Is the tether exactly the same as the dollar? ── Credit risk with derivative products created by Wall Street

4 mins read

Whether the US dollar-linked stable coin “Tether (USDT)” is completely backed by the dollar on a one-to-one basis has been controversial for many years. At last, those who are critical of Tether and those who support Tether can actually bet money, not just words.

Launched on September 3, the product covers the risks of default on USDT-issuing Tether.

Under this CDS, Tether is considered to have defaulted if the price of USDT drops significantly from the normal $ 1 price. For example, if USDT drops to 70 cents, the seller will pay the buyer 30 cents.

CDS first appeared on Wall Street in the 1990s and was notorious for triggering the 2008 global financial crisis.

However, CDS was created to manage risk, and its price is arguably an early warning to the market about credit problems. Also, unlike the written agreement depicted in the movie The Big Short, the new CDS is a smart contract executed by code on the Ethereum block chain.


“I’m not very interested” Tether

Derivatives only transfer risk. Some people want to take risk and receive money, but to eliminate risk.

Investors do not need to hold USDT to buy CDS. CDS can be used to bet on USDT’s default, while those who believe Tether will meet its obligations can earn a premium.

If you have one, you can also get a yield on your own money.


Hedging for crypto asset exchanges

In late August, Opiam launched a contract to indemnify buyers for default on a “credit delegation” loan, a type of unsecured loan, at Aave, a money market.

In both CDSs, information about out-of-chain events that trigger payments (in this case, changes in USDT prices), the so-called “Oracle”, is provided to smart contracts by Chain link. Chain link is a notable project that has seen significant adoption of Oracle services this year).

Fully collateralized smart contracts may eliminate risk, but at the same time introduce new risk. It’s a software bug.

To reduce the potential for bugs, security firm Smart Dec audited the new CDS code and the opium itself.


Will it eliminate concerns about USDT?

The new CDS tied to USDT can be customized to make payments in a variety of scenarios, including USDT below a preset price level, says Aave founder Stani Kulechov. He said. He also advises Opiam.

As stated on Opiam’s blog, USDT has become the lifeline of a borderless cryptocurrency exchange. It is called a “stable coin” because it is designed to maintain the value of fiat currency.

The oldest stable coin, USDT, has the largest market capitalization and is issued at $ 13.8 billion. It boasts the 5th largest scale of crypto assets as a whole. Traders often use USDT to move funds quickly to exchanges to take advantage of arbitrage opportunities.

Tether, the issuer of USDT, is currently under investigation by the New York State Attorney General’s Secretariat on suspicion of misappropriation of funds, along with its sister company Bit finex.

Tether announced in April 2019 that only 74% of USDT was backed by “cash and cash equivalents.” The company then said in November 2019 that the USDT was once again fully backed up in a rebuttal to an academic treatise blaming the USDT for the 2017 Bitcoin bubble.

In any case, Opiam’s CDS acts as a hedge for cryptocurrency exchanges, which are heavily influenced by Tether’s solvency, according to Beliyakov.

CDS also acts as insurance against the “long tail risk” of rare events common to DeFi (decentralized finance) applications, soon with USD Coin (USDC), Binance USD (BUSD) and Die (DAI).


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