Tether (2021) | Introduction to DeFi

Video 3.2 – Tether In this video,
We will learn about Tether And We will also learn about the risks associated
with Tether Hello and welcome back. In this video, we will take a look at the
largest stablecoin by market capitalization and trading volume – Tether, known by the
symbol USDT. Tether, in theory is tethered to the USD in
a 1:1 manner. So, always, 1 Tether equals 1 USD. Simple, right? One interesting trivia – Do you know the most
actively traded cryptocurrency in the world? No, it is not Bitcoin. It is not Ether either. It is Tether. In fact, the trading volume of Tether is greater
than the trading volume of Bitcoin and Ether, combined.

That’s something, isn’t it. The market capitalization of Tether at the
time of this video is $62 billion, next only to Bitcoin and Ethereum. Now you can see how important Tether is to
the crypto currency ecosystem. Without Tether, much of the trading liquidity
will be gone from the system. Important, Tether may be, but in this video
we will also take a good look at the risks associated with the number one stablecoin
in the world. Tether is available on the Bitcoin blockchain,
Ethereum blockchain as an ERC -20 token and also on EOS, TRON and other blockchains.

Tether Limited, that issues Tether is controlled
by the owners of Bitfinex, the world’s largest crypto currency exchange. This symbiotic relationship between the world’s
largest stablecoin and the world’s largest crypto currency exchange is something that
can make a lot of people, including me uncomfortable. In theory, you give a dollar to Tether limited
and backed by your dollar, a new Tether digital token is minted. When you want to redeem your Tether for fiat,
the Tether token is burnt or extinguished out of circulation and you take your fiat
back. So, the amount of Tether in circulation matches
the amount of USD in circulation Well, this is what we assume when we think
of a Stablecoin like Tether. Now, let us see if our assumptions are really
true. If we go to the Tether website we see that
unless you can redeem your USDT for US Dollars, only for transactions with a minimum size
of 100,000 USD and above. The fee for the same is 1,000 USD or 1% , whichever
is higher.

So, for 100,000 USD, your redemption fee would
come to 1%. But even this is not guaranteed. Let’s go to the Legal section in the Tether
website and check out point no 3 – About Tether Tokens – General restrictions : Tether reserves
the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated
by the illiquidity or unavailability or loss of any Reserves held by Tether to back the
Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions
of securities and other assets held in the Reserves. Now let us go to the risk disclosure statement
At the very end, point number 8 – “Valuation Risk: Tethers are backed 100%
by Tether’s Reserves. Those Reserves are not insured and could be
subject to unexpected diminution in value or to governmental and regulatory freezes
and seizure.

This may result in delays and other barriers
to redemption and sale.” Do you think this is just boiler plate legalese? Think again. If all that Tether Limited is doing is keeping
the fiat USD in their bank accounts, there is no way there would be “unexpected diminution
in value” of these assets. This can only mean “Tether reserves” could
be carrying credit risk or market risk. This is there only in the fineprint. The general narrative is that Tether reserves
match the Tether supply. And one more thing. Tether has never been audited. Despite a plethora of doubts about the integrity
of the Tether reserves, Tether has not been subjected to an independent audit, even once. If you go to the Tether website, there is
a transparency update, where Moore Cayman, an independent accountant has performed an
attestation engagement for Tether and has given an opinion that everything is fine. But an attestation is different from an independent
audit. Think about it. How difficult would it be for a 60bn dollar
market cap Stablecoin company to get audited by one of the big 4.

So, If we have to summarize, this is what
we have in front of us. The largest stablecoin by market capitalization
and trading volume is issued by a centralized organization that has never been audited. We don’t know for sure if there are adequate
assets backing all the minted Tether. In other words, USDT – Transparency – Low,
Decentralization – Non existent, and therefore Risk is very high. Video Summary – In this video, we learnt about Tether. We also covered the risks associated with
USDT. In the next video, we will learn about another
stablecoin Circle’s USDC.

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