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> All you need for a stable stablecoin is to save every dollar put in to it. That’s the issue right there. How does Tether save its dollars? We can see it in t

> All you need for a stable stablecoin is to save every dollar put in to it. That’s the issue right there. How does Tether save its dollars? We can see it in their transparency report[1]. Whether you believe them or not it’s not just cash in a bank account. * 0.41% Non-U.S. Treasury Bills * 55.53% U.S. Treasury Bills * 0.15% Reverse Repurchase Agreements * 5.81% Cash & Bank Deposits * 9.63% Money Market Funds * 28.47% Commercial Paper and Certificates of Deposit How much of that is liquid and directly convertible to dollars 1:1 in he next 24 hours? Not 100%. What happens when they start selling billions in Treasury Bills and Commercial Paper to fund redemptions? The market price of those assets will drop. What if the value of those assets is already below 1:1 because of recent market events? What if they’re not being as transparent as they say they are? > As long as they never spend anything from the reserve, this can't fail no matter how unpopular the currency is. This can easily fail many different ways. [1]: https://tether.to/en/transparency/#reports https://tether.to/en/transparency/#reports

TheOtherHobbes 4y ago
So buyers thought they were buying some kind of novel risk-free crypto asset tied to Real Dollars™, while in reality they were mostly just buying T-Bills with unknown maturity dates and probably sound commercial paper. Nice.
agumonkey 4y ago
So the financial system is mostly reluctance ?
- NortySpock 4y ago
  Well, friction in transactions, arbitrage, and collective belief in the value of an asset.
  - worik 4y ago
    >....and collective belief in the value of an asset. Among other things the financial system is a web of trust. IMO one of the fundamental things that crypto gets wrong is replacing trust with algorithms. I do not think that can be done. Trust is about people. Time will tell if an algorithm that can automate trust can be found. I do not expect it will
    - hackingforfun 4y ago
      I think a sufficiently advanced algorithm can over time. Bitcoin is an example of a system of trust that has worked pretty well so far (although it requires a lot of electricity, but that is the trade off). There are also people on the Bitcoin core team, so there is some trusted element there. Crypto will likely continue to innovate on algorithms, given the chance. I think there can be trust in people, plus algorithms, with algorithms taking over more over time. This is already happening even in traditional finance, i.e. giving more control over to algorithms that participate in HFT. People do monitor those, but people monitor crypto, too, and maybe the failures in crypto so far mean too much control has been given. I would argue that some more things in finance can be automated, without things being so black and white (i.e. no control vs total control given to algorithms). I do think the trust model given to governments and traditional finance gatekeepers can be iterated on, with some regulation involved too. I don't think we've figured everything out yet.
kolbe 4y ago
Billions is a small number in the US Treasury market. They do not move the market with that kind of size.
- GreaterFool 4y ago
  True. The US Treasury market is backed by war. That's solid business that you can rely on :-)
jcranmer 4y ago
> What if the value of those assets is already below 1:1 because of recent market events? The statistics you're bringing up are as of March 31. Do note that 6% of reserves are in "Other Investments (including digital tokens)", and Bitcoin (as a proxy for all cryptocurrencies) is down ~30% since then, so that's at least 2% of their assets that have been wiped out by market conditions. Keep in mind that said report also said that, as of March 31, liabilities are 99.8% of assets, so Tether's accounts says it should already be underwater. (Although, if I'm reading the attestation correctly, all of the assets--including cryptocurrencies--are actually valued at purchase cost and not fair market value, so what the actual present value of those cryptocurrences is now or was 2 months ago is extremely unclear. Transparent is the opposite of how one could describe Tether's financials.)
- LatteLazy 4y ago
  They only need to have made 2% on those other investments and the 2% lost on crypto is irrelevant. Also, if 2% of outstanding tether has been lost (forgotten wallet keys etc) then those can never be redeemed and again, tether wins. Inflation is another factor worth considering here: tethers deposits are deminishing but it's investments are (or should be) shielded. I think people fail to notice how similar a (non-fraud) tether model is to a traditional bank: you take short term deposits, you make long term loans, and you hope to have enough capital on hand to deal with any runs. Given the liquidity of modern capital markets, it's very rare for the fed to have to bail out small deposit banks. So it's reasonable to assume the same will apply to tether.
