Looking ahead to USDT, the king of liquidity and the dream of a digital dollar

Written by: Ping

Looking back at the predictions from major institutions for 2022, more focus was placed on the transition of hotspots in underlying public chains and application layers. One often overlooked but equally important corner is------stablecoins.

The US dollar stablecoin is now the foundation of the entire market's prosperity, with all the glory stemming from liquidity, where the king remains USDT, holding over half of the market share.

A strange phenomenon is that, although there are occasional doubts about USDT, for most people, it is indispensable.

The issuer Tether has long faced criticism regarding insufficient and opaque collateral assets, with some viewing it as a potential systemic risk in the blockchain industry. Last year, Tether actively responded to related rumors, revealing more details about its collateral for the first time. In the asset quarterly report audited by Moore Cayman published in August, it was evident that Tether primarily used commercial paper and certificates of deposit as collateral, accounting for the vast majority of its assets. Tether emphasized that most of the notes are highly liquid and of good credit quality (Moody's A2 or above) and published another quarterly report audited by Moore Cayman in December, while also "daily updating the reserve asset balance sheet" (https://wallet.tether.to/transparency), stressing that reserve assets are typically greater than the amount of stablecoins issued.

Beyond the crypto realm, the influence of USDT is gradually spreading into the real world.

In February last year, USDT even became the legal tender of Myanmar's shadow government, significantly solidifying the US dollar's status as the global hegemonic currency and enhancing its influence in global politics and online activities.

Connor Spelliscy, founder of the American blockchain policy lobbying group Blockchain Association, believes that the existence of stablecoins will not threaten the US dollar; rather, it can expand the circulation of USD and create more demand for its use. He further pointed out that despite the controversies surrounding the largest stablecoin USDT, the lack of a formal digital currency plan from the US Federal Reserve, combined with various countries competing to issue central bank digital currencies (CBDCs), makes the overly strict regulatory approach towards private stablecoins in the US quite unwise, potentially pushing the blockchain industry overseas or towards other central bank digital currencies, making moderate regulation of US dollar stablecoins even more difficult.

The substantial influence of stablecoins like USDT in the global market has become closely intertwined with the overall development of the crypto industry and the global political and economic landscape, significantly constraining the direction of US regulatory policies on stablecoins.

Overall, the author believes that the global stablecoin market will continue to grow in 2022, and compared to other stablecoins like USDC, PAX, and TUSD, USDT has stronger liquidity and global influence, a trend that is currently hard to break.

Market Logic of Stablecoins

The value of stablecoins primarily lies in two aspects: first, to meet the liquidity needs of the cryptocurrency trading market, creating a trading currency with stable consensus value that circulates within the cryptocurrency market, with US dollar stablecoins, especially USDT, gradually becoming the mainstream consensus in the cryptocurrency trading market, holding the largest market share in centralized exchanges; the second type serves as an alternative to traditional dollars. In recent years, due to the global expansion and popularization of the cryptocurrency market, as well as the liquidity of USDT in stable redemption, US dollar stablecoins are increasingly viewed as alternatives to the US dollar by many users. The advantages of USDT are also quite evident, as it offers significantly better transaction speed and fees for dollar exchanges in cross-border trading activities compared to traditional finance.

In summary, stablecoins like USDT are present in both the on-chain and off-chain worlds.

The market characteristics and competitiveness of stablecoins differ from other cryptocurrencies that combine the nature of both money markets and stock markets. The operation of stablecoins deliberately excludes the price risks associated with stock markets, seeking only to possess the characteristics of money markets, primarily to provide stable liquidity.

As Nobel laureate Bengt Holmstrom discusses in "Understanding the role of debt in the financial system," the money market and stock market serve distinctly different roles and market logics. The stock market serves risk, where market participants are highly sensitive to information and actively demand transparency from companies to assess stock value and risk, reflecting current price consensus in the price discovery mechanism.

In contrast to the stock market, the money market does not serve risk but rather liquidity. Under normal circumstances, the money market does not have a price discovery mechanism to respond to different information valuations. Participants in the money market care about the liquidity and universality of money and have reached a certain consensus of symmetric ignorance regarding excessive collateralization of money issuance, showing insensitivity to information.

