Recently, reports have been citing that the largest stablecoin Tether (USDT) is not backed by US dollars.
This statement is not completely true because they are backed by USD, but not entirely. They are backed by the US dollar in addition to other assets which may be loans or “cash equivalents.”
One section of their homepage reads:
“Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”
While it’s good they stand by their true slogan that “every tether is also 1-to-1 pegged to the dollar,” this more in-depth explanation goes against what they have been implying for years. For the past several years now they have been claiming that each tether is backed by a dollar, which may be true in terms of the valuation of their portfolio, which is also news to investors but is certainly an indirect way to word things. The reality is that there is not a dollar for each tether in the bank. If everyone wanted to redeem their Tethers for US dollars right now, Tether would need to sell all of their assets for cash. Doing this has inherent risk, which worries investors.
In response to Tether rumors, several stablecoins have been coming into existence. One unique example is Dai, by Maker, which is actually a decentralized, collateral-based stablecoin. This means that users can send Ethereum to a smart contract as collateral to get Dai. The smart contract acts as a self-stabilizing mechanism to adjust fees and incentives for users to create Dai. Simply put, if the price of Dai exceeds $1 due to Ethereum’s price rising, then the incentives will be such that users want to create more Dai. As a result, more Dai enters the circulating supply, driving the price down towards $1. If the price is below $1, then the demand goes up because users can get more Dai for less money – taking advantage of an arbitrage opportunity. Dai is a publicly transparent, decentralized stablecoin based on the Ethereum blockchain.
On the other hand, another centralized stablecoin alternative is Stably. Stably was recently added to Binance and has growing volume.
So, 2019 seems to be a year for stablecoins, which means Tether should clean up their image a bit.