[mathgenius]

It recently occurred to me, with the whole LUNA fiasco, that any "stablecoin" that is 1-1 backed by fiat can come under attack from leveraged traders, and get de-pegged. So it really doesn't matter what backing tether has, although more is obviously better. When the music stops it's anyone's guess what will happen.

[gringoDan]

Any stablecoin that is NOT backed 1-1 by fiat, correct? I.e., algorithmic stables. If you're 100% collateralized by USD in your bank account, how can it get de-pegged?

[jandrese]

Are there any 1-1 fiat stablecoins that aren't just flat out lies? Like every new crypto coin minted requires a matching real dollar to be stashed away. My impression is that nobody does this because it would mean massive waits to buy the crypto coins when the real dollars run low and because the way to make real money is with leverage.

[onlyrealcuzzo]

Since Gemini is actually compliant - I imagine GUSD is close.

It's only ~$0.2B of a ~$160B market, though.

[gringoDan]

USDC is legit: https://www.centre.io/usdc-transparency

[ceejayoz]

Tether has attestations, too. They're not audits; Tether got caught moving money in right before an attestation check, and moving it out right after.

https://ag.ny.gov/press-release/2021/attorney-general-james-...

> In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’

> On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.

An attestation tells you what the bank balance is. An audit tells you where it comes from, who has claim on it, etc.

[stickfigure]

The difference is that USDC is run by a US-based public corporation and its managers are US citizens that live in the US. If USDC is a fraud (or even just materially misrepresented), they go to jail.

Is that a guarantee? No, but I don't understand why anyone would use USDT instead of USDC.

[edit: s/UST/USDT]

[ceejayoz]

Maybe! First, they have to get caught; Bernie Madoff managed to run his ponzi for decades, running the value up to $65B. Jail for misrepresentation is pretty rare; IIRC only one person in the entire 2009 financial crisis wound up with jail time.

> No, but I don't understand why anyone would use UST instead of USDC.

That's fair, I just don't understand using either.

[rapsey]

Current market cap is 52 billion. Just where is that money?

[scrlk]

Apparently with BlackRock and BNY Mellon: https://decrypt.co/97795/blackrock-handle-circle-usdc-cash-r...

[koolba]

With treasuries paying 1.6% x $50B, that’s $66M per month of interest.

[thebean11]

Held by Circle and Coinbase in T bills I believe.

edit: more likely held by some holding company controlled by those two companies.

[dereg]

USDC.

[mathgenius]

With leverage you can long or short more than the available supply of tethers. You are effectively creating fake tether with leverage, and then selling it (or buying it). This stuff also happens with equities, commodities, etc.

If there was no leverage, then yes, a 1:1 backed stablecoin would hold it's value.

EDIT: I mean the story here is far from clear, you also need to consider arbitrage bots that act between exchanges, etc. etc.

[qeternity]

This isn’t even remotely true. You’re conflating 3 or 4 things with this mistaken understanding.

[UncleEntity]

Even with leverage one would assume that a 1:1 backed asset would survive intact with the people loaning out their coins taking the losses in the case of a run.

If they engage in fractional reserve issuance (which it appears they do) then all holders of the coin will be subject to losses if they can’t cash out before the reserves run out. Pretty much guaranteed run by that point.

[zmgsabst]

No, 1-1 backing prevents this.

Let’s imagine that I have 1000 cans of beer in my warehouse and I give out 1000 tickets to exchange for a beer.

Let’s further imagine you have infinity dollars to “break the peg”. So you buy tickets, trade tickets, give them away for free after re-buying them… doesn’t matter. As many times as you want.

Everyone who has a ticket at the end can still visit my warehouse to claim a beer — no matter the financial manipulations you engaged in.

[danachow]

For a USD backed stablecoin what are “tickets” vs what are dollars in your analogy?

[zmgsabst]

Tickets are crypto tokens; beers are USD.

If I start with 1000 tokens I distribute and 1000 dollars in my vault, no matter what you do with the tokens, I can exchange a token for a dollar — because your manipulation of the tokens doesn’t remove dollars from the vault. Those only change when: 1. I receive a new dollar, so issue a token; or 2. I destroy a token and release a dollar.

“Shorting” doesn’t impact that: if you borrow someone’s ticket, then sell it for $0.85, that doesn’t create a new ticket — there is still one ticket and one beer… and one IOU. What happens to the original owner is either the borrower buys a ticket back and returns that (canceling out the IOU) or else that original owner no longer has a ticket — they’re owed the value of a ticket by the borrower.

In the case of tokens/dollars, that value is easy to assess: the person borrowing your stable coin token who fails to return it owes you $1… but that doesn’t come out of my vault, because you don’t own a token. You’ll have to get that $1 by suing the borrower over failure to deliver.

[hathym]

you can't make a profit like that. banks (and tether) make profit by miniting news tickets out of thin air, lending the newly minted tickets at a certain rate, once the credit is reimbursed they usually destroy the minted tickets and keep the profit.

[zmgsabst]

That’s one approach to profit, called “fractional reserve”.

Typically, people who want a 1-1 backed coin are uncomfortable with that model… so you instead take profit on the issuance: you charge $1.05 to issue $1 in tokens (while keeping $1 in the vault) — a process called seigniorage.

https://en.wikipedia.org/wiki/Seigniorage

[im3w1l]

$1 buys one tether. One tether redeems for $0.999. Then there's also interest on T-bills and stuff.

[Anderkent]

You mean any stable coin that is _not_ 1-1 backed?

[mathgenius]

No, once you have leverage the ratio doesn't matter anymore. It's just whoever has deeper pockets wins.

[NovemberWhiskey]

If Tether is fully collateralized, then if you sell Tether below 1, the buyer can redeem it for $1 and make an arbitrage profit.

The usual expectation is that arbitrage opportunities vanish as the rush of risk-free profit takers closes the price gap. As such, it doesn't matter what other participants are in the market; the arbitrage buyer is always going to be the best bid below 1.

You might see temporary breaks from the arbitrage-free price due to liquidity (e.g. in a thin market, there might not be enough buyers initially).

If you keep selling, you'll eventually get to a situation where no Tether are in circulation, but every last Tether will sell for ~1.

How do you get the idea that leverage matters here?

[lxgr]

That's not how leverage works.

If you're long on an asset and are not lending it out, neither short selling nor leverage can hurt you with a fully backed stablecoin – you can always just go to its issuer and redeem it.

As an analogy, consider owning shares of some publicly traded corporation. No matter what happens on the stock market, this doesn't impact your ownership of the actual, physicaly corporation, which entitles you to dividend payments, a proportional share of its assets when liquidated etc.

[lxgr]

Would the downvotes care to explain how it works instead?