The demise of Terra UST has harmed the reputation of stablecoins as well as the broader crypto sector. Tether, on the other hand, claims to be different in an attempt to disassociate itself from the impact.
Tether notes in a recent blog post that, as a collateralized stablecoin, it “has nothing in common” with UST, which relies on an algorithm to keep its dollar peg. In the case of USDT, collateralized means that the token is backed by assets such as dollars and cash equivalents.
“While UST is referred to as a stablecoin, it has nothing in common with collateralized stablecoins like Tether USD₮. UST is an algorithmic stablecoin.”
Billions of dollars were lost in the Terra debacle, the consequences of which will be felt for years to come. Can Tether, on the other hand, restore market confidence?
In the firing line: algorithmic stablecoins
According to the blog post, despite the years of instability in cryptocurrency, Tether has remained the ‘primary form of dollar-based liquidity.’
It goes on to say that, being a collateral-based stablecoin, USDT holders can exchange their tokens for dollars 1:1. And the company has always been able to pay its redemption commitments since its beginning.
“Tether has never failed to process a redemption request for USD at a value of $1(R15.91) per USD token since 2015.”
While USDT exchange rates may fluctuate from time to time, there is no risk of de-pegging as long as Tether may redeem tokens at face value.
The post went on to criticize algorithmic stablecoins, claiming they had a poor track record and several examples of failure. It also quoted a University of Calgary research that characterized them as naturally fragile and in a perpetual state of vulnerability.
Tether was never de-pegged, according to Bitfinex’s CTO
Tether deviated significantly below its $1 (R15.91) peg price on May 12. The USDT price fell as low as $0.9409(R14.97) on that day, sparking fear in markets already hurting from the UST crash.
Nonetheless, Bitfinex CTO Paolo Ardoino addressed the problem later that evening in a Twitter Spaces chat, clarifying the technical differences between collateralized and algorithmic stablecoins.
Ardoino also stated that Tether was adequately liquid to meet redemptions at $1(R15.91) even amid the panic selling. As a result, notwithstanding the variations in exchange rates, there was never a difficulty.
Soon after the public address, USDT was restored to its peg price.