[alethiophile]

> Now, arbitrage bots will look at this in crease in btc-usdt, and be mandated to buy btc with USD so that BTC-USDT and BTC-USD are in parity.

This is the bit that doesn't make sense.

Arbitrage bots trying to push BTC-USD up to match BTC-USDT will end up holding a lot of USDT. So what do they do with it? You can't just magically make USD markets go up; that needs actual USD to enter the system (as part of the arbitrage process, if nothing else).

[raziel2701]

Someone in this whole scheme is leveraged to the tits on tether, and newly minted tether is needed as an asset to back the old tether. And as long as nobody actually tests the convertibility of the currency too strongly, this can hold up.

[alethiophile]

But if arbitrage bots were pushing the BTCUSD price up to match BTCUSDT, they'd have giant piles of USDT. And they'd have to convert it back in large quantities, or else they'd go broke.

The world where no one tests the peg too hard is incompatible with the world where Tether caused huge BTC runups all on its own.