[Market Info] Tether Risk and How to Mitigate It
Tether was no doubt one of the greatest creations on blockchain. In terms of utility, arguably it is the only meaningful creation, because as of today, with cryptocurrecny one cannot actually buy anything except for cryptocurrency itself. However, values are always meaningful when they are relative — 0.069009 — does this mean something to you, or it’s better put this way: today’s BTC price is $39908 and ETH $2754, therefore ETH/BTC is 0.06009. Stablecoins, a reference point where one can measure his investments in cryptocurrency relative to his investment out of the cryptocurrency, is much needed. And here, Tether USD, is the starting point of all.
History of Tether and Where It Stands Today
Tether can be dated as early as a whitepaper dated back to 2012, before the existence of Ethereum. The first Tether was created on the Omni layer of Bitcoin network and was named “Realcoin” in Oct 2014 by co-founders Brock Pierce, Reeve Collins, and Craig Sellars. More details on the history of Tether can be read in the Wikipedia.
Today, Tether is the bethomoth of the stablecoins now — with 60 billion in circulation, it’s more than the other stablecoins combined.
Most Tether was issued since De-Fi summer last year, driven by the strong demand for yield-farming and other related products, like Curve and Aave. However, a major boost was in Feb 2021,after New York Attorney General relinquished its pursue of convicting Tether. After paying a minimal fine, Tether embarked on a minting frenzy: tens of billions of USDT were issued since then.
The Ultimate Risk
There has always been a concern that depsite the company’s claim, each USDT is not fully collateralised by 1 US dollar. As Attorney General James put it, “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”
Even though there’s no concrete evidence that Tether has failed to fully back its 60 billion of USDT in circulation, the sheer amount, which is too big for any bank in the world without raising any regulatory attention, caused much suspicion. A detailed argument has been recently presented by Stephen Diehl on Twitter, on what’s the risk. This is not the first time USDT is challenged — in fact, every year, there were allegations that USDT would burst, esp when there were looming concerns over a falling market.
Tether’s financial backing reached a climax last week and to an extent contributed directly tp the 5.19 dip, when the company released a one-page on its reserves. Within this piece of limited information, at least one can tell that over half of the Tether in circulation, which is $30 billion, are in commercial papers issued to companies, rather than cash or cash equivalent. No further details are available as to which companies hold these commercial papers.
The market jitted a bit even this is not the first time Tether is challenged. Financial Times has a special report on Tether’s disclosed reserves.
In the event that the quality of these commercial papers are not high, or not liquidity in the situation of run-on-the-Tether, or simply these papers are not really, then Tether will fall short of one USD each. This is the ultimate risk of Tether, and the ultimate risk for De-Fi and even cryptocurrency industry, as not only Tether is over half of the stablecoins in circulation, it’s also the main currency of Curve’s 3pool, and the dominant trading pair of many exchanges like Binance, and many most aspects.
How to Mitigate It
We do not make a judgment on the quality of Tether’s reserves; neither do we deny there’s a probability of Tether going under the value of one USD. We suggest some ways to mitigate the risk, and how much one wishes to implement these measures are a subjective matter.
Using other stablecoins
First of all, if you have a choice of not using USDT and still achieve the same purpose, then do not. There are a variety of asset-backed stablecoins today, and we have classified them into 5 groups. The closest and strongest of all might be USD Circle; or you can choose the crypto native stablecoin DAI. We do not extend the discuss over this point here.
There’s rarely a situation where only USDT can be used. The situation is rather that USDT is affiliated with other stablecoins. Curve’s 3pool, with a depth of $1.4 billion, can exchange USDT almost seamlessly with USDC and DAI; in addition, another 20 metapools are relying on 3pool to be the market maker. It’s very hard to avoid USDT in this sense, the only USD stablecoin pools on Curve that do not have USDT are Compound pool and sAAVE pool. Use these whilst you can. The same principle applies for other defi investments.
Using synthetic structures
If you are looking at achieving yield in the cryptocurrency industry without taking market volatility risk, there are other ways than using stablecoins to do yield farming. A typical way is to use Coin-margined futures in Binance or FTX.
The essence of this strategy is to buy any coin, deposit it into a futures exchange (e.g. Binance Futures) and short the entire amount. (Details here.) This gives you no market volatility risks, no matter what coins you buy, since you short the full amount, and still the yields from cryptocurrency, and positive for most of the time of the year (10% to 20% per annum in our experience).
De-fi insurance protocol
If you really have to invest or use USDT, e.g. you have a big bag on Curve, then you can consider buying insurance on USDT. There are so far two de-fi protocols providing such insurance: Opium and Unslashed.
Opium costs above 10% and Unslashed is about 2% — but neither platform has handled any claim relating to USDT off-peg — so it’s all hypothetical that these insurance protocols should work.
Lastly, you can always borrow USDT, if you think it’s probably going to go off-peg. Usually there’s a high cost, for instance, borrowing USDT on average costs 5% to 10% per annum. This might be costly, but luckily that the two dominant lending platforms are both having incentives now.
Not only this means the actual borrowing costs of USDT might be low or negative, it also means you can repeat the following to do yield farming: 1) deposit Dai; 2) borrow USDT; 3) sell USDT for DAI — till that your overall leverage ratio is about 60% to 70%. As both lending and borrowing will qualify you for platform incentives, you can get a yield of 10% to 20% whilst get protected against USDT off-peg risks. (More details on this strategy please follow our Medium, and read this.)
We genuinely hope that USDT is stable and fully backed, so that De-fi can grow steadily out of its infancy and form an important part of the next-generation financial system. We also believe that the design of blockchain and decentralised finance should advocate transparency. As there’s some doubts over Tether, even it’s pure speculation, it does no harm, or at least only at a small cost, to get ourselves protected.
(Serenity Team, 21 May 2021, Twitter: https://twitter.com/SerenityFund)