The reason it hasn't collapsed already is that all the exchanges are in on it. It's crypto's equivalent of "too big to fail."

Individuals will be told they're not customers by Tether (this happened on Twitter a while back, someone set out to prove you could and Tether stonewalled them, so he deleted his account). They're offered a piddly USDT:USD market pair on a few exchanges, like Coinbase and Kraken, as a distraction. There, they can sell their USDT to folks trying to buy it (for instance, to fund a DeFi position) or the exchange obo Tether, Inc. to keep the charade going.

Only institutional parties like exchanges, Alameda and Cumberland are "deemed customers" and they'll never redeem because they know they can't.

Everyone's in on this. I think only a court-ordered exchange liquidation could possibly end the game, like a Binance collapse for instance.

Oh, I understand why it hasn't collapsed already.

I just don't see how Tether refusing to honor redemptions makes it more resilient to a run in progress, rather than less. If nobody wants to buy 1 USDT for a dollar, the peg will break all the same. If Tether stepped in as a buyer of last resort, that would make it more resilient- but if it doesn't, that worse for the peg, not better.

It's better for anyone with physical custody of the Tether assets I guess (they have a pile of gold to Scrooge McDuck dive into) but the currency is even more boned than if they'd propped the market up by buying Tethers back.

A 100% collateralized stablecoin that just hands everyone back their dollars if they ask can survive anything, a 50% collateralized one can spend a lot of it back into the market to prop the price up, at least for a while. But if Tether can't or won't, that's going to make maintaining the peg a whole lot harder!

> Oh, I understand why it hasn't collapsed already.

I feel stupid, but I still actually don't. If considerably more people will want to sell it than there is a demand for it, the price will have to go down, no matter what, as long as "price" is anything more than a decorative label on the exchange's website and you actually can swap it for any currency at all. So, either the exchange should cover all that demand, which doesn't sound reasonable (I'm not sure it's realistic, and even if it was — why would they do that? if this happens, Tether is dead, they can either abandon it or go down with it), or there actually must be some demand. So, I assume it's the latter.

But why would there be any demand for it, if everybody (basically) knows that USDT is a scam? It isn't the same thing as "SHIBA is a scam" or whatever, because even if everyone agrees SHIBA is essentially worthless, people are buying it to speculate, so it can hold onto a belief that others believe it will grow. You cannot speculate on USDT, since USDT cannot grow by definition, it's a stablecoin (and not the only one — there are others with better reputation). It can only crash.

So why doesn't it?

To make the price of USDT (or anything, for that matter) go down, someone who holds it must be trying and failing to offload it at the current price. Conversely, it's possible to prop up the price by being willing to buy fairly large amounts at the current price, burning your cash stockpile in the process. Meaningfully shorting the price of USDT requires getting access to a large stockpile without adding to Tether's (or its confederates') reserves and burning through their entire reserves.

There are two ways this can be done. The first is to be a large holder of USDT already, one whose nominal position is greater than the entire reserve pile, and attempt to liquidate it in favor of USD (this is basically a bank run). Or you can artificially induce this by borrowing enough USDT and selling it to either soak up the entire reserves or induce others to do so as well. But Tether's reserves are probably substantial enough to make this latter option infeasible except for the very largest financial institutions.

Now the largest holders of USDT are those exchanges that immediately convert any USD you put into them into USDT. And so long as you don't try to withdraw that USDT for real USD, they're unlikely to sell any stocks of USDT they hold (in your name or in their own name). Effectively, this means that so long as there is a net inflow of hard currency into the cryptocurrency ecosystem, no Tether crisis is likely to happen. However, should there be a sustained net outflow... well, we'll discover who the equivalent of Lehman Brothers in the cryptocurrency world is.

While crypto prices are rising generally there are more people putting money in and fewer people taking money out. Even a short shift in the market isn't enough to change that.

