Secondary Stablecoins Capitalized on Lapse of Tether (USDT) Peg

Secondary stablecoins were able to capitalize on Tether slipping from its peg, following the collapse of TerraUSD last month.

On May 12, the largest stablecoin Tether briefly dipped from its $1 peg to $0.95, causing investors to redeem $10 billion in the following weeks. As a consequence of this lapse, the second and third most used stablecoins were able to gain further users.

The largest stablecoin after tether, USD Coin, gained $5 billion in market value, while Binance USD, which became the third-largest stablecoin, accrued another $1.4 billion in value, according to CoinGecko. Having risen from roughly $11 billion in June 2020, stablecoins have since risen to $160 billion in market value. 

However, Tether still remains the largest stablecoin by a significant margin, with a market value of $72 billion. On the world’s largest cryptocurrency exchange, Binance, many tokens and derivative contracts retain being quoted and collateralized in Tether. Meanwhile, the market capitalization of USD Coin stands at about $54 billion, while Binance USD has $18 billion.

Tether’s black box

The shakeup was caused by the collapse of TerraUSD, which had previously been the third-largest stablecoin. Since then, investors and regulators have become more concerned about the risk of a potential run on Tether. If investors chose to redeem Tether en masse, regulators worry that a fire sale of the traditional assets it holds as collateral could destabilize financial markets. 

Tether claims to maintain its peg to the US dollar by an equivalent amount of reserves that includes commercial paper, bank deposits, precious metals, and government bonds. However, Tether hasn’t disclosed its reserve investments in detail, which could potentially contain several illiquid or leveraged assets. 

Based on the lack of knowledge and information about its reserves, Binance founder and CEO Changpeng Zhao said he regards tether as a high-risk stablecoin. “It’s a black box to most people, including myself,” he said.

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