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My thoughts on the displacement of the USDT peg against USD


jag216
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I've seen BC Backer and a number of other people discuss the potential 'loss' of Tether in the marketplace and the impact that this event would have on the rest of the crypto space with both trepidation and catastrophic consequences.

I'd like to briefly propose a counter-argument to this. I think that USDT losing its peg to the USD provides a lot of edges and opportunities for price recalibration, gives the opportunity for layer 1 and layer 2 protocol tokens to shine as currencies, and would potentially serve to decentralize the pricing oracle mechanisms due to simple bots losing their anchor currency.

First, we have never seen how the cryptocurrency space has reacted to the crash of a complex financial system, where cascading asset collapse crush all markets from high speculation to safe haven assets leaving no safe space to run to.

My primary interest in XRP was piqued after the 2008 crisis and the search for a highly liquid, highly transportable currency that might have the advantage of industry utility. We saw during the bailout crisis that when the economic powerhouses collapsed under the weight the bad debt they issued, the US government made these companies whole through a special discount window where they could get money at virtually interest in order to provide liquidity to retail and corporate customers. What they did instead was leverage the free money they were being lent back into bonds and other government guaranteed instruments that would make sure they earned a 2-3% yield on 0% money.

This affected the general consumer in that when money supply enters the markets, it is always worth the most to the entity that first receives it - new money can be leveraged and spent at todays value without adjusting for inflation. As the money then hits business and retail consumers, it is now spending into a market that already has adjusted pricing for inflation.

Banks get to allocate today's money at yesterday's prices. We are forced to spend today and tomorrow's money at today's prices.

When I first dug out my old BTC wallet and converted by .5 BTC into LTC, and then saw LTC fly, I looked all over the space for a place to park my gains. At the time XRP was as close to a stablecoin as I could find, but it also promised to have as its goal a few interesting characteristics: First, it wanted to be a global liquidity intstrument that could quickly transfer value between national currencies. The liquidity crunches created so many problems during the 2008 crash due to inefficiencies and trust issues in the markets, I recognized that having an asset that was easily redeemable in a variety of global currencies within minutes could possibly make this token a powerful defacto forex intermediary currency. In a crisis, XRP could be considered a safe haven asset as traditional currencies lacked the speedy rails and many people all over the world found their wealth was trapped in the traditional system during the financial crisis.

This use case cannot be understated, but in times of plenty it means very little. Being able to outrun the contagion of collapsing fiat currency markets isn't valuable when markets are stable - or when people are unaware of how volatile the value of their fiat currency actually is.

So I used XRP as a stablecoin to lock in my winnings, and on discovering how powerful an asset it could be ended up holding it, and buy more. A lot more. Much much more.

I think we can all agree that the correlation of BTC to other altcoins is primarily due to the hyperliquidity it has - being dominant in the trading pair space and having the most exchange support of any other cryptocurrency, it is constantly being traded against altcoin markets with the end game being translating any boosts in altcoin value into more BTC. Leveraged position against altcoin/btc pairs has provided a mechanism for BTC holder to siphon value from any altcoin boosts we've seen.

For many years there was a lot of hate for XRP, because if XRP gained exposure and notoriety as a potentially better intermediary utility token many slippage problems go away, and it is fairly easy to demonstrate that slippage during BTC transaction gaps created a lot of lucrative arbitrage opportunities that simply do not exist if your transaction times are a few seconds.

There are interests that saw the value of having XRP as a dominant trading pair, and Bitrue in particular has provided a great service against the grain of BTC maximalists interested in profiting from inefficiencies and friction within the cryptocurrency exchange ecosystem. Because the traditional fiat markets made a big stink about interacting with cryptocurrency exchanges and networks, folks always risked slippage and just general volatility prior to the introduction of stablecoins into the market.

Once stablecoins like Tether were added, it provided a centralized anchor built on the back of the global market dominance and reserve status of the USD. How this ever got established without boots on the ground and military assault on global offices I do not understand. If agents can break down the doors of Liberty coin and confiscate hard assets because the coin looks a little too much like official US mint currency, one would think that the government would be even more interested in providing roadblocks against a digital currency that de facto acted like a US dollar in the cryptocurrency exchange space.

Serving as a more efficient bridge, by virtue of being on the Ethereum network, Tether was poised to serve as the de facto reserve currency of the cryptocurrency space. BTC never served this role, and because of value volatility likely never will. It will act like a commodity. But this provided a lot of gas fees and support for the Ethereum network. While Tether as a token never could theoretically appreciate in value despite its higher utility, clearly it provided benefits to the protocols that hosted it and added utility to their use case.

Interesting how Tether never made its way to the XRPL. It has made its way to a variety of token platforms, but in general this is only to facilitate transferring USDT between exchanges in faster, cheaper manner.

But XRP already does this.

Competitive stablecoins on ERC-20 are excessive. Arguments can certainly be made about the varieties of underlying capital mixes and mechanisms for maintaining value, but from a consumer perspective there is little difference between ERC-20 stablecoins. Once Tether made its was to Tron and later Solana, ERC-20 Tether should have begun its sunset, though these networks have certainly shown issues.

