Here’s Why Tether has not Depeged

Paigambar Mohan Raj
Source: The Daily Hodl

Tether, one of the most popular stablecoin issuers, has published a blog where they explain the blueprint of private stablecoins.

The blog investigates how the collateralized stablecoin architecture of Tether offers the best framework for private stablecoins. Additionally, it addresses some of the concerns analysts raised, such as updates on the company’s cash holdings, explanations of why its peg has never “broken,” and details on how its lending is protected and heavily collateralized.

There are multiple benefits of blockchain-based stable assets as opposed to volatility-based tokens. In that regard, collateralized stablecoins provide a novel approach to trade value in the digital medium.

How does Tether’s model work?

A collateralized stablecoin is fundamentally a fungible token issued on a blockchain in exchange for a type of collateral held by a firm or protocol. A USD-collateralized stablecoin was initially developed and released by Tether. Seven years later, the wholly backed supply of USDT has grown to about $71.5 billion, with a peak of $83 billion.

In the USD-collateralized stablecoin approach, the value of the stablecoin is backed by assets such as Treasury bills, bonds, cash, and other assets. The stablecoin is redeemable at any moment for the predetermined value ($1 for USD).

Once they are released, stablecoins can be moved on digital infrastructure until their owner decides to redeem them. According to Tether’s most recent assurance opinion, US Treasury bonds currently make up over 47% of all USDT reserves, while commercial paper accounts for less than 25% of USDT’s backing.

It’s crucial to remember that the USDT’s stability is derived from its redemption options rather than from the exchange rates at which it trades.

It does not imply that USDT has lost its peg if the price of the currency diverges from $1 on a significant exchange, as it did in May. Every time USDT has ever deviated from $1 on exchanges, Tether has continued to instantly and without restrictions swap USDT for dollars on a 1:1 basis. Nothing else creates stability for stablecoins other than direct redeemability.

Because of all these factors, Tether’s collateralized stablecoin concept is still the most widely used design for stablecoins. For the foreseeable future, this is probably going to remain the situation.