  - ncallaway 4y ago
    > I think people fail to notice how similar a (non-fraud) tether model is to a traditional bank That’s exactly what’s unethical about it. They’re operating a bank, but have skipped all the regulations and oversight that banks operate with. I have no issue with Tether operating a fractional reserve deposit system, if they are subject to the same oversight (and insurance) that banks are subject to.
    - 4y ago
dragontamer 4y ago
> What if the value of those assets is already below 1:1 because of recent market events? My long-term treasuries are down well over 10% this YTD, in case anyone wants to know. So if Tether had say, $50-billion in 10-to-30Y treasuries at the start of the year, they only have $45-billion of that now. There are serious market risks when you buy/sell Treasuries. Yes, they're among the safest instruments on the market, but rising interest rates and inflation are huge issues and absolutely wreck the value of long-term treasuries.
- tyrfing 4y ago
  > So if Tether had say, $50-billion in 10-to-30Y treasuries at the start of the year, they only have $45-billion of that now. They don't. As stated at the link: > U.S. treasury bills comprises U.S. treasury bills with a maturity of less than 120 days.
  - dragontamer 4y ago
    Except USDT doesn't have any audits or proof of their reserves. My overall point is that USDT could very well be buying up dollar-backed securities, such as 30-year treasuries, and yet still lose a ton of money if the market moves under them. Unless Tether allows 3rd party audits of their reserves, I don't think its necessarily safe to assume that they actually hold those reserves.
    - tyrfing 4y ago
      If you assume that the attestation is fabricated, there's really no reason to talk about treasuries - might as well assume they embezzled 50-70B. Personally, I think it's mostly accurate, with discrepancies being around things like marking securities to market. (Just look at VC practices there, for example.) The explicit statements of "X amount of treasuries under Y maturity" are likely to be true, a vague catchall like "other investments" not so much, which puts an upper bound of ~ 15B short. Lastly: a temporary liquidity crisis that drives USDT down far below the peg is something that would be incredibly profitable for the operators. With perfect information, it would be a situation of trading 50 cents for dollars, and could be used to erase a partial deficit overnight.
SilasX 4y ago
Everything you’ve just said would apply equally well to money market mutual funds (which hold the same kinds of assets), and yet they very rarely have problems honoring redemptions or keeping $1/share peg.
- User23 4y ago
  https://www.investopedia.com/terms/b/breaking-the-buck.asp https://www.investopedia.com/terms/b/breaking-the-buck.asp Edit: Just providing context for those who may be interested.
  - SilasX 4y ago
    Right, I’m familiar with an alternate expression for what I just described. Were you disputing that it’s rare, or…?
- ChrisLomont 4y ago
  First, MMMFs target $1/share, they do not promise it nor are they legally beholden to honor it. It's a goal, not a promise. It also works because the US dollar has been remarkably stable and most of their holdings are USD. No crypto is so stable, with a bunch of them being about the most volatile assets you can lose money with.
  - SilasX 4y ago
    > First, MMMFs target $1/share, they do not promise it nor are they legally beholden to honor it. It's a goal, not a promise. How is that relevant to the claim in question? (Which, if you’ll recall, was whether tether can maintain the peg and redemptions while holding the same assets as MMMFs, which generally do that just fine.) > It also works because the US dollar has been remarkably stable and most of their holdings are USD. Okay, now you lost me, and I’m not convinced you have the recent discussion in mind. The original comment was claiming that Tether can’t maintain the peg, because it holds non-dollar assets. I pointed out a trillion dollar industry by that maintains a peg, using those same assets, and you’re saying the non-dollar assets only succeed there because the dollar is stable? Which is somehow an argument about how these assets are good enough for MMMFs to work but not Tether? Please take a minute to review the thread and see if you’re still supporting the claim I disputed.
darcys22 4y ago
See this is just low quality FUD, They have 39B in US Treasury Bills, how much do you think these will drop if they sell? The truth is next to nothing. and a 39B moat for sell offs seems very reasonable
sbf501 4y ago
I read that selling off commercial paper can impact just about everything because it is used extensively between banks. I don't quite understand it, but apparently this is how crypto came to impact the stability of other markets; through buying and selling huge amounts of commercial paper and impacting its price. I'd like to understand that better, if anyone feels like writing an ELI5.

