As Terra’s UST stablecoin continues to unravel, Tether, the crypto market’s largest stablecoin is also showing signs of stress.
Stablecoin Tether (USDT) briefly lost its $1 USD peg in early morning trading and dropped to as low as $0.95 at 3:24 AM New York time before returning to $1, according to CoinGecko.
As a stablecoin, USDT is meant to be pegged to the price of the US dollar – an attempt to form a stable reference asset that is not as volatile as other major cryptocurrencies. Tether is by far the largest stablecoin in crypto, with a $80.7B market capitalization, and $150B of volume traded in the last 24 hours, according to Coingecko. USDC, the second-largest stablecoin, has about half the market cap.
Jitters around USDT follow the recent implosion of the Terra ecosystem’s stablecoin UST and its sister coin Luna. UST fell from its $1 peg and now sits at $0.43 while Luna has fallen 99% from $15 to $0.01 in the last 48 hours alone. And while Terra’s crash sent ripples throughout the market, a prolonged slide in Tether would likely cause a tsunami.
“From my perspective, it was irrational and fear-driven due to other market volatility,” Messari analyst Dustin Teander told The Defiant. “Redemptions seemed to all flow fine ($300mn in 24hrs) so no reason people need to sell on CEXs at 3,4,5% discounts.”
Business As Usual
Tether said in a press release this morning that it is “business as usual amid some expected market panic following this week’s market movements.”
The stablecoin issuer said it “continues to honour redemptions normally” and that verified customers in allowed jurisdiction can redeem USDT for dollars. Tether has processed over $300M of USDT redemptions in the past 24 hours and is “processing more than 2B today,” according to the press release.
Earlier, Tether tweeted it will coordinate with a third party to perform a chain swap, but that the “Tether total supply [would] not change during the process.”
Justin Sun, CEO of TRON, tweeted that the TRON DAO Reserve bought 100M USDT with an average price of $0.982 in order to “safeguard the overall blockchain industry.” This move comes only a few weeks after Sun revealed TRON will be using $10B of their reserves to launch their own algorithmic stablecoin.
After Terra’s “Lehman Moment”, there have been increased discussions of stablecoin regulation in Washington. Janet Yellen, the U.S. secretary of the treasury, said it was “urgent” for Congress to pass new legislation to regulate stablecoins.
Signs of stress started to emerge on Wednesday in one of Curve Finance’s stablecoin pools. The 3pool, which usually holds roughly an equal amount of USDT, DAI, and USDC, breached 80% USDT dominance. This means people are selling USDT for DAI and USDC.
“[My] Intuition is that there is a small preference for many on-chain users, especially in the US, towards USDC,” Parsec Finance founder Will Sheehan told The Defiant. “Usually it’s so marginal it doesn’t manifest, but panics like this slam those spreads wide open,” he said, adding that avoiding USDT is a “max risk-off move.”
While 3pool is Curve’s third-largest pool at $1.8B, Charlie Watkins, project lead at Curve, doesn’t think 3pool’s imbalance towards USDT is cause for concern. “The Curve 3pool holds less than 2% of the Tether supply, so significant shifts like this aren’t a major concern,” he told The Defiant.
Still, the imbalance was a sign of broader market jitters about the stablecoin that has long battled with questions about its collateral.
Concerns about the stablecoin came to a head in a 2019 NYAG investigation alleging that Tether misrepresented the degree to which USDT was backed by fiat collateral. While Tether critics were proved right, the market was willing to trust that its reserves were adequate to ensure the stablecoin maintains its peg.
Today proved there’s a limit to that trust in times of extreme market stress.