Tether sounded the alarm: Curve and Uniswap are selling USDT in large quantities

There is growing speculation that Tether’s USDT, the largest stablecoin by market value at around $83.4 billion, could be facing a crisis.

There is currently no sign of USDT’s peg to the dollar, and USDT trades at almost exactly $1. However, stablecoins, which are coins nominally pegged to a stable asset (in the case of USDT, the dollar), can lose parity with that asset.

Specific liquidity pools on Uniswap and Curve protocols — the deepest pools in the DeFi ecosystem — currently appear to be flooded with USDT sellers.

When sellers flood the market, it can lead to a rapid depegging, as happened during the Silicon Valley Bank collapse, when the highly regarded USDC stablecoin (issued by Circle and Coinbase) lost its peg and fell to $0.93, only to recover to parity with the dollar within a few days.

According to Blockworks Research analyst Ren Kong, two major pools currently appear to be vulnerable to significant selling pressure: Curve 3pool, which holds $380 million in USDT, USDC, and DAI, and the Uniswap v3 USDC/USDT pool, which holds $75.85 million in USDC and Tether.

Curve 3pool is the third largest DEX mining pool and the largest USDT and DAI mining pool in the DeFi (decentralized finance) field.

Both are considered key to DeFi, and both have quickly seen USDT’s share rise significantly, with the stablecoin’s share of the Curve 3pool rising from 22% three days ago to over 50% at the time of writing.

In other words, USDT holders have been dumping the stablecoin, actively selling USDT for USDC/DAI. The total impact on Curve 3pool is about $120 million in net USDT inflows (selling pressure).

While the current sell-off does not constitute an attack, analysts believe a sell-off of this magnitude could be seen as a precursor to something more significant.

The sell-off is particularly concerning because once a decoupling occurs, its speed and magnitude are likely to be accelerated by a lack of liquidity in the pools, especially for Uniswap v3 pools where most liquidity is concentrated around the $1 price.

A decoupling of the USDT stablecoin could be disastrous for the crypto economy, especially since USDT has been gaining market share at the expense of the well-regulated USDC stablecoin following the SEC’s tough regulatory actions against U.S. crypto firms.

Over the past three months, USDT’s market cap has increased by about $14 billion, while the USDC token has lost almost the same amount.

Is Tether in trouble?

While there are no definitive conclusions yet, the unusual level of selling can reasonably be viewed as concerning.

Tether has long maintained that USDT is backed by equivalent assets in reserves, including cash and bonds, but it has never undergone a proper audit; only a “proof” of its ability to meet its obligations.

Tether’s instability comes at an especially inopportune time for cryptocurrencies, which have faced an onslaught of enforcement actions from the U.S. Securities and Exchange Commission and other regulators.

Both the CFTC and SEC have expressed particular interest in stablecoins, and after USDC depegged in March, Tether’s problems could lead to the kind of systemic collapse that regulators and lawmakers in the cryptocurrency industry have begun to fear.