Not a week goes by where stablecoins aren’t discussed and debated in the mainstream media, which only goes to show how far the industry has come in the last 4 years.
During volatile market conditions, this only increases! This article will explore how Tether's collateralized stablecoin model provides the ideal structure for private stablecoins. It will also discuss many of the questions analysts have including updates on Tether's reserves, answers to why Tether's peg has never "broken", and how Tether's lending is secured and over collateralized.
Tether’s innovation (collateralized stablecoins) has polarized and inspired the world at large. Some countries are (unnecessarily) concerned about the potential impact private stablecoins may have on their financial infrastructure. This is, of course, a misplaced concern as private stablecoins not only pose no risk to financial stability but actually present meaningful opportunities for improvement and innovation in global financial systems.
A collateralized stablecoin is essentially a digital, fungible, token issued on a blockchain which is issued against a form of collateral held by a company or protocol. Tether was the first company to create and launch a collateralized stablecoin- USD₮. Seven years later, USD₮ has reached a fully backed supply of over $71.5 billion dollars with a peak of 83 billion dollars.
Collateralized stablecoins provide a unique way to transact value digitally, providing all of the advantages of blockchain-based assets via a medium of exchange that is stable in price as opposed to the healthy volatility that characterizes most blockchain-based assets.
Due to USD₮’s success, many other projects have launched and tried to launch their own variations of Tether’s collateralized stablecoin model. Collateralized stablecoins have a combined value that exceeds $150 billion dollars!
Even with this rapid and profound growth, the impact of stablecoins is still in its first inning. They still represent a smaller financial asset, primarily used by those early adopters who understood their value before the rest of the world.
We expect that stablecoins will become an integrated and foundational part of global financial infrastructure in the years and decades to come. While Tether continues to maintain USD₮’s leading role as the largest and most widely trusted stablecoin, there will be many other stablecoins that emerge as financial tools to improve the economic ability and freedom of the world.
The collateralized stablecoin model represents a blueprint for private stablecoins. It provides a roadmap for issuing stable assets on blockchains that can be transacted in a fraction of the time of traditional financial transactions, and for a fraction of the cost. Additionally, private stablecoins empower users to access financial infrastructure without borders, unlike the closed-loop systems of national banking structures.
Collateralized stablecoins also present an interesting way to free the value locked in collateral. The various assets used to back collateralized stablecoins become liberated, not because the collateral is directly used or rehypothecated, but because their value is transferred to the stablecoin which provides liquidity to global commerce.
The USD₮ collateralized stablecoin blueprint is a model where assets like treasury bills, bonds, cash, and potentially other assets are used to back the value of the stablecoin. These assets not only back the stablecoin, giving it a real and fixed value, but the stablecoin is redeemable at any time for the agreed-upon value ($1 for USD₮). Once issued, the stablecoins can move around freely on digital infrastructure until the owner seeks to redeem them.
An important point to note is that USD₮’s stability emerges from its redemption facilities (verified users exchanging USD₮ for dollars on a 1:1 basis with Tether) not from its trading price on exchanges.
If the price of USD₮ diverges from $1 on a major exchange, as occurred in May, it does not mean USD₮ has lost its peg. Every time that USD₮ has ever diverged from $1 on exchanges, Tether has continued to redeem USD₮ for dollars on a 1:1 basis, quickly, and with no limitations on the size of redemption.
Direct redeemability produces stability for stablecoins, nothing else does. You can’t build a stablecoin whose stability requires market operations and the trading price of the asset.
This is part of the failure of Terra/Luna. This lesson did not need to be learned again, the world has experimented with currency pegs many times in our financial history.
It is extremely common that whenever countries have tried to peg the value of a currency to a specific value, the effort has been a failure. Not only do pegs break, but an enormous amount of capital must be spent to maintain artificial stability.
While the price of USD₮ on exchanges might fluctuate due to supply and demand changes, however, USD₮ are always redeemable on a 1:1 basis as they are fully collateralized, which keeps the value of USD₮ at $1.
Collateralized Stablecoins are the Winning Model
Tether’s collateralized stablecoin model represents the dominant model for stablecoin issuance. While there are other approaches being used to issue stablecoins, and there will likely be many more over the next decade, Tether’s model represents over 90% of all stablecoins in the market.
This will likely continue to be the blueprint of choice for private stablecoins, which may be issued by companies, funds, or even banks in the future.
In response to the demand for liquidity on blockchains and markets, organizations will be able to create and issue collateralized stablecoins by utilizing currently unused collateral in the form of various assets. In this sense, the value represented by that collateral can be utilized to provide direct liquidity to the market as needed.
As Tether’s stablecoin model is always fully backed by collateral, the amount of collateral being utilized to issue stablecoins is always in direct response to the need and demand for liquidity. As blockchains become more diverse and more integrated, there will emerge a need for liquidity in various different systems, which may or may not be interoperable.
Private stablecoins will be issued to satisfy this demand.
