USDT is scary because of the lack of liquidity for everyday investors, but I don't buy into the fact that they don't have the fiat to back it up.
When Tether issues a million coins, those coins get sold on the market for (close to) a million dollars. They immediately have the fiat to back up every coin issued. Even dropping those million dollars into a regular savings account at 2% annual interest would leave them with plenty of profits to work with.
There is the potential that they invested some of their money into crypto, and lost out big when bitcoin plummeted. But unless they have an awful business model and zero oversight, one must assume that they have diversified their portfolio enough that they would have sufficient fiat to handle some withdrawls.
It's sort of the same argument as we have with fiat currency. There are not enough coins and bills in existence to cover even a tiny fraction of all the fiat currency that exists in the world, but since everyone isn't going to withdraw their physical fiat currency at once, the system carries on working just fine. The same is true for USDT. Even if they don't have sufficient fiat to back it up, it still continues to function as a currency pegged at 1USD so long as the currency's investors don't all withdraw their funds at once. The only thing that makes USDT scarier is that we don't know how much fiat they're holding, and they're less regulated than regular fiat systems.
It's a valid point and I have to assume that as long as cryptos are flying high over the ace of spades, the USDT business model will stay afloat. The biggest issue I have, and why I buy into the arguments that it's maybe not backed at all is that tether's whitepaper as well as follow up comments by the team talk about transparency and auditible records that will be regularly published for anyone to verify all claims on reserves. This has yet to happen, so until it does, it begs the question in my mind, "why not?"
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@gibberishcode - They have made some efforts to provide greater transparency, example:
https://tether.to/wp-content/uploads/2017/09/Final-Tether-Consulting-Report-9-15-17_Redacted.pdf
It is concerning that these reports aren't coming out more often, but I think there might be concerns about disclosing too much information to competitors (and regulators) about where and how their money is being held.
Crypto is in an uncertain time where there's a great risk of government regulation or asset freezes for connections to illegal activities. Disclosing their banking information to too many parties could put Tether at risk.
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This is similar to makers model. Except with maker, they have an auditable reserve. Tether could cash out for fiat dollars, buy lambs and have 0 accountability.
Dai also has parameters that incentivize creation and destruction dynamically, as opposed the the one way inflation process of tether creation.
Tether is a dangerous proposition and I would hate to be holding that bag,
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