Tether Peg Hiccups Are Nothing New

The price of stablecoin Tether (USDT) briefly fell to 97 cents on Thursday, according to data compiled by Blockworks, raising fears regarding the stability of its peg to the US dollar.

A downtrend in cryptoasset markets — this week spurred by the solvency crisis of FTX and Alameda Research — leads traders to seek safe haven in stablecoins.

The sudden price drop of Tether this morning led put traders on alert. However, during periods of heightened market volatility, temporary price wobbles are not uncommon.

USDT is considered the backbone to the cryptoasset ecosystem, making up almost 9% of the entire digital asset market capitalization. The coin is supposedly backed 1:1 by US dollars and highly liquid assets — which maintains its “peg” to the greenback — although Tether’s track record when it comes to transparency has been criticized in the past.

“During periods of market volatility, the trading price for USDT that is quoted on exchanges may fluctuate,” the company said in a statement.

In fact, in May, after the implosion of the Terra ecosystem and its UST stablecoin, the price of USDT also dipped.

“This happens because there is more demand for liquidity than exists on that exchange’s order books and has nothing to do with Tether’s ability to hold its peg nor the value or makeup of its reserves,” the company said.

Adding that, “industry critics and skeptics alike have done themselves an injustice by remaining uninformed and jumping to conclusions.”

Tether’s price is also reflected in on-chain liquidity, chiefly via the Curve 3Pool on Ethereum — which holds a significant amount of liquidity on the three largest stablecoin assets, DAI, USDC and USDT — where changes to supply and demand can influence the price of Tether.

Early Thursday, Curve’s 3Pool became unbalanced, a sign that some industry participants began shorting Tether.

Curve 3pool getting quite unbalanced. Rather heavy on the USDT! https://t.co/kwtfvv2anJ pic.twitter.com/J3CtcFgZ33

— simian_derivative (@simianderiv) November 10, 2022

A higher percentage of USDT in the pool reflects a drop in the relative value of USDT compared to USDC and DAI.

Generally, the ability for large market participants to redeem USDT for dollars makes such de-pegs short lived.

Indeed, chief technology officer of Tether, Paolo Ardoino, tweeted that the company had “processed ~700M redemptions in [the] last 24h. No issues. We keep going,” he said.

The company further confirmed that it had extended no credit towards FTX or Alameda Research — and that its tokens were 100% backed by reserves which exceed the liabilities.

As of writing, the proportion of USDT in the Curve pool has dropped back to 67%, with about $670 million in liquidity available.

“Trust is built over years, but can be lost in moments. It’s easy to wonder who else could fail if large and trusted players suddenly go under,” Tether said. “Tether will continue to dispel fears and speak to the concerns of the community.”

Since the dip earlier this morning, the price of Tether has rebounded to $1.01.

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