Via Medium, June 18:
A risk assessment by a DeFi security dude. Note: I worked as a security auditor and engineer in the blockchain space for three years and participated in audits and formal verification of DeFi protocols such as Aave, Bancor and mStable which also involved assessing economic risk. Consider this a complementary Tether risk assessment that Tether didn’t ask for.
This article reflects my personal opinion and I’ve been known to be wrong at times. Let me know in the comments if you spot any glaring errors.
Tether’s USDT stable coin has experienced massive growth since the start of the ongoing bull cycle. There’s now an order of magnitude more USDT in circulation than during the height of the 2017–2018 cycle. This makes it worth re-investigating whether the crypto markets are robust against a potential Tether-related liquidity shock.
In this article I attempt to address the following questions:
- How would a loss of confidence in Tether play out in the short term?
- Who would get most rekt if a Tether-related crash happens?
- Would a Tether confidence crisis be a black swan event* that would severely impact the market?
* For the purpose of this article, we use “black swan” to refer to a massive event that would surprise most people. After all, 95% of people in the crypto space insist that Tether is fine. If you’re unhappy with that definition feel free to think of it as a white swan event.
“What may be a black swan surprise for a turkey is not a black swan surprise to its butcher.”
— Nassim Nicholas Taleb
1. The shape of US dollar liquidity in the crypto markets
In 2018, Hasu found that USDT made up for 29% of Bitcoin’s liquidity. Since then, the situation has become a lot more complicated. Not only is there 12x as much Tether in circulation. USDT base pairs also dominate spot markets on centralized exchanges (CEX) where they account for roughly 65% of trading volume. Furthermore, the complexity of the market has increased significantly due to the proliferation of crypto-related TradFi products, DeFi protocols and USDT-collateralized derivatives. That said, this analysis focuses on CEX and DeFi markets which would get directly impacted by a Tether shock.
The stable coin landscape
As of June 17th, 2021, USD stable coins have an aggregate market cap of $106.2 billion and USDT has a 61% share of that pie.
Stablecoin market share. Total supply is 106B, TheBlockCrypto. Also, pie charts are awesome
Now, where’s all that USDT located? CryptoQuant tracks $7.25B USDT in exchange USDT reserves. However, this doesn’t count USDT on the Tron blockchain which accounts for half of the USDT supply. According to Tether’s rich list, 17 billion Tron USDT are held by Binance alone. The list also shows 2.68B USDT in Huobi’s exchange wallets. That’s almost 20B USDT held by two exchanges. Considering those numbers, the value given by CryptoQuant appears understated. A more realistic estimate is that ~70% of the Tether supply (43.7B USDT) is located on centralized exchanges.
Interestingly, only a small fraction of those USDT shows up in spot order books. One likely reason is that a large share is sitting on wallets to collateralize derivative positions, in particular perpetual futures. The CEX futures market is essentially a casino where traders bet on crypto prices with insane amounts of leverage. And it’s a massive market: Futures trading on Binance alone generated $60 billion in volume over the last 24 hours. It’s important to understand that USDT perpetual futures implementations are 100% USDT-based, including collateralization, funding and settlement. Prices are tied to crypto asset prices via clever incentives, but in reality, USDT is the only asset that ever changes hands between traders. This use-case generates significant demand for USDT .
With regards to DeFi, 2.19% of the USDT supply is locked in smart contracts according to Glassnode. Again, the real number is likely higher since Glassnode can’t possibly track all DeFi protocols across all blockchains. We’ll assume a value of ~5% which seems to be compatible with the numbers shown by major Ethereum DeFi protocols: Cumulative USDT liquidity on Aave, Compound and Uniswap is $1.73B.
***
The rest of the pack
The market perceives USDT differently from other, “safer” stable coins. This distinction is sometimes made explicit on exchanges. For example, FTX considers USD, USDC and BUSD to be equivalent while USDT is treated as a separate asset....
....MUCH MORE
If interested see also:
Of Tether, Bitcoin, Fraud and HOLY HELL
"Investigating the Charge "Bitcoin Price is Dependent on $60 Billion Accounting Fraud""