Today, Tether in an official post stated that they have redeemed and burnt USD 500M worth of tethers. Since tethers are supposed to be backed 1:1 by USD, this must mean that an equivalent USD 500 M actual dollars was used to redeem those tethers. The blockchain side of the transaction can be easily inspected on the blockchain. This is one of the best features of the blockchain - it's transparency. It would be good for those running the tether stable coin to show proof of the equivalent fiat transactions that accomplished this.
How Stablecoins Work
Stablecoins like tethers are supposed to provide a way to make fiat currency into blockchain form. This means bringing the fiat currency onto the blockchain by minting only the exact amount of the stable coin as the actual fiat currency backing it. This is a notable difference between stablecoins and cryptocurrencies like bitcoins. A stablecoin does not create new money. It also means you are supposed to be guaranteed a value for the stablecoin in fiat currency if at anytime you wish to redeem back fiat from the stablecoin.
For instance, if you acquire 1 bitcoin, for say USD6,500, you are not guaranteed by anyone anywhere that you can one day redeem or sell back that 1 bitcoin for USD6,500. Or any amount. You could as easily only receive back USD100 for it at some point in future or USD100,000. The market determines that. Stablecoin on the other hand are guaranteed. They represent an exact and equivalent fiat amount that exists outside the blockchain. An advantage of stablecoins over its fiat version is that by bringing fiat currencies onto the blockchain they allow the advantages of transparency that the blockchain brings to be applied to the fiat currency.
Why is Tether's Buying Back USDT?
Tethers, with symbol USDT, has apparently had some problems convincing some that they do have reserves to match the amount of tethers they printed on the blockchain. And recently, we saw tethers lose its 1:1 USD peg which could be interpreted as that they either did not have the reserves or the market do not believe they do. There are prior articles I wrote here and here nearly a year ago explaining those issues so those can be referenced for some of the issues. The point here is that it would seem quite simple to always demonstrate at any time that reserves exists to back any given tether, and the events today only accentuates that point.
Overall Is This a Good Development for the Market?
I guess another way to ask that is if this will this burning of tethers bring greater transparency into tethers? The mere burning of tethers obviously does not make it clearer if or where the reserve backing every tether is or that it exists exactly 1:1. However, this might be in response to the development of other stablecoins. The concept of stablecoins is a good one, and one I wrote on nearly a while ago before tethers became prevalent on almost every exchange. Newer ones have recently been developed that are touting better transparency. These include:
We also see exchanges such as Coinbase, Binance, and others adding other stablecoins to compete or instead of tethers. Good and transparent stablecoins are good for everyone. But what's to guarantee we won't get a proliferation of stablecoins including some just as low in transparency or even worse than the complaints that have been raised by tethers. In blockchain in general, people are generally wary of regulations.
On this and several issues, there might not be too many ways to actually ensure a true and transparent functioning of the market without some form of regulation. A close alternative is maybe formation of a voluntary organization in the crypto community that the coins subscribe to with clear rules that all follow so that members of the public can determine compliance by examining the level of adherence to those rules. Right now it's just a free for all. And it is a lot of due diligence to ask of the public to research and study each and every crypto, look on the blockchain, read every audit, and all just to make the right call. We do a lot of studying as it is and most serious members of the community already wear the hat of self trading analyst, self financial consultant, self investment analyst, all while also doing their own daily jobs.
Reference
- Upcoming USDT Redemption – October 24th, 2018
- Untethered: The History of Stablecoin Tether and How It Has Lost Its $1 Peg
- Tether Loses Its Dollar Peg: You Had One Jpb!
- Audit the Teths – A Macro Case for Why Tethers Need to be Audited for Confidence to Return to the Market
- Tether Facing Scrutiny from the Research Community - Explosive New Research Paper Claims Manipulation
About the Author
Ken has a doctorate in Engineering, and a master’s in Computer Aided Engineering, An IT professional, programmer and published researcher with over thirty publications in various fields of technology, including several peer reviewed journals and publications.
Legal Disclaimer: I am not a financial adviser and this is not financial advice. The information provided in this post and any other posts that I make and any accompanying material is for informational and educational purposes only. It should not be considered financial or investment advice at all. You should consult with a financial or investment professional to determine what may be best for your individual needs.
This is only opinion. It is not advice nor recommendation to either buy or sell anything! It's only meant for use as informative, educational, or entertainment purposes.
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