What does it mean when people say USDT is decoupling?

What is the meaning of USDT decoupling?

Author: Blockingcryptonaitive

With the strict regulation of cryptocurrencies by regulatory agencies in the United States, the cryptocurrency community may have been overly FUDed in the past two weeks.

The latest FUD is USDT. The New York Attorney General recently provided Tether’s financial documents to CoinDesk, including detailed information on customer and bank account reconciliations. The news spread, and the market price of USDT deviated from $1, causing many people to say that USDT was uncoupled again.

But in fact, many people who say that USDT is uncoupled are not particularly clear about what they mean by uncoupling? Because Tether has never guaranteed that the market price of USDT is pegged to $1, nor can it be guaranteed. What it guarantees is the casting of USDT or redemption of US dollars at a ratio of 1:1.

• News Weekly | US judge denies SBF’s request for prosecutor to review FTX debtor’s request
• Is BlackRock applying to the SEC for a Bitcoin ETF or a trust?
• Why did the SEC reject the approval of a bitcoin ETF for spot trading? Will BlackRock’s attempt be successful this time?

USDT is “uncoupled” again?

On June 15th, Curve 3pool data showed that the proportion of stablecoins in the 3pool pool was imbalanced, with USDT accounting for 76% of the pool at 08:00 on June 15th and USDT slightly falling to 0.997. In addition to Curve 3pool, Uniswap v3 USDC/USDT liquidity pools also experienced similar situations. Many people have therefore begun to claim that USDT is “uncoupled” again.

Curve 3pool is a liquidity fund pool composed of three stablecoins: DAI, USDC, and UDST. Ideally, the three stablecoins each account for 33.3% of the share. When one stablecoin accounts for more than 33.3%, it means that investors are using this stablecoin to swap the other two stablecoins.

In the case of USDT on June 15th, investors sold USDT and exchanged it for USDC or DAI. The inflow and outflow of USDT in Curve 3pool also indicates this. Approximately $200 million of USDT flowed into Curve 3pool within 24 hours.

The reason why the cryptocurrency community pays attention to the deviation of stablecoins in Curve 3pool may be because Curve 3pool is the largest stablecoin fund pool, with a total locked value of $410 million, and its reflected price has benchmark significance in DeFi.

Curve 3pool TVL has dropped from a peak of $6 billion to $410 million.

However, on the other hand, the 70% imbalance of USDT in Curve 3pool may not be as important as imagined. There are three reasons: first, although the total lock-up value of Curve 3pool is $410 million, compared with the peak of $6 billion, the decrease has exceeded 93%, and its pricing power has been lost. Second, the selling volume of $200 million is insufficient to affect the overall market price of USDT relative to the total issuance of USDT of $86 billion. Third, as long as Tether maintains a 1:1 redemption of the US dollar, there will naturally be market arbitrageurs to balance its price in Curve 3pool.

What does it mean when people say USDT is decoupling?

According to the Tether white paper, the operation mechanism of USDT is very simple. When Tether receives $1 fiat currency from a customer, it corresponds to the issuance of 1 USDT. When Tether receives a redemption request for 1 USDT from a customer, it returns the equivalent of $1 fiat currency to the customer.

Tether states that its stablecoin USDT is backed by the US dollar at a 1:1 ratio, meaning Tether guarantees a 1:1 issuance and redemption of USDT with the US dollar. Tether does not guarantee that the value of USDT will remain equal to $1 throughout its circulation.

Therefore, USDT has two prices: the market price and the issuance/redemption price. Tether has never guaranteed that the market price of USDT is linked to $1, nor can it guarantee it. It only guarantees the issuance and redemption of USDT at a 1:1 ratio, plus a 0.1% deposit/withdrawal fee (charged both ways).

That is to say, the market price of USDT is completely unrelated to Tether. Tether or its related interests may even hope that the market price of USDT is lower than $1, so that they can buy back USDT at a lower price. Of course, for long-term interests and stable operation, Tether may not do so.

Because Tether’s business is really a simple and beautiful business. Tether takes the US dollar fiat currency deposited by users and invests these dollars in almost risk-free and highly liquid income products such as US Treasury bonds, overnight repurchase agreements, term repurchase agreements, and money market funds. Tether’s reserves are completely a “golden goose” that lays golden eggs and is truly “lying to make money”.

As a matter of fact, according to the latest data from Tether, the USDT issuer, Tether’s profit in only the first quarter of 2023 reached 1.48 billion US dollars, and its excess reserve reached 2.44 billion US dollars.

In the market, various factors such as short sellers, fake news, or regulations can cause market FUD, triggering investors to sell USDT and causing the market price of USDT to deviate from 1 US dollar.

However, as long as Tether follows the 1:1 redemption promise between the issuance of USDT and the redemption of US dollars, it can be said that USDT is always pegged to the US dollar at 1:1. As for the issuance, Tether is willing to accept your reserves and give you 1:1 USDT.

Can Tether guarantee 1:1 redemption of USDT?

According to Tether’s Q1 2023 reserve attestation report, if Tether’s report is credible, Tether’s direct holdings of national debt exceed 53 billion US dollars, accounting for more than 64% of the total reserves. These national debts, along with other reserves in the cash and cash equivalents category (such as overnight repurchase, term repurchase, money market funds, cash, and bank deposits), account for nearly 85% of Tether’s total reserves, providing Tether with high-quality and liquid assets that can be quickly sold to process redemption as collateral.

After the USDC reserves were affected by the bankruptcy of Silicon Valley Bank, Tether reduced its cash and bank deposits by 90%, and currently has a total of 480 million US dollars in cash and bank deposits.

The remaining assets are some high-risk assets such as bitcoin, other investments, corporate bonds, and mortgage loans. If there is a problem with this part, what should be done? Tether said that its excess reserve is 2.44 billion US dollars.

Moreover, Tether made sufficient preparations in the service terms. Tether reserves the right of “physical return” in the USDT stablecoin service terms. When there is insufficient liquidity, Tether can return bonds, stocks, or “other assets held in the reserve” to users instead of returning US dollars. “If any reserve held by Tether to support Tether Tokens has insufficient liquidity, is unavailable, or is lost, it will cause delays in redemption or withdrawal of Tether Tokens. Tether reserves the right to delay redemption or withdrawal of Tether Tokens, and Tether also reserves the right to redeem Tether Tokens through physical assets, including securities and other assets held in the reserve. Tether will not make any statement or guarantee as to whether Tether Tokens previously traded on the website can be traded at any time in the future.”

So, will Tether’s reserve proof be fraudulent? First, countless regulatory agencies are watching Tether, and the cost of fraud would be too high. Second, as mentioned in the previous section, Tether’s reserve is a “mother hen that lays golden eggs” and a truly “lying profit” product. The risk/reward ratio is too small. Unless all large-scale problems such as US Treasury bonds, overnight repurchase, term repurchase, money market funds, cash and bank deposits collapse, this is not something Tether can control.

Perhaps because of this, Tether CTO Blockingolo Ardoino directly stated on Twitter: “Tether is ready as always, and we are ready to redeem any amount of funds.”

Therefore, as long as there is no problem with Tether’s USDT reserve, the “decoupling” of the USDT market price is not a problem at all.

The problem of USDT decoupling only arises if there is a problem with the USDT reserve. Tether’s USDT reserve is the most critical and important issue.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!