become the de-facto crypto reserve trading pair, and expanded its utility to a broader set of use cases beyond simple exchange and cross border transfers. Tether has now become a primary facilitator of global crypto derivative, lending, and open finance activity.
March as an inflection point
When looking at a chart of Tether’s issuance, March represents a clear inflection point in its growth. Uncertainty around the COVID-19 crisis resulted in huge amounts of international investors looking to flee into safe assets such as the USD. The dollar remains the world’s most reliable and popular fiat currency, and is seen by many as a safe haven asset. As a borderless dollar equivalent, Tether represents an efficient, low-friction method of accessing USD exposure. While it’s simple to access the USD domestically, Tether can present a superior option to local banking systems in other countries that don’t have widespread access to the dollar.
Tether’s accessibility and popularity as a flight to safety resulted in arbitrage opportunities for traders. This was most evident on March 12th, with Tether reaching as high as $1.05 as investors willing to pay a premium to hold USDT and shed exposure to risk assets. This presented an opportunity for arbitrageurs who closed the premium over the following days by minting large amounts of new coin.
Additionally, on Black Thursday, many traders had enormous difficulty moving funds across platforms, with lengthy fiat settlement times and expensive, lengthy on-chain transaction times. Holding Tether on an exchange or in a wallet allows traders to more easily take advantage of market dislocations and access liquidity on short notice.
The result is that Tether has eclipsed Bitcoin and the USD as the dominant trading pair for spot and crypto OTC trading. To be clear — in no way does Tether eat into Bitcoin’s core value proposition as a censorship-resistant store of value. As a dollar pegged asset Tether is still fully susceptible to the ‘Great Monetary Inflation’ that Bitcoin can hedge against.
Spot →Derivatives, Lending, and Open Finance
Tether’s dominance has expanded to derivatives and lending markets as well. While initial perp swap models were BTC-denominated, USDT denominated derivatives products have become commonplace, with newer futures and swaps platforms like Binance, Huobi and OKex denominated and margined in Tether. It’s natural that the reserve asset for both spot and derivatives is converging upon the same asset.
As a result of Tether’s increased utility as a trading pair and reserve asset, its lending market has grown substantially. Featuring prominently across both centralized and decentralized providers, there is sustained demand for Tether borrow from funds, market makers, and companies. The use cases range from a desire for leverage, market-making, and working capital/arbitrage purposes. As a liquid and accessible currency with persistent demand, USDT now represents a viable option for lenders to earn yield in a scalable, sustainable manner.
Similarly, Tether’s expanded utility has resulted in it playing a larger role in the Open Finance ecosystem. Initially supported by upstart lending protocol Aave in March, Tether accounted for much of Aave’s early growth, with $8m worth of USDT available on the platform by May.
After Aave’s early success through supporting USDT, Compound voted in USDT support via a governance poll in May. A few weeks later, Compound started its liquidity mining program , in which capital suppliers can earn COMP tokens based on the aggregate interest accrued. Tether has played a major role in the liquidity mining program, accounting for nearly 50% of earned COMP as of 6/29. This in part due to high USDT interest rates caused by strong underlying demand, combined with Tether’s liquidity and accessibility. It’s worth noting that has happened even though users are not yet able to borrow against their USDT collateral for leverage, something that is possible with other assets such as BAT, ETH, or USDC.
While Tether has only recently emerged as a relevant asset in ‘Open Finance’, it’s quickly become an important component. While it’s too early to portray USDT as the reserve currency for ‘open finance’, it’s growth in a short period of time is impressive and shows it has an important role to play. Tether itself has also shown an interest in expanding its role here, recently investing capital in Aave and Celsius.
USDT-ETH is King
Ethereum has been the main beneficiary of new Tether issuance, and now accounts for ~60% of outstanding Tether and ~88% of USDT transaction volume. Compared to alternatives, USDT-ETH has a unique set of attributes. It has low block times and fast exchange confirmations (<~10 minutes, low(ish) fees, and a widely supported ERC-20 standard.
As Tether scales and fees continue to rise on Ethereum, it is possible that new issuance and activity will move to alternative chains. Traders are chain-agnostic, economically rational actors who will use the most liquid, accessible, and convenient manner of Tether. While there are other chains that facilitate Tether transfers with lower fees (e.g. Tron), they don’t have the wide set of integrations and custodian support that the ERC-20 standard maintains. If this changes, we could see other chains become dominant issuers of Tether.
Future Considerations
In spite of its growth over the past year, Tether still has its naysayers. The NYAG case is still ongoing, and some continue to question Tether’s backing and stability. Additionally, some have wondered how crypto dollar business models might function in a low-interest rate environment.
Still, it appears Tether is becoming a ‘cockroach’ in its right — able to weather attacks and uncertainty. In the past year, it has become a key asset in crypto capital markets, with a growing history of reliability, usability, and accessibility.
What are the implications of all this? For service providers, it means that supporting USDT is more essential than ever, with providers that don’t have it at risk of being left out of a massive global liquidity pool. For traders and investors, it means using Tether and USDT-based products. For the broader crypto community — it means understanding Tether and its broader role in the crypto ecosystem.
While Tether’s growth from $3B to $10B over the past year, it still represents a blip in the broader global asset landscape. As Tether scales, it will face new, unseen challenges such as governments and central banks around the world.
Special thanks to my colleagues Spencer Bogart, Kinjal Shah, Aleks Larsen, and Andrew Yang for valuable conversations and feedback.
