Understanding Tether’s Peg and Reserves

During periods of market volatility, users (and critics) discuss the mechanisms behind how Tether maintains the stability of USD₮ and the nature of its reserves more frequently. Tether was recently tested by market volatility and over $10 billion dollars in redemptions. The results proved that Tether is the most resilient company in crypto and in traditional finance. 

A question for Tether's critics: Which bank is able to process withdrawals for 10% of their total assets within 48hrs? A feat Tether was able to do effortlessly, and which was nowhere near its capacity.

This article will explore the nature of Tether's peg and updates to its reserves.

How Tether Maintains Stability

In the aftermath of Terra/Luna’s dramatic collapse, stablecoins have fallen under a new wave of scrutiny from investors, and critics. The basic premise of a stablecoin is that each coin is redeemable for a fixed value which is almost always tied to a fiat currency. USD₮ has always been redeemable 1-for-1 for dollars- 1 USD₮ = 1$.

Given the fact that Terra lost its peg, it’s natural that investors might have questions about what stops USD₮ from facing a similar fate.

First, it’s crucial to understand Terra and USD₮ utilize completely different designs, mechanisms, and collateral. Terra was an algorithmic stablecoin that at the end of the day was not fully collateralized. It has a number of mechanisms designed to achieve stability, but ultimately those failed.

USD₮ is, quite simply, fully backed by collateral. It has maintained its peg because every USD₮ is redeemable for dollars via Tether, and as such any time the price goes below $1 investors can earn a profit by buying USD₮ for a discount and redeeming it with Tether.

Tether recently redeemed over $10 billion in redemption requests using the collateral which fully backs USD₮.

Exchange Pricing vs Redemption Facilities

Most commentators and investors use the current trading price for USD₮ that is quoted on exchanges like Binance, FTX, Kraken, and others. On these exchanges, users can see what the current market price of USD₮ is. During periods of intense market volatility USD₮’s price on these exchanges may go below or above $1.

This does not mean USD₮ has broken its peg.

It only signifies that there is more demand for liquidity than exists on that exchange's order books.

Tether has over $70 billion dollars of collateral which it can redeem USD₮ against. No exchange’s order book has anything remotely resembling that amount of liquidity. As such, a few billion dollars of demand to exchange USD₮ for dollars can easily exceed the availability of liquidity on an exchange (causing a change in the price of USD₮ on that exchange)- but will not exceed Tether’s redemption facilities or change the price Tether redeems USD₮ for.

Ultimately, USD₮ maintains its peg because of Tether’s redemption facility for USD₮ and the collateral behind it, not because the price of USD₮ generally trades at 1$ on exchanges. In fact, USD₮ generally trades at $1 on exchanges because investors know Tether’s redemption facility is reliable. Tether has never turned down a redemption requisition for USD₮.

Some critics have tried to suggest that Tether processing $10 billion dollars in redemptions is a sign of weakness, but what it actually shows is that Tether is able to redeem a request for over 10% of outstanding USD₮ tokens within days.

Almost no bank in the world would be able to process a withdrawal request for 10% of their assets within the same time frame, much less a few days.

Tether’s ability to redeem $10 billion is a real-time demonstration of its strength, and the confidence the larger crypto ecosystem has in USD₮.

Tether’s Reserves

Outside of discussion around the peg, it’s common that during periods of volatility people discuss (and critique Tether’s reserves).

Tether has released multiple assurance opinions which show the makeup
of Tether’s reserves
. The vast majority of USD₮ reserves are cash and common cash equivalents. 

In Tether’s latest assurance opinion, Tether announced that over 55% of total USD₮ reserves are now US Treasuries and that commercial paper now makes up less than 29% of USD₮’s backing.

While both commercial paper and treasury reserves are commonly held cash equivalents, US treasuries now make up a much larger percentage of Tether’s reserves.

However, Tether is committed to further reducing commercial paper as part of its reserves and increasing its holding of US Treasuries. This will be reflected in future assurance opinions in the coming months.

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 $10 billion in redemption requests within days.

USD₮ has been the market leader in the rapidly growing stablecoin sector since its very inception. Tether has navigated multiple black swan events (including the Coronavirus crisis) and many cryptocurrency market drawdowns over 50%. During these events, USD₮ has always maintained its peg and Tether has always processed every redemption request for its verified customers.

While markets may continue to be volatile, USD₮ will not be.

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