Holmstrom argues that opacity is an inherent characteristic of the money market; excessive public information can disrupt the existing state of symmetric ignorance, making previously insensitive market participants sensitive to information. This can lead to panic or frenzy, introducing unnecessary price discovery mechanisms that harm the original liquidity and price stability of the money market.

Therefore, the standard for measuring the development of stablecoins should not be to scrutinize whether there are sufficient asset collateral or to question transparency, but rather to look at liquidity. This is why the TerraUSD stablecoin UST, despite having no substantial asset collateral, still relied on the Terra ecosystem and the liquidity brought by connecting to IBC, causing its issuance to soar to tens of billions of dollars.

USDT emphasizes through its "Asset Audit Quarterly Report" and "Daily Updated Reserve Asset Balance Sheet" that its issuance has always been in a state of over-collateralization, and that the collateral assets are reputable, which is sufficient to maintain the market's consensus of symmetric ignorance.

The current state of transparency of USDT may not harm liquidity; in fact, it may help increase liquidity, aligning with the inherent logic of the money market, forming an effective consensus in the money market, and accelerating the global expansion of USDT.

Liquidity Advantage

The liquidity advantage of USDT is primarily reflected in the number of trading pairs on-chain, trading depth, and the depth of OTC against fiat currencies, as well as its off-chain usage.

According to trading volume data from Coinmarketcap on December 30, USDT's daily spot trading volume was $64.7 billion, accounting for 87.13% of the total trading volume of all stablecoins at $74.3 billion, far exceeding the second-largest trading volume of $4.3 billion for BUSD and the third-largest of $3.6 billion for USDC.

Although the recently surging TerraUSD stablecoin has seen its market cap rise significantly to $10 billion, its trading volume is only $129 million, with a trading volume/market cap ratio of just 1.3%. In contrast, USDT has an 83% ratio, indicating that most UST is not circulating but locked in DeFi mining pools, showing a clear difference in the monetary attributes of UST and USDT.

Currently, USDT still has the most trading pairs on centralized exchanges, making it the preferred stablecoin for converting between crypto assets. Additionally, in local exchanges outside North America, most only provide trading pairs for USDT against local fiat currencies for fiat deposits, and the OTC market is similarly dominated by USDT. The global liquidity and universality of USDT are its irreplaceable advantages; while other stablecoins' issuance mechanisms may better meet regulatory requirements in North America, they struggle to satisfy the liquidity demands of the global market, making it difficult to shake USDT's position.

Most trading pairs for USDT against local fiat currencies not only have stable liquidity but also, compared to the exchange rate of USD against local fiat currencies, the convenient USDT is often more valuable than USD. For example, in Taiwan, the most popular fiat deposit venue MAX only supports USDT for fiat-to-stablecoin exchanges, where USDT/TWD is 27.83, while USD/TWD is slightly lower at 27.64, creating a subtle state where USDT is long-term more valuable than USD. A similar premium phenomenon is also observed in the Binance exchange for the Turkish lira TRY against USDT, further enhancing USDT's trading volume globally.

In the cryptocurrency acceptance report released by Chainalysis, several leading countries, including Vietnam, India, Pakistan, and Ukraine, heavily rely on the OTC market denominated in USDT for deposits. Local centralized exchanges in India and Ukraine only provide trading pairs for fiat against stablecoins in USDT, with other stablecoins like USDC and GUSD having almost no liquidity for exchanging USDT against local fiat currencies.

Looking at the trading volumes of various trading pairs on the largest exchange Binance, the preferred choice for most fiat-to-crypto conversions remains USDT, rather than directly exchanging for BTC or ETH. Even on Binance, trading pairs for fiat against BUSD are still a niche choice, with trading volumes far less than USDT. The global liquidity of USDT and its connection to real economic life is currently difficult for other stablecoins to challenge.

