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Tether (USDT) is a controversial stablecoin, to say the least. Having been embroiled in several incidents — most notably concerning its reserves — Tether has somehow managed to stay afloat. And even become the most used stablecoin on the market.
Even a year ago, investors and analysts would not have been able to predict Tether’s current position. Some even believe that Tether is set to overtake Ethereum (ETH) in terms of market cap (it has already overtaken XRP). Although, as a stablecoin, its market cap is not quite as significant a factor as something like Ethereum.
It’s come a long way and taken a little effort to improve its standing in the community’s eyes. However, it continues to generate controversy in many ways. It seems like Tether finds trouble one way or the other.
The most prominent of criticisms in recent times concerns Tether’s decentralization or lack thereof. As we shall, Tether has undertaken several actions that put the ethos of decentralization into question. This is a market that was built from the idea of being democratic and decentralized. Some of Tether’s recent actions, however, are reminiscent of the very problems digital currencies are trying to solve.
Tether recently blacklisted several Ethereum addresses, now amounting to 100 and containing a total of $46 million. Before we dive deeper into this, it has to be said that at least some of these addresses belong to bad actors. Perhaps there is some saving grace in the fact that Tether has blacklisted some addresses, but the fact that it is possible makes one wonder about future incidents. A bad actor or not, it is not reassuring to users if their funds can be frozen.
If such an act is possible, one can imagine national authorities asking for addresses to be blacklisted and frozen. This goes against the very reason why many people have entered the cryptocurrency market. It is important that it remains outside the sphere of influence of current market forces.
As it stands, Tether functions sort of like a bank — and we know how deceitful and opportunistic banks can be. That’s not to say that Tether operates like a bank — but it has none of the positives that a more decentralized stablecoin does.
Now, this is a far bigger concern for several investors, especially since we cannot be totally sure of Tether’s reserves. Tether has printed millions of dollars worth of USDT in the past 2–3 years, and shows no signs of slowing. There are even talks of this figure, hitting at least $100 billion.
In total, Tether has printed over 3.3 billion USDT. In January 2018, Tether had printed $400 million in four days. This year in May, it had printed $480 million in just five days. In July, it had printed $300 million. There are several other such occasions. This Twitter account covers these developments thoroughly. Can Tether really back all of these funds up?
This is a serious concern for investors. Some are worried that Tether lacks the reserves to back its USDT supply, a justifiable thought. We have no way of knowing this without a proper audit, and the ramifications would be dire if it lacked the reserves. Some have said that it could severely hamper the cryptocurrency market’s growth.
Tether may be a stablecoin, but it still goes against the principle of decentralization to print what seems like an endless supply of tokens. What it really seems to act like an arbitrage mechanism, which in the long seems like can come back to bite Tether.
Most importantly, fiat reserves (now with “additional” assets) are what back Tether, which does not make it decentralized at all. MakerDAO is a good example of a decentralized digital currency variant of fiat currencies because it requires crypto-collateral.
When Tether surreptitiously changed its policy last year, it inflamed the issue. The new policy stated that the cryptocurrency was backed by both fiat reserves and “equivalents”. Several reports last year, and a statement from a lawyer in April 2019, confirmed that only 74% of the asset’s supply was backed by cash securities. This is not the kind of transparency that is championed by cryptocurrency proponents.
There is a lack of transparency with Tether, which is at the heart of the criticism surrounding it. As the largest stablecoin provider, it owes it to the trading community to be more transparent in its dealings. Investors do not want to see big projects be ambiguous when it comes to their financials, certainly not one that could have a big impact on the market.
Take a stablecoin system like that of MakerDAO, for example. While it has shortcomings of its own, it is at least decentralized, with DAI backed up by collateral. It has assets to back up an increasing supply, which we are unsure about with respect to Tether.
If you need more convincing, just think of how Tether is able to recover cash at will. On its own, this is alright, but one wonders about future scenarios where this power can be abused. Such incidents have happened in fiat markets, but the digital currency market is actively working towards a system where authorities cannot arbitrarily freeze or control accounts. Again, there is no implication that Tether has done that in the aforementioned case — but you certainly can’t call it decentralized.
This is not to say that Tether could not do something about its current situation. For one thing, it could release a proper audit of its reserves, putting to rest one of the biggest concerns for traders. It could also do more to assuage traders of its printing spree — does it truly enough to back all of it?
Tether is here to stay, that’s for sure, and it’s likely to grow considerably in market cap in the medium-term future. But the least it can do is address some of its shortcomings, if only for its own sake. Market infrastructure is still forming, so there is time yet for competitors to gain some ground on Tether.
Although there are militant critics of Tether, not all the community is asking for draconian action to be taken. We are playing with definitions here, but anyone who speaks of digital currencies in good faith will not call Tether a decentralized currency.
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