Tether’s collateralized stablecoin model is the most compatible with regulatory requirements which most private stablecoin issuers will most likely be expected to comply with. It is most easily able to be integrated into the world’s current regulatory frameworks and the world’s existing financial system.
Traditional assets, held by regulated custodians, become the known collateral used to issue the private stablecoins of the future.
While other approaches to stablecoins will continue to be experimented with, it is highly likely that Tether’s collateralized model will be the approach the vast majority of private stablecoins utilize in the future.
Additionally, Tether’s model helps strengthen national currencies instead of weakening them. For example, USD₮ further solidifies the use of the dollar globally both via the demand for collateral and its use as a unit of account. This is a critical benefit of Tether’s model, as it eliminates any potential conflict between the interests of national currencies and private stablecoin issuers. The interests of both parties become aligned and complementary, as private stablecoins empower the digital payment rails of the future.
For all of these reasons, Tether’s collateralized stablecoin model continues to be the dominant blueprint for stablecoins. This is likely to continue to be the case for the foreseeable future. Even in the present, other stablecoins adopting Tether’s model further strengthens and supports the innovation that Tether brought to market years ago!
We look forward to seeing everything the next generation of innovators will continue to build with Tether’s stablecoin blueprint!
Volatility, Stability, and Liquidity
Crypto markets are currently undergoing significant volatility, and we are witnessing leverage being flushed from the market. When leveraged traders and companies unwind, it can put enormous pressure on markets.
It is important to realize that Tether and USD₮ reserves are conservative, liquid, and transparent and proven to provide full redeemability to our customers even in the worst crypto market conditions as experienced in the past weeks.
Tether and USD₮ have faced and withstood countless black swan events, large redemptions, and market crashes- more than almost any other cryptocurrency except for Bitcoin.
Through all of these events, USD₮ has maintained its role as the preferred stablecoins for most users, exchanges, and businesses.
USD₮ is the most resilient and trusted stablecoin on the market and has strong backing as indicated by Tether’s attestations on the nature of USD₮ reserves.
The Fitch Ratings "Stablecoin Dashboard: 4Q21” independently states that Tether has the most detailed reporting, and also affirms that the liquidity of Tether’s portfolio has increased with its reduction of commercial paper.
This reduction of commercial paper has increased substantially since this report was made.
An Update on USD₮ Reserves
In Tether’s latest assurance opinion, Tether announced that over 47% of total USD₮ reserves are now US Treasuries and that commercial paper now makes up less than 25% of USD₮’s backing.
Since this time, commercial paper has been reduced by an additional $5 billion and US treasury holdings have been increased by $5bn.
Additionally, Tether is committed to further reducing commercial paper as part of its reserves and increasing its holding of US Treasuries. Tether is reducing its commercial paper holdings as rising interest rates create superior risk-reward opportunities with US Treasuries. While commercial paper is a secure and widely used cash equivalent, US Treasury bills are more liquid and provide greater flexibility when there are short-term liquidity demands. Coupled with rising yields, Treasuries are an attractive and secure collateral option for Tether's reserves.
This change in Tether's reserves will be reflected in the next assurance opinion, published quarterly.
These announcements are part of Tether’s ongoing commitment to transparency and stability. Tether’s reserves are strong, conservative, and liquid. This is further demonstrated by Tether’s ability to honor over $10 billion in redemption requests within days.
Part of Tether’s reserves (3.82%) are in the form of secured lending to non-affiliated entities.
During times of market volatility, when users are concerned about the solvency of crypto companies, it’s natural that there are questions around rather these loans pose any risk to Tether or USD₮.
The answer is no.
Tether’s loans are overcollateralized and any changes of risk due to financial circumstances of the companies who have borrowed capital are managed by Tether’s risk management team in real-time to avoid any impact on the stability of USD₮.
Redemptions and Competition
Competition has been growing recently focusing on different use cases than Tether. For example we see competitors focusing more on being at the service of the banking industry, while Tether focuses its efforts on being the most used currency for peer to peer exchanges, remittances, a tool of freedom and inflation hedge for developing countries.
USD₮ is still not only the largest and most widely used stablecoin but the premiere choice for most trading. The overwhelming majority of trading occurs via USD₮ pairs.
It's common for USD₮ to have 10x the trading volume of its largest competitor on a given day.
These metrics are all evidence of the confidence the market has in USD₮ and the unparalleled liquidity it has offered for years.
It’s interesting to note also that while other stablecoins claim to have a strong redemption track record, every stablecoin apart from Tether has an average net balance between issuances and redemptions in a given timeframe - no others have been able to demonstrate 10% of redemptions in 48 hours. The bottom line, it’s to demonstrate when new issuances can cover redemption requests - but so far only Tether has demonstrated that it’s able to work efficiently and safely in the most volatile market conditions.
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Tether supports and empowers growing ventures and innovation as a digital token built on multiple blockchains.