TheOtherHobbes 4y ago

So buyers thought they were buying some kind of novel risk-free crypto asset tied to Real Dollars™, while in reality they were mostly just buying T-Bills with unknown maturity dates and probably sound commercial paper. Nice.

agumonkey 4y ago

So the financial system is mostly reluctance ?

NortySpock 4y ago
Well, friction in transactions, arbitrage, and collective belief in the value of an asset.
- worik 4y ago
  >....and collective belief in the value of an asset. Among other things the financial system is a web of trust. IMO one of the fundamental things that crypto gets wrong is replacing trust with algorithms. I do not think that can be done. Trust is about people. Time will tell if an algorithm that can automate trust can be found. I do not expect it will
  - hackingforfun 4y ago
    I think a sufficiently advanced algorithm can over time. Bitcoin is an example of a system of trust that has worked pretty well so far (although it requires a lot of electricity, but that is the trade off). There are also people on the Bitcoin core team, so there is some trusted element there. Crypto will likely continue to innovate on algorithms, given the chance. I think there can be trust in people, plus algorithms, with algorithms taking over more over time. This is already happening even in traditional finance, i.e. giving more control over to algorithms that participate in HFT. People do monitor those, but people monitor crypto, too, and maybe the failures in crypto so far mean too much control has been given. I would argue that some more things in finance can be automated, without things being so black and white (i.e. no control vs total control given to algorithms). I do think the trust model given to governments and traditional finance gatekeepers can be iterated on, with some regulation involved too. I don't think we've figured everything out yet.

kolbe 4y ago

Billions is a small number in the US Treasury market. They do not move the market with that kind of size.

GreaterFool 4y ago
True. The US Treasury market is backed by war. That's solid business that you can rely on :-)

jcranmer 4y ago

> What if the value of those assets is already below 1:1 because of recent market events? The statistics you're bringing up are as of March 31. Do note that 6% of reserves are in "Other Investments (including digital tokens)", and Bitcoin (as a proxy for all cryptocurrencies) is down ~30% since then, so that's at least 2% of their assets that have been wiped out by market conditions. Keep in mind that said report also said that, as of March 31, liabilities are 99.8% of assets, so Tether's accounts says it should already be underwater. (Although, if I'm reading the attestation correctly, all of the assets--including cryptocurrencies--are actually valued at purchase cost and not fair market value, so what the actual present value of those cryptocurrences is now or was 2 months ago is extremely unclear. Transparent is the opposite of how one could describe Tether's financials.)

LatteLazy 4y ago
They only need to have made 2% on those other investments and the 2% lost on crypto is irrelevant. Also, if 2% of outstanding tether has been lost (forgotten wallet keys etc) then those can never be redeemed and again, tether wins. Inflation is another factor worth considering here: tethers deposits are deminishing but it's investments are (or should be) shielded. I think people fail to notice how similar a (non-fraud) tether model is to a traditional bank: you take short term deposits, you make long term loans, and you hope to have enough capital on hand to deal with any runs. Given the liquidity of modern capital markets, it's very rare for the fed to have to bail out small deposit banks. So it's reasonable to assume the same will apply to tether.
- ncallaway 4y ago
  > I think people fail to notice how similar a (non-fraud) tether model is to a traditional bank That’s exactly what’s unethical about it. They’re operating a bank, but have skipped all the regulations and oversight that banks operate with. I have no issue with Tether operating a fractional reserve deposit system, if they are subject to the same oversight (and insurance) that banks are subject to.
  - 4y ago

dragontamer 4y ago

> What if the value of those assets is already below 1:1 because of recent market events? My long-term treasuries are down well over 10% this YTD, in case anyone wants to know. So if Tether had say, $50-billion in 10-to-30Y treasuries at the start of the year, they only have $45-billion of that now. There are serious market risks when you buy/sell Treasuries. Yes, they're among the safest instruments on the market, but rising interest rates and inflation are huge issues and absolutely wreck the value of long-term treasuries.