The Dream of Digital Dollars

Currently, in the crypto space, USDT's biggest competitor is USDC. Although USDT and USDC seem to share the same goal: to become a de facto digital dollar, their growth logics differ.

USDT relies on trading scenarios (which require higher liquidity), while USDC's growth largely depends on the demand brought by DeFi, such as lending and yield farming.

The continued high growth of USDC requires further penetration into the DeFi ecosystem; however, a current growth challenge is that, in a parallel public chain landscape, various public chain ecosystems are attempting to launch and promote their own dollar stablecoins. BSC has BUSD, Terra and Cosmos ecosystems have UST, and the new DeFi gang has MIM, which to some extent may weaken USDC's influence in the DeFi ecosystem.

Last year, USDC also faced a trust crisis. USDC had promised that its reserves were entirely composed of US dollar cash. A reserve report released by Circle in July 2021 showed that 61% of its reserves were in cash and US Treasury bonds, while the remaining reserves included Yankee certificates of deposit (13%), commercial paper (9%), corporate bonds (5%), municipal bonds, and US agency bonds (0.2%). This drew criticism and skepticism, leading Circle to announce that it would convert USDC reserves to 100% cash and short-term US Treasury bonds. In October, Circle stated it received a subpoena from the SEC requesting some project information.

Although both are free riders of US dollar hegemony, USDT's current global liquidity and high usability significantly reinforce the US dollar's status as the hegemonic currency for pricing digital assets. The existence of stablecoins encourages a global increase in the number of digital dollar users, strengthening the dollar's position and penetration in the online world and globally.

Stablecoins not only function within blockchain exchanges but also have a tremendous impact on the real-world political economy. The rapid and low transaction fees of USDT have become a tool for cross-border transactions to avoid the traditional bank fee gouging, and it has also become a hedging tool in regions with significant currency fluctuations, even directly replacing local currencies.

In December 2021, the shadow government National Unity Government (NUG), formed in opposition to the Myanmar government, announced USDT as its official currency to avoid surveillance while circulating domestically, and also issued government bonds denominated in USDT.

Last year, during the severe depreciation crisis of the Turkish lira, a large amount of TRY was exchanged for USDT as a hedge. Recently, some dental clinics in Taiwan have begun accepting USDT for treatment fees, indicating that the stable value of USDT has formed considerable consensus globally, generating many practical applications for transaction payments, which is irreplaceable by other stablecoins.

Moreover, the US government's seemingly tough stance on stablecoins may just reflect the position of a minority of conservative cryptocurrency policymakers, while the actual situation is more uncertain. In a recent Senate Banking Committee hearing on stablecoins, Democratic senators Elizabeth Warren and Sherrod Brown argued that all stablecoins are potential dangerous scams that should be vigorously cracked down on, while Republican senator Patrick Toomey proposed a harmonious regulatory framework that encourages the development of blockchain technology.

Connor Spelliscy, founder and researcher of the American blockchain policy lobbying group Blockchain Association, believes that the existence of stablecoins will not threaten the US dollar; rather, it can expand the circulation of USD and create more demand for its use, helping to maintain US dollar hegemony. A strict crackdown or rejection of stablecoins will only harm the current status of the dollar.

Therefore, from a macro perspective, before a digital dollar stablecoin, fully controlled by state power, can replace USDT's position, excessive regulation of the current largest US dollar stablecoin USDT would be an unwise move that harms the dollar's hegemonic status and the global influence of the US, and the likelihood of this actually happening is low.

However, USDT's absence in the booming development of decentralized applications is another concern for future development. Currently, there is a lack of star Dapp application services centered around USDT; only relatively basic DeFi services utilize USDT, while decentralized exchanges like Uniswap focus on WETH and USDC, and PancakeSwap on WBNB and BUSD. The emerging NFT and GameFi sectors this year also rarely price or transact in USDT, which is a concern.

In summary, USDT has excessive asset reserves and possesses an unparalleled liquidity advantage, making it not only the core stablecoin for centralized trading but also gradually penetrating off-chain, becoming a bridge connecting the crypto world and the fiat world, serving as a de facto digital dollar. This trend and position are currently difficult to break.