Few months ago, Tether made up over 90% of the stablecoin market. However the other regulated stablecoins have gained market share, and currently Tether makes up only around 58% of the stablecoin market.
Share of Total Stablecoin Supply
Currently USDC dominance has risen to 25% while BUSD has risen to 11%. Both USDC and BUSD are much better regulated and approved by US regulatory authorities including NYDFS.
At the current pace, Tether dominance is set to drop below 50% in the coming months. The risks of using Tether have been outlined many times. However with its dominance dropping, Tether losing its peg due to a bank run event wont be as catastrophic now when compared to few months ago, when Tether cornered 90% of the stablecoin market.
Tether's Backed By Shadow Assets
Tether is backed by a basket of instruments including cash, cash equivalents, commercial papers, and even bitcoin/metals. The risky part of their holdings are in the form of commercial papers, and Tether have not disclosed the origin/companies that have provided these papers to Tether. Hence there is a risk of default here, if these companies collapse then these bonds and papers held by Tether wont be worth anything. It is speculated that Tether holds papers from Chinese companies, including large Chinese real estate companies that are currently under stress due to the real estate market in China being under pressure.
In a well regulated market like the bond market of most countries, debt instruments like Tether have to disclose their entire holdings and calculate the NAV (net asset value) of their holdings on a daily basis - this ensures that the investors and end users of these instruments actually know what is backing the debt instruments. However Tether being the shady operator it is, has not even disclosed its full holdings, let alone calculate NAV on a daily basis. This is the source of substantial risk in holding Tether.
Loss of Peg
Imo - if Tether was to collapse, it wont collapse completely i.e to "zero". What would more likely happen is that there would be a loss of peg if it becomes clear that the companies backing the papers held by Tether start to default on their payments or go bankrupt. Given Tether is backed with some cash and cash equivalents which can be considered as safe assets, it is the commercial papers that are prone to default. One can come up with a worst case scenario - a haircut of 60c per USDT i.e. the peg would crash to 40c. This is the worst case scenario given Tether's present holding structure. If this plays out, any person holding USDT could lose 60c per dollar. This is not happening now, or scheduled to happen any time soon, but is just a risk that anyone holding Tether must be aware of.
If USDC and other stablecoins continue to grow, Tether's fallout could be contained very well without any permanent impact to the market. We will definitely see days of red in the charts, but we could be spared structural damages to the crypto markets. Hence it is extremely important that people move from Tether to any other stablecoin - there are dozens of them now that are much better that USDT.
More importantly, USDT seems to have captured the DeFi market as well. All the top DeFi protocols rely now on USDT including Aave, Compound, Curve etc. This need not be the case, and these protocols must lead the way in avoiding Tether and providing their users a much better and transparent stablecoin.
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