The Tether/Bitfinex controversy sheds light on how far the cryptocurrency world has come in the past couple years. For those who aren’t big traders or aware of how Tether works they issue Tether tokens and claim that each tether token (USDT) is backed up by one dollar they have in a bank account. This provides a useful tool for many cryptocurrency traders who can use the consistent unit of account that the U.S. Dollar provides. In practice, Tether tokens are not redeemed for dollars but rather traded as an intermediary between cryptocurrencies.
However, in three years, the Panamanian domicile Tether has never issued a fully public audit of its account. This lack of transparency is exactly what the public blockchain protocol was intended to prevent. It’s applying banking 1.0 to a new paradigm. It’s like inventing the automobile and then having it propelled with a horse. Wait, humans actually did that..
What’s the risk here? At worst, Tether has been ‘printing’ Tether tokens without sufficient collateral in dollars to support them (sounds familiar). If faith in Tether wanes considerably this could cause turmoil in the cryptocurrency markets, at least in the short term. For the time being, Tether is sticking to its guns and no damning evidence has come out to the public.
This is a lesson in the risks of applying old institutional methods to a new paradigm. Tether is essentially functioning like a traditional bank by holding deposits and issuing bank notes. Moral hazard. The temptation will always be for Tether to issue more tokens than it has dollars on reserve. This outcome is less a condemnation of Tether than a condemnation of the system which allows this behavior – traditional banking.
Enter bitUSD, a digital asset pegged to the purchasing power of the USD. Like Tether, one bitUSD is backed by collateral (a cryptocurrency – bitshares). Unlike Tether, this collateral has security and transparency baked in because all activity stays on a public blockchain. I routinely borrow bitUSD (and other currency derivatives) into the market and the price I pay is locking up > 1.75 x the value of the debt as collateral. E.g.
Debt -- Collateral -- Ratio -- Call Price
Count on the cryptocurrency community paying attention to Tether over the next few weeks. But do yourself a favor and get yourself set up with a Bitshares account.
Resources
More background on Tether/Bitfinex - https://medium.com/@bradfrankel16/why-a-tether-audit-would-ruin-bitcoin-96da091cc154
Updated Resources
Charlie Lee (Developer of LiteCoin) speaks about this - https://twitter.com/SatoshiLite/status/936325730383695872
