DeFi Lender Euler Finance Accepts USDT as Collateral

Skepticism about whether USDT is fully backed by reserve assets has been around since 2017.

Despite this, crypto’s largest dollar-pegged stablecoin, with a $68B market capitalization, has continued to make inroads into DeFi. The latest example is a governance proposal from lending protocol Euler Finance, which will allow the protocol to accept USDT as collateral for loans.

The proposal passed on Sep. 29 with over 88% of voters in favor, making Euler the largest lending protocol on Ethereum to allow users to borrow against their USDT.

Seraphim Czecker, head of risk at Euler, thinks the risk of accepting USDT as collateral is overblown.

“There was a lot of FUD [fear, uncertainty, and doubt], obviously back in the day, but at this point, if you talk to the big players they move hundreds of millions every day in redemptions and they don’t complain at all,” he told The Defiant.

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The Defiant

Tether has a redemption mechanism whereby institutions can redeem USDT for dollars. If that process were ever to fail, that would be a key indicator that Tether doesn’t have enough liquid dollars backing USDT.

Aave and Compound, the two largest DeFi lending protocols on Ethereum, allow users to supply USDT so other users can borrow the dollar-pegged stablecoin, but the USDT can’t be used as collateral. Instead, users must collateralize other assets in order to borrow USDT.

With $277M, Euler is the third-largest lending protocol on Ethereum in terms of total value locked (TVL), according to DeFi Llama.

Euler TVL

If the change is successful, there’s a chance Aave and Compound may follow suit in order to compete with Euler. Czecker said he believes that’s a possibility, but added that the decision would be up to the governance of the two protocols.

So far, money hasn’t exactly poured in — in the roughly five days since governance voted the Snapshot proposal through, the amount of USDT supplied to the protocol has stayed at approximately $36M.

Czecker chalks up the tepid response to a simple lack of awareness, telling the Defiant that the majority of the largest active traders in DeFi and CeFi are supportive of the move to allow USDT collateralization.

Despite the somewhat muted on-chain response, he remains optimistic that the change will attract significant amounts of capital.

“I think it should add a couple hundred million, medium term,” Czecker said.