All of this looks very similar to me to the original anchor point of gold-backer fiat currency mechanisms. While gold did have some price movement, for the most part it provided a measurable centralized peg of value against which other currencies. With the US dollar serving as the world reserve currency, price discovery of fiat currencies from other nations all over the world could reliable look to the value of the dollar and its set interest rates to establish their own market values and interest rates. Danielle Dimartino Booth has spoken before about why negative interest rates cannot be in the cards for the federal reserve, because if they go to zero all of the formulas for the rest of markets break - the dollar ceases to serve as the global reserve currency once interest rates go negative de facto.

But what happened when Nixon took America off the gold standard? What happened when the peg of the dollar was removed? The footage Adam Curtis pulled together of London trading desks dealing with the aftermath of the dropping of the gold standard is fascinating (Can't Get You Out of My Head, Ep 3).

If stablecoins disappear, CBDCs can certainly not replace them. And really, the loss of the USD peg to gold didn't destroy the currency at all. But it created a vast array of new market edges that required discovery, relationship building, management and eventually exploitation.

Foreign exchange markets as a valuable sort of global arbitrage was born in the this era, but cryptocurrency is different.

Cryptocurrency STARTED from this point of chaos - adding stablecoins was a regressive tactic to make the markets more palatable for traditional market traders who needed an easy way to maintain liquidity on exchanges without risking slipping values.

So what happens next? If USDT loses its peg to the dollar, it becomes like any other cryptocurrency, although its use case is greatly diminished. It serves as an arbitrage vehicle until folks simply don't understand its reason to exist.

We would return to the landscape of volatile trading pairs - endless edges for profit and loss - but we have a larger variety of protocols and coins now that can be used to efficiently transport value. And the utility of these tokens in serving as intermediary assets is not capped or pegged to a flawed debt-back fiat currency.

What happens when the first stablecoin pegged to the gold-backed ruble comes to market?

As slippage appeared in USDT charts for longer periods, I shifted my USDT into PAXG. Looking at the charts this seemed like the most logical step.

But as for the rest, we would not be returning to world where BTC is the only game in town that has the most dominant pairs.

We've got exchange tokens which function as de facto CBDCs within the exchange networks. BNB, BTR, etc, etc. The fact that these exchanges are beginning to list the coins of other exchanges is fascinating. This is like a country allowing you to open a savings account denominated in currencies of another country. Maybe this is part of out banking future as well. It makes a lot of sense.

I find it deplorable that the SEC lawsuit caused exchanges to drop XRP - because this act precisely undercut the opportunity that exists for XRP to act like a bridge currency in crisis. I am very thankful that Bitrue and Uphold were smart enough to maintain this asset, and to also have the foresight to bring on competitive token/protocols like Solana into the mix.

If US dominance as a global world currency depletes, stablecoins are already dead as they are now if they do not pivot to peg to whatever global standards develop. It would not surprise me to see parallel economies develop based on asset-backed currencies vs debt-created currencies - nor would it surprise me to discover trade barriers and friction insert itself between these networks - as the systems are ultimately incompatible - debt-based monetary issuance sucks the equity out of asset-backed systems. This is the fundamental basis of Gresham's Law: https://www.investopedia.com/terms/g/greshams-law.asp

We've lived in a world, and still do, where we measure our cryptocurrencies - which represent a broad spectrum of tokenomic policies - by what they are worth against a debt-based fiat currency. It may be frightening to try to determine what the value of the crypto you hold actually is, but it is very important for everyone who is a serious long-term investor in any cryptocurrency to do so. What is the public gain, the networking value, distribution, speed, reliability, etc. worth to you. What is the service rendered by the network worth to you in terms of security, information, entertainment, community, etc.

In a BTC/AR pairing, how much deflationary secure bitcoin is 1 Arweave of immutable WEB3 digital storage worth to you? How much distributed 3d rendering power is worth trading to fill that arweave space with art you've designed? How much Sol is it worth t be able to mint an NFT entitling people to that art? How much Vid coin to give people access to the digital files that created it (as Beeple has done).

As global reserve currency standards are bound to shatter and reform, whether you lose the anchor of false security known as Tether now or later doesn't matter. It is going to happen - not as soon as you think, and yet far faster than you expect (as Christine Lagarde has said).

Had XRP not gone through such massive disinformation caompaigns, and had USDT not entered the chat, I believe XRP would be worth much more today. But there wasn't a level playing field - and there never is - and now as traditional finance embrace interconnectivity with traditional fiat currencies and cryptocurrencies, it seems that - aside from sometimes questionable yield mechanisms - stablecoins are likely to be replaced by CBDCs across excahnges as a means of encouraging and/or dissuading people from different countries from participating on global exchange platforms.

This is going to be dumb for awhile. I can imagine the SEC trying to prevent any exchanges that have not registered with them from listing or holding FedCoin.

But as more of the retail universe accepts cryptocurrencies, who cares? Who really wants to HODL an infinitely printable FedCoin that is programed to self-destruct if not spent within 30 days, or can't be spent on things the government deems you cannot have, or that provides all of your spending and consumption habits to manipulative officials?

So my immediate thought is that the days of stablecoin utility are already numbered. It's time to think beyond fiat - get back to our roots - know what we hold.

At least that's the way I see it.

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