Tether’s USDT Faces Challenges with Peg Stability, Says Kaiko Research

On Sep 2, 2023

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Stablecoins, which are digital currencies anchored to specific assets like the U.S. dollar or the British pound, can sometimes deviate from their peg in times of heightened volatility. The crypto community has seen USDT, the leading stablecoin by market cap, deviate from its peg for much of August. Such deviations have previously been attributed to factors like Tether’s redemption fees, reduced market liquidity, and set minimums for redemption imposed by Tether.

A tweet from Kaiko Data highlighted this:

USDT has been depegging all month. Why hasn’t anyone noticed?
In this week’s Deep Dive we propose a novel method of rating stablecoin depegs, check it out below ⬇️https://t.co/o8LuiTMSqW
— Kaiko (@KaikoData) August 31, 2023

Interestingly, Riyad Carey, an analyst at Kaiko, proposed a new measure termed “depeg severity,” which correlates to the total trade volume of a stablecoin. As the trading volume escalates, the threshold for a depeg event decreases. Concurrently, the monetary value affected by these peg deviations rises with growing stablecoin trading volume.

While other competitors like TUSD, BUSD, USDC, and DAI have had their share of depegging episodes over the year, they were reportedly more consistent and showed less deviation from the U.S. dollar than USDT. This year, the most drastic depegging event for USDT happened on August 7 around 8 am UTC. On almost all trading platforms, USDT was trading at a 2% lower rate than its standard $1 peg. This occurred shortly after news surfaced about a significant $500 million net sell-off of USDT on major crypto platforms such as Uniswap, Binance, and Huobi.

With decreasing liquidity, significant USDT selling has become harder for the market to handle.

Carey stated, “USDT has a peg stability problem. Its redemption fee and minimum means it’s often rational for USDT holders to sell the token on the market rather than redeem it for USD with Tether.” He continued, “With decreasing liquidity, significant USDT selling has become harder for the market to handle.” Although the deviations in USDT’s peg might not seem monumental in price, the consistent devaluation is alarming, which, if persistent, could erode trust.

Redemption Fee, a Tether-specific Issue

Carey has also stated in an interview that:

The redemption fee is a USDT-specific problem. Most stablecoin issuers, like USDC which doesn’t charge this fee, primarily profit from the interest on their USD reserves. Given the prevailing high interest rates in the U.S., it’s baffling why USDT retains its redemption fee unless it’s purposefully designed to minimize redemptions. However, this strategy might be myopic as it further destabilizes USDT’s peg.

Currently, when users opt for fiat withdrawals over $1,000 from Tether, they are charged a 0.1% fee, effectively valuing USDT at $0.99. Additionally, there’s a whopping $100,000 minimum for fiat withdrawals or deposits. On top of this, a non-refundable $150 is charged for “verification” – a step Tether says ensures only genuine applicants proceed. Carey posits an obvious solution, “Given Tether’s $850 million profit in the second quarter, eliminating this fee wouldn’t drastically dent their profits unless they fear cheaper redemptions might cut USDT’s circulation.”

Tether’s USDT Faces Challenges with Peg Stability, Says Kaiko Research

Redemption Fee, a Tether-specific Issue

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