Tether's Stablecoin USDT Has Been Depegging
USDT, a stablecoin designed to maintain a stable value by being pegged to the U.S. dollar, has been experiencing depegging throughout August.
Tether's USDT has been experiencing depegging throughout the month of August, according to recent research by Kaiko. Stablecoins like USDT are digital currencies designed to maintain a stable value by being pegged to a particular asset, such as the U.S. dollar. However, USDT has been losing its peg to the U.S. dollar, a situation that has been linked to various factors including Tether's redemption fee, reduced market liquidity, and the minimum redeemable amount requirements set by Tether.
USDT has been depegging all month. Why hasn't anyone noticed?
In this week's Deep Dive we propose a novel method of rating stablecoin depegs, check it out below ⬇️https://t.co/o8LuiTMSqW — Kaiko (@KaikoData) August 31, 2023
Kaiko analyst Riyad Carey introduced a new metric called "depeg severity," which is based on a stablecoin's total trading volume. According to this metric, the severity of depegging decreases as trading volume increases.
While other stablecoins like TUSD, BUSD, DAI, and USDC have also experienced minor depegging events, they have been relatively more stable and less sensitive to deviations from the U.S. dollar. This suggests that the depegging issue is more pronounced for USDT.
The most severe depegging incident for USDT occurred on August 7, when it traded at a 2% discount compared to its $1 peg on nearly every trading platform. This event followed reports of approximately $500 million in net selling of USDT across major crypto exchanges like Binance, Huobi, and Uniswap.
According to analysts, USDT's depegging problem has incentivized most holders to sell it on exchanges rather than redeeming it for USD via Tether. This is due to the redemption fee and minimum requirements set by Tether. Currently, Tether charges a 0.1% fee for fiat withdrawals over $1,000, meaning that USDT is redeemable at $0.99, with the minimum fiat withdrawal or deposit set at $100,000.
Interestingly, USDT has lost its peg during a period of low market volatility. Unlike most past instances where depegging occurred due to high liquidity, this time low liquidity was the main culprit. The low volatility made it difficult for the market to absorb the sale of USDT.
Carey said, "The obvious solution is for Tether to remove its redemption fee and minimum." He further elaborates that Tether's reported Q2 profits of $850 million would not be significantly impacted by eliminating the fee. The only way this could affect profits substantially, he suggests, is if Tether anticipates that making redemptions more affordable would lead to a considerable reduction in USDT's supply.