But a longer term crypto recession would have a run on the exchanges, many would want to cash out, and the price isn't going to be stable

If I understand correctly nobody has a useful handle to profit from killing it and all the players have an incentive in it's continued existence. Killing it would require large scale collaboration among individuals who collectively would all be hurt.

> all the players have an incentive in it's continued existence

Even retail investors? Why do they hold a stablecoin that has any risk at all, with no upside? What is the retail investor’s end game here?

Large yields on stablecoins, inability to bank on KYC exchanges, desire to gamble on leveraged exchanges like Binance.

In each case no one believes it will collapse while they hold.

Can you elaborate on how a stablecoin gives the holder any yields? I thought the whole idea is that it doesn’t appreciate or depreciate.

You can lend them to centralized lending platforms such as Celsius, or on Defi platforms, for 9+% APR.

This is a highly risky activity pitched as not risky.

Ah, thank you for explaining. I assume the idea here is that the borrower of the stablecoin is then using it to make a bet on the continued price appreciation of some other currency, making it a leveraged bet. Crazy risky. Who is supposed to enforce the terms of the borrowing? Or is it done programmatically somehow?

Yup, exactly. Most used seem to be loans to buy more crypto.

With centralized lenders (Nexo, Celsius, Blockfi) you sign over ownership of your crypto to them and hope they will meet their promises.

In Defi it’s programmatic. I am less familiar with the mechanics there. I figure there is massive risk when I see 20+% yields but do not understand the system.

Ah I see. The point I was making is that since it brazenly doesn't have backing and it openly gets to choose who is allowed to redeem, a run would be very hard to actually start. The exchanges themselves are incentivized to backstop the pegs (up to a point) out of their own capital to ensure their own survival.

Beyond that, you are correct of course!

That makes some sense, since in normal banking you can bleed collateral until you're nearly dry without actually provoking a run, and when you're forced to start looking under your couch cushions for change and ask your depositors for patience, there's the trigger for your run. Tether doesn't have to worry about that...

But if "folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange" then surely the most desperate will be willing to take a haircut on their Tether to get out of it first, and then the Tether price collapses anyway, through some combination of the exchanges shutting down trading, drawing down their own collateral to maintain the peg (and then running out), and/or the exchange reluctantly allowing the price to float?

Like, the too-big-to-failness is definitely part of why it's still a thing, but that just means that the real buyer of last resort is other large crypto holders who don't want the ecosystem to collapse. That's great for Tether-the-company, and maybe good for Tether the coin, but it seems to me sort of distantly related to Tether allowing direct withdrawals.

There's an obvious mechanism for maintaining the peg if Tether allows large holders to redeem Tether: those holders buy any slightly discounted Tether, then hand it back to Tether and redeem it and keep the tiny profit. This will work but it's just Tether propping up the price with its capital with extra steps...

Assuming that the unlicensed exchanges have the capital to process withdrawals. In other unregulated industries the people operating the gray market platforms are almost always embezzling money and not keeping customer funds in segregated accounts. If the exchanges spend money propping up Tether they won't have it available for withdrawals.

Exchanges make money hand over fist, they keep non-trivial basis points from a nice simple MySQL transaction. The question is: is the net outflow from the USDT peg into USD more than the revenue they are bringing in?

Yeah but they're operating in a gray market that is going to almost certainly close or shrink with regulation and they're greedy so why not take as much as possible? It's not like the customers have any recourse when their sketchy offshore exchange disappears or closes without paying everyone.

Exactly this - the idea that Tether not being legally obligated to let you cash out USD somehow being a shield against a run seems ridiculous.

Being unable to redeem your USDT for dollars - regardless of reason (because Tether is out of money or Tether is refusing) - is what causes the run and the crash.

An entity that is holding a bunch of cash but refusing to honor IOUs it has issued will find that the value of those IOUs will rapidly approach zero. Permanently. Even if it laters starts honoring those IOUs, the IOUs have lost their utility forever and the price will remain at/near zero.