Hopes, Expectations, Black Holes, and Revelations — or How I Learned To Stop Worrying and Love Tether
Three years ago I wrote a short piece which describes the demand for Tether to exist from an economic sense and not its perceived utility. It’s time for an update because things have, as they always do in the cryptocurrency space, evolved.
I’ve been formulating this follow up for some time, but a recent Twitter thread by a journalist covering the space who is unafraid of controversy — Amy Castor — where she called out certain individuals in the space for their clear ethical conflicts of interest devolved at points into a discussion about Tether. It’s worth noting that when said individuals were pressed on the topic they ceased to participate.
There’s a lot of outdated information and thinking out there, so let’s update thinking about the single most rage triggering asset in cryptocurrency, but first some history just to keep everything in context.
Once upon a time 1 Tether (USDT) was said to be redeemable for $1. Bitfinex and Tether lost banking access which forced them to find custody for over a billion dollars in cash which NO BANK ON THE PLANET WOULD TOUCH. The reason why ended up becoming clear when the wildcat bank backing Tether was raided by Interpol for laundering of criminally obtained assets to the tune of about $850,000,000. The percentage of that sum which was actually Bitfinex is a matter of some debate but there’s no sufficient reason not to think it was all theirs. To avoid the risk of further digression we will skip over the fact that Bitfinex had somehow co-mingled funds with human traffickers and drug lords … but I’m now getting ahead of the narrative.
Now there’s a big fucking hole inside a black hole inside the Bitcoin black hole which is a serious problem, but at the same time the nature of the problem also presented a solution: instead of backing Tether in actual dollars, stuff a bunch of cryptocurrency in a basket to the valuation of the cash that got seized and viola! A black hole is successfully filled with a black hole, creating a stable asset.
Bitfinex is the first financial firm to successfully divide by zero and here’s how they did it. With a few extra steps taken shortly after that which I am about to explain, Tether has now become impossible to shut down without ending the entire industry as we know it.
This is the abbreviated version because, honestly, if you are still reading and understand the context I’ve laid out you know how to verify everything I am about to relate. The technique involved is what I have termed “black hole rollover” and it’s how we get from the blog post I wrote three years ago to where Tether is an unstoppable force of nature.
Starting The Engine
There’s a bit of premeditation which might be indicated by the timeline of events. In June of 2016 the USDT printer went online for the first time in any significant volume and we saw Bitcoin cross $18,000 for the first time about 18 months later as utilization of USDT as a base pair began to become a standard across exchanges.
Then… tragedy strikes! Bitfinex is hacked 90 days after Tether is announced and then the scheme I outline goes into full swing in August 2016.
Black Hole Rollover #1 — BFX
Given Bitfinex had already assumed the burden of the Bitcoin Black Hole the loss of funds from a hack they suffered August 2016 made the situation of managing the black hole too complex to solve with just manipulating spot prices and cycling off of the resulting options volume. To fill the need for an asset to reclaim the value now missing, the BFX token was offered which was representative of an equity obligation in Bitfinex to the tune of the funds lost in the hack with the promise of a buyback at USD value of the equity it represents. In 2016 that buyback was fulfilled for US dollars but it is also worth noting that the hacker was never caught or even proved to exist. If we assume the “hacker” was Bitfinex — who one might assume initiated this scheme to fill the Bitcoin Black Hole and there’s no evidence indicating to the contrary — then their ability to liquidate those assets at some point in the future is what de-risked the rest of the scheme as we have seen it evolve.
It’s worth noting that this year the funds “stolen” from Bitfinex are being moved to unknown wallets as you read this. If we assume this theory is accurate to some degree, the seemingly staggering $400,000,000 reward Bitfinex has offered for those tokens is a safe bet since nobody will ever claim them...except for perhaps Bitfinex. In this theory the “hacker” would negotiate to return the funds (ostensibly because they recognized you can’t hide on a blockchain), which would allow Bitfinex to pay its principals $400M under the table, replace the assets, and close out this chapter with a nice, neat bow and nobody would be the wiser.
Black Hole Rollover #2 — “Unus,” said Leo.
The 2017 boom of the ICO market provided the asset pairings and churn which USDT required in order to find market traction and begin to pool in trader accounts.
However it’s at this time USDT started to have it’s own problems, which would be the seizure of cash by Interpol I mentioned previously. Having lost banking access as well as about billion dollars in liquid cash, one might imagine that the creators of Tether would be under some pressure to find a means to free up the cash liquidity which backed USDT while still providing a plausible explanation as to why USDT still has any value.