tyrfing 4y ago
> So if Tether had say, $50-billion in 10-to-30Y treasuries at the start of the year, they only have $45-billion of that now. They don't. As stated at the link: > U.S. treasury bills comprises U.S. treasury bills with a maturity of less than 120 days.
- dragontamer 4y ago
  Except USDT doesn't have any audits or proof of their reserves. My overall point is that USDT could very well be buying up dollar-backed securities, such as 30-year treasuries, and yet still lose a ton of money if the market moves under them. Unless Tether allows 3rd party audits of their reserves, I don't think its necessarily safe to assume that they actually hold those reserves.
  - tyrfing 4y ago
    If you assume that the attestation is fabricated, there's really no reason to talk about treasuries - might as well assume they embezzled 50-70B. Personally, I think it's mostly accurate, with discrepancies being around things like marking securities to market. (Just look at VC practices there, for example.) The explicit statements of "X amount of treasuries under Y maturity" are likely to be true, a vague catchall like "other investments" not so much, which puts an upper bound of ~ 15B short. Lastly: a temporary liquidity crisis that drives USDT down far below the peg is something that would be incredibly profitable for the operators. With perfect information, it would be a situation of trading 50 cents for dollars, and could be used to erase a partial deficit overnight.

SilasX 4y ago

Everything you’ve just said would apply equally well to money market mutual funds (which hold the same kinds of assets), and yet they very rarely have problems honoring redemptions or keeping $1/share peg.

User23 4y ago
https://www.investopedia.com/terms/b/breaking-the-buck.asp https://www.investopedia.com/terms/b/breaking-the-buck.asp Edit: Just providing context for those who may be interested.
- SilasX 4y ago
  Right, I’m familiar with an alternate expression for what I just described. Were you disputing that it’s rare, or…?
ChrisLomont 4y ago
First, MMMFs target $1/share, they do not promise it nor are they legally beholden to honor it. It's a goal, not a promise. It also works because the US dollar has been remarkably stable and most of their holdings are USD. No crypto is so stable, with a bunch of them being about the most volatile assets you can lose money with.
- SilasX 4y ago
  > First, MMMFs target $1/share, they do not promise it nor are they legally beholden to honor it. It's a goal, not a promise. How is that relevant to the claim in question? (Which, if you’ll recall, was whether tether can maintain the peg and redemptions while holding the same assets as MMMFs, which generally do that just fine.) > It also works because the US dollar has been remarkably stable and most of their holdings are USD. Okay, now you lost me, and I’m not convinced you have the recent discussion in mind. The original comment was claiming that Tether can’t maintain the peg, because it holds non-dollar assets. I pointed out a trillion dollar industry by that maintains a peg, using those same assets, and you’re saying the non-dollar assets only succeed there because the dollar is stable? Which is somehow an argument about how these assets are good enough for MMMFs to work but not Tether? Please take a minute to review the thread and see if you’re still supporting the claim I disputed.

darcys22 4y ago

See this is just low quality FUD, They have 39B in US Treasury Bills, how much do you think these will drop if they sell? The truth is next to nothing. and a 39B moat for sell offs seems very reasonable

sbf501 4y ago

I read that selling off commercial paper can impact just about everything because it is used extensively between banks. I don't quite understand it, but apparently this is how crypto came to impact the stability of other markets; through buying and selling huge amounts of commercial paper and impacting its price. I'd like to understand that better, if anyone feels like writing an ELI5.