People keep saying that USDT is decoupled. What do people mean when they say USDT is decoupled?

With US regulators taking a tough stance on cryptocurrencies, the crypto community may have been overwhelmed with FUD in the past two weeks.

The latest FUD is USDT. The New York Attorney General recently provided Tether’s financial documents to CoinDesk, including detailed information on customers and bank statements. As the news spread, the market price of USDT deviated from $1, and many people said that USDT was decoupled again.

But in fact, when many people talk about USDT decoupling, they are not particularly clear about what they mean by decoupling? Because Tether has never guaranteed that the market price of USDT is pegged to 1 US dollar, and it cannot guarantee it. It only guarantees that USDT will be minted or redeemed at a 1:1 ratio.

USDT is “decoupled” again?

On June 15, Curve 3pool data showed that the proportion of stablecoins in the 3pool pool was unbalanced, of which USDT’s share soared to 76% at 08:00 on June 15, and USDT fell slightly to 0.997. In addition to Curve 3pool, a similar situation also occurred in Uniswap v3 USDC/USDT liquidity pool. As a result, many people began to claim that USDT was "decoupled" again.

Curve 3pool is a liquidity pool consisting of three stablecoins: DAI, USDC and UDST. Ideally, all three stablecoins account for 33.3% of the market. When a stablecoin accounts for more than 33.3%, it means that investors are using this stablecoin to swap the other two stablecoins.

In the USDT case on June 15, investors sold USDT in exchange for USDC or DAI. The inflow and outflow of USDT in Curve 3pool also illustrates this. In 24 hours, Curve 3pool received about $200 million in USDT.

The reason why the crypto community is concerned about the deviation of stablecoins in Curve 3pool may be because Curve 3pool is the largest stablecoin fund pool with a total locked value of US$410 million, and the price it reflects is indicative in DeFi.

Curve 3pool TVL has dropped from a peak of $6 billion to $400 million

But from another perspective, the 70% imbalance of USDT in Curve 3pool may not be as important as imagined. There are three reasons: First, although the total locked value of Curve 3pool is 410 million US dollars, it has dropped by more than 93% compared with the peak of 6 billion US dollars, and its pricing power has been lost. Second, relative to the total issuance of USDT of 86 billion US dollars, the sales volume of 200 million US dollars is not enough to affect the overall market price of USDT. Third, as long as Tether maintains a 1:1 redemption of US dollars, USDT's "decoupling" from Curve 3pool will naturally have market arbitrageurs to balance its price.

What do people mean when they say USDT is decoupled?

According to the Tether white paper, the USDT operating mechanism is very simple. Tether mints 1 USDT for every 1 USD in fiat currency received from the customer, and returns 1 USD worth of fiat currency to the customer when Tether receives a redemption request for 1 USDT.

Tether says its stablecoin USDT is backed by the US dollar 1:1, which means that at the two key nodes of minting USDT and redeeming USD, Tether guarantees 1:1 minting and redemption. Tether does not guarantee that USDT is always equal to 1 US dollar during circulation.

Therefore, USDT has two prices, the market price and the minting/redemption price. Tether has never guaranteed that the market price of USDT is pegged to 1 USD, nor can it guarantee it. It only guarantees that USDT will be minted or USD will be redeemed at a 1:1 ratio , plus a 0.1% deposit/withdrawal fee (two-way fee).

In other words, the USDT market price has nothing to do with Tether. Tether or its stakeholders even hope that the USDT market price will be lower than $1 so that they can buy back USDT at a low price. Of course, for the sake of long-term interests and stable operations, Tether may not do so.

Because Tether's business is really a simple and beautiful business. Tether takes the US dollar fiat currency deposited by users and invests these US dollars in US Treasury bonds, overnight repurchases, regular repurchases, money market funds and other almost risk-free and highly liquid income products. Tether reserves are completely a "hen that lays golden eggs" and are truly "earning money without doing anything".

This is indeed the case. According to the latest data from Tether, the issuer of USDT, Tether's profit reached US$1.48 billion in the first quarter of 2023 alone, and its excess reserves reached US$2.44 billion.

In the market, various factors such as short sellers, fake news or regulation will cause market FUD, thereby triggering investors to sell USDT, causing the USDT market price to deviate from 1 US dollar.

But as long as Tether honors its promise of 1:1 in both minting USDT and redeeming USD, it can be said that USDT is always pegged to USD at 1:1. Not to mention minting, if you send Tether reserves, it will definitely be willing to accept and give you 1:1 USDT.

Can Tether guarantee 1:1 redemption of USDT?

According to Tether's reserve proof report for the first quarter of 2023, if Tether's report is credible, Tether's direct holdings of Treasury bonds exceed $53 billion, accounting for more than 64% of total reserves. These Treasury bonds, together with other reserves in the cash and cash equivalents category (such as overnight repo, term repo, money market funds, cash and bank deposits), account for nearly 85% of Tether's total reserves . These high-quality, liquid assets provide Tether with collateral for quick sales to process redemptions.

After USDC reserves were implicated in the bankruptcy of Silicon Valley Bank, Tether reduced its cash and bank deposits by 90%, and its cash and bank deposits currently total $480 million.

What remains are some high-risk assets such as Bitcoin, other investments, corporate bonds and mortgages. What if this part goes wrong? Tether said that its excess reserves are $2.44 billion .

Furthermore, Tether has already made sufficient preparations in the terms of service. Tether reserves the right of "physical return" in the USDT stablecoin terms of service. When liquidity is insufficient, Tether can return bonds, stocks or "other assets held in reserves" to users without returning US dollars. "If any reserves held by Tether to support Tether Tokens are illiquid, unavailable or lost, it will cause delays in the redemption or withdrawal of Tether Tokens. Tether reserves the right to delay the redemption or withdrawal of Tether Tokens, and Tether also reserves the right to redeem Tether Tokens in kind, including securities and other assets held in reserves. Tether makes no representations or warranties as to whether Tether Tokens previously traded through the website can be traded at any time in the future (if at all). "

So, will Tether's reserve certificate be forged? First, numerous regulatory agencies are watching Tether, and the cost of forging is too high; second, as mentioned in the previous section, Tether's reserve is a "hen that lays golden eggs" and a real "lying profit" product. The benefit/risk ratio is too small.

Unless U.S. Treasuries, overnight repos, term repos, money market funds, cash and bank deposits all collapse, such a large-scale problem is simply beyond Tether's control.

Perhaps because of this, Tether CTO Paolo Ardoino directly stated on Twitter: "Tether is as ready as ever, and we are ready to redeem any amount of funds. "

Conclusion

Therefore, as long as there is no problem with Tether’s USDT reserves, the “decoupling” of the USDT market price is not a problem at all.

The real USDT decoupling is when there is a problem with USDT reserves. Tether’s USDT reserves are the most critical and core issue.