Flush with cash from the asset sales mentioned previously, Bitfinex pays out any existing USDT holders which are able to demand funds from them and then changes the nature of Tether completely. Instead of being backed by USD it is to be backed by a basket of assets, which is not unheard of in finance. It’s assumed those assets are cryptocurrencies of various types but no accounting of any kind is ever offered.
So what’s in the basket? People assume it’s Bitcoin and other like assets which may very well be true, but that’s where the perception of what USDT is begins to be too narrow to see what’s really going on.
The first asset in the basket could very well be the BFX tokens repurchased from the market. That would provide a good start, but it’s not possible to generate inflation except on an annual basis (without raising eyebrows) and a new asset which Bitfinex controlled completely would solve the problem.
Enter UNUS SED LEO in 2019. More cash, more assets to play with, more markets to dump on, and a wholly controlled asset which can be placed in the USDT basket and then pumped to allow for new printing of USDT.
Yes, correlation is not causation and the market cap of LEO is only $1.3B, however what LEO provides is just that extra added amount of volume and energy to make the entire system operate as we see it in 2020. LEO provides the ability to expand and contract the basket of value behind USDT and not require the addition of purely high value assets like Bitcoin and Ethereum or constantly modifying the equity value represented in BFX tokens.
Closing the Hole
We’re not quite done yet, however. There’s two pieces missing from this picture which makes Tether unstoppable even if Bitfinex itself suffers corporate death while at the same time sealing shut the Bitcoin Black Hole FOREVER.
Keep in mind that at this point USDT is completely disconnected from any real cash reserve and is backed wholly in assets which can be added, removed, or the basket can be replaced entirely. Also keep in mind that in 2020 USDT is the #1 traded asset by volume in the entire industry.
The first of the two missing pieces is that Tether expanded the number of base protocols in which it exists to Ethereum, TRON, and EOS (another Bitfinex sponsored monstrosity which is suspected to back USDT) with “wrapped” versions on about every other blockchain which can support them. Bitcoin only holds about $1B worth of the $20B currently in circulation, with Ethereum now hosting the largest supply topping out at about $15B.
As the 2017 ICO boom provided the base pairs to give Tether its initial market presence, so too does decentralized finance not only create the trading options necessary to soak up additional liquidity but also allows for that value to be “locked up” and effectively deflate the USDT in circulation.
The Bitcoin Black Hole exists because the exchange which supports the price of Bitcoin by volume also collects fees in Bitcoin (which is how they make money) and those fees must be converted to cash (read: dumped) in order to realize profit and pay bills.
Bitfinex never has to dump another sat on the markets, ever again. It simply goes into the basket, which adds to USDT value, which allows the price to be pumped higher, which allows for more trading, which allows for the collection of more fees… you see where this is going.
Because we have a universe of assets and galaxies of ways to trade them…the Black Hole itself has been spread so thin that it isn’t even an economic concern much less an existential threat to the ecosystem.
Now we get to what you’ve been waiting for: the explanation of why this will last forever or until regulators destroy the whole industry.
Magic Internet Money
Tether and Bitfinex are not the same corporation. Tether controls the issuance contracts for all USDT in circulation on all blockchains, but Bitfinex manages the backing assets.
If Tether dies, the keys are passed on to another LLC and life goes on.
If Bitfinex dies, Binance can then make a deal with Tether to back the network with their own basket.
If Binance dies, Bittrex can then replace them.
If Bittrex dies, OKCoin can then replace them.
So while it’s obvious the market continues to shrink and must deal with the inevitable turmoil all of those exchange closings would create… USDT very well has every chance of outliving all of them.
That’s it. Tether wins.
Postscript
One might ask what the value of the hacker moving those coins around in 2020 would be and what they could possibly be doing with them.
The easiest means of dealing with these coins would be to sell them to another large exchange which would be able to hold them in cold storage (a single address that never moves) and be able to monetize them. This, of course, would require the exchange to look the other way but we’re talking about $400M of an asset which is already hard to find in amounts over $20M. Even a “good” actor might be tempted to bend the rules a little if they think the risk is worth the reward.
Given this is about a half a billion in assets I wonder who might have had the need this year to find $400,000,000 worth of BTC because there was a buyer who wanted them.
