It’s getting to the point where I’m thinking of starting up a weekly column that’s just about stablecoin drama. If you think I should do it, drop a comment below. I’m not scared.
Amidst all of the goings-on with the UST implosion, DEI losing peg, and USDT briefly losing it (although it’s still not back to exactly $1), I want to take some time to write about the world’s largest stablecoin.
Strap in and keep reading, degens. I’m going to take a deep dive into USDT and include some of my thoughts on this mighty giant of a stablecoin.
Table of contents
The History of USD Tether
Tether USD is a stablecoin launched in 2014 by Brock Pierce, Reeve Collins, and Craig Sellars. The token is pegged to the US dollar, and each Tether token is backed by one US dollar held in reserve. Tether was initially issued on the Bitcoin blockchain using the Omni Layer protocol.
In 2017, Tether released an ERC-20 version of the token on the Ethereum blockchain. The ERC-20 coin is currently the most widely used version of USDT.
In 2018, Tether was embroiled in controversy after allegations that the company behind the coin may not have enough US dollars to back all of the tethers in circulation. However, Tether has since regained its peg to the US dollar and continues to be one of the most popular stablecoins in use today.
Then again, in 2021, there was some more controversy. It seems like USDT is the stablecoin everyone loves to hate on. But they kept chugging along, doing their thing and finding a ton of success along the way.
Tether in Its Current State
At the time of this writing, USDT is the number one stablecoin in all of cryptocurrency, with a total market cap of $73 billion and available on more than 40 different blockchains.
That’s a lot of scratch.
While they are still hesitant to be audited, their public reports appear to be fixing what everyone said was a problem. They got caught in some lies and shenanigans. But slowly, these issues are being rectified. This is good news for the long-term health of Tether as well as for people who invest with USDT.
(source)
Many people will see this table of information and not completely understand what’s going on, so I will try to help.
First, it’s important to note that 86% of Tether’s reserves are cash and “cash equivalents”. At one point in time, less than 3% of the reserves were actual cash. At that time, Tether’s market cap was a fraction of what it is today.
Secondly, according to the source above, their holding of commercial paper has dropped by 17% since the end of last year. So what is commercial paper, and why is it important that this number is dropping?
What is Commercial Paper?
Commercial paper is a type of debt instrument issued by corporations to raise funds for working capital and other short-term expenses. Unlike bonds, which are often issued with a fixed interest rate and maturity date, commercial paper usually has a variable interest rate. It is issued with a shorter maturity date of anywhere from one to 270 days.
Because commercial paper is unsecured, it typically carries a higher interest rate than bonds. Corporations with excellent credit ratings often use commercial paper to obtain funding at a lower cost than what would be available through traditional bank loans.
The term "commercial paper" refers to the fact that these securities are commonly used to finance commercial transactions. Commercial paper is typically issued in denominations of $1,000, and the securities are usually issued with maturities of one year or less. Unlike bonds, commercial paper does not provide the issuer with a source of long-term financing.
Instead, its purpose is to finance short-term obligations, such as inventory or accounts receivable. Although commercial paper is a relatively simple and straightforward debt instrument, it can be an essential source of funding for many businesses.
Loaning out funds in this form or taking on this kind of debt can be high-risk. Tether recognizes that and has boosted other forms of “cash equivalents”. The majority of their reserves, more than 50%, are in U.S Treasury Bonds, aka Treasury Bills or T-Bills. These are considered high-quality holdings. Let’s get into why that is the case.
What are U.S Treasury Bills?
U.S. Treasury bills, or T-bills, are short-term debt securities issued by the U.S. government with maturities of one year or less. T-bills are sold at a discount from their face value and mature at par, meaning that they are issued at a lower dollar amount than they will be worth when they mature.
The government provides T-bills in denominations of $1,000, often at a discount to their face value. For example, a T-bill with a face value of $1,000 may be issued at a discount of $990. The difference between the face value and the issuance price is the interest that accrues on the T-bill until it matures. When the T-bill matures, the holder receives the face value of the bill.
Businesses commonly use T-bills as a source of cash for short-term financing needs. For example, a company might use T-bills to finance the purchase of inventory or to meet payroll expenses. T-bills are also popular with individual investors to park cash in a low-risk investment.
Because T-bills' backing is by the full faith and credit of the U.S. government, they are one of the safest investments available.
What Does This Mean for Tether and USDT Users?
Tether is getting rid of high-risk cash equivalents, moving to something more stable, and doing it in a big way.
It’s possible that the largest stablecoin available on dozens of chains is now too big to fail. However, that doesn’t mean it’s an impossibility. Every stablecoin can fail. Crypto can fail. The U.S government can fail.
But for now, everything appears like it’s going to be ok for the time being. Sure, Luna and UST imploded in spectacular fashion. DEI, the algo-stable from Deus Finance, hasn’t seen peg in over a week. The market, at least overall, isn’t in great shape.
And that’s ok.
It’s all ok. Breathe.
When the market goes completely bearish, and the FUD is about to drive you nuts, it’s time to go outside. Take a break from crypto. Just walk away from your screen. Try to relax.
Sitting around and watching the charts all day, especially if it’s a stablecoin chart, is an excellent way to go crazy. USDT will be fine. DAI will be fine. So will USDC and BUSD.
My Verdict?
As far as stablecoins go, everything is mostly fine. However, there is something you need to be aware of as an investor. If you’ve retreated to stables due to market sentiment and think you’re safe, you may be wrong.
Stablecoins are only native to specific blockchains. As an example, I’m invested heavily in Fantom. USDC, DAI, and USDT are not native to that chain. If things were to get really bad and The Fantom Foundation folded, my stablecoins would be worth zero because they aren’t native to that network.
Essentially, they’re wrapped stablecoins, or a receipt for a stablecoin given to whoever bridged these tokens over from a native chain. This means the bridge is still holding the native stables, or they’ve possibly sold them off to someone else. But as long as Fantom is around, they’ll be worth $1. Fantom is a high-conviction play for me, so I’m not worried.
If things aren’t looking good on your blockchains of choice and your conviction is slipping, it might be good to bridge them over to a native chain for maximum comfort.
The Takeaway
If our favorite stablecoins were that risky, they probably wouldn’t have such high TVLs and see regular use on dozens of blockchains.
So when one of these stables drops to .9988, be patient. They will likely regain peg as the companies that run them have way more on the line than the people buying and selling.
Thanks for stopping by today and checking out this post. If you enjoyed it, feel free to drop a comment below. You can also check out this post on 6 ways to survive a crypto bear market if you want to keep reading.