In light of the recent collapse of both the TerraUSD (UST) stablecoin and Terra coin (LUNA), Blockstream CEO Adam Back points out the confusion being caused by mainstream outlets for publishing headlines about Tether (USDT) losing its peg to the U.S. dollar.
In Back’s Twitter thread, he explains that Tether’s USDT peg to the U.S. dollar was intact and that the mainstream outlets claiming otherwise are false. “Confusion stems from more basic lack of knowledge [that] one of the original reasons for the introduction of Tether, the first large stable coin, was that for cross-exchange and arb traders, banks SUCK,” he writes.
Back describes the frustration with trading and transacting with 1970s technology where transfers normally take two or more days to settle in an exchange account. From a trader’s perspective, using Tether to quickly move fiat funds between Bitcoin exchanges is an ideal settlement method. This process avoids the possibility of Bitcoin’s price moving up or down too quickly by the time funds are settled within an exchange account.
In an example provided by Back, he explains that if a trader has funds on exchange A but there is cheaper Bitcoin on exchange B, the trader may buy USDT on exchange A and then move their Tether to exchange B where they may finally buy the cheaper Bitcoin. This trading strategy is otherwise known as arbitrage, where the price of an asset or good may be purchased for a lower price on a different market (or exchange). The trader is then able to profit from small differences in the asset’s price.
With Bitcoin, things move much faster than traditional markets. Milliseconds may mean the difference between a successful arbitrage trade versus an unsuccessful one. If the arbitrage opportunity is huge, the trader can bid the USDT price higher than $1 in order to get USDT before other traders.
In the opposite scenario where traders are getting margin calls, USDT might slightly drop below $1. Back adds that if someone is not in a rush to receive USDT, they have the option to wait and put a limit order of $1 per USDT and they will receive them once the market’s temporary high demand is over.
To clear up confusion between UST and USDT, Back states that the UST drop in price led confused individuals to also sell their USDT. Arbitrage traders quickly took advantage of the short USDT price drop. USDT temporarily fell to around $0.95 and has recovered back to $1 while UST is currently sitting at around $0.20.
Back goes on to clarify that the drop in USDT to $0.95 was not a break in the peg to the U.S. dollar. This is because Tether was doing $1 wires in $3 billion worth of volume over that period.
“It's just a market for time preference of USD vs USDt. ie people in a hurry, usually for a trading opportunity, but here probably more to do with confusion amplified by media,” points out Back.