THE RISE OF TETHER

The challenge of stability has been bothering the crypto world for a long time. It was natural that the idea of a peg would find its audience among the blockchain developers. However, the first attempts at pegging implemented a system that avoided the traditional holding of fiat currency reserves, so CoinoUSD, NuBits, and BitUSD never gained much traction and, consequently market capitalization. Tether was launched in 2015 with an initial market capitalization of $10 million. It was a success providing many of the blockchain services crypto enthusiasts find appealing. It enabled greater privacy than fiat dealings, avoided credit and debit card fees and offered a prospect of less shifting prices to merchants using Bitcoins. In March 2017 Tether rose to number 13 cryptocurrency in market capitalization with $55 million in circulation.

The issuer of Tether holds dollar-denominated assets in reserves and is expected to redeem tokens on demand. This token that represents USD in a digital environment is growing in popularity and boasts of stability.

 

DIFFICULTIES EMERGE

In March this year the first shadow of doubt appeared  concerning the background of Tether. In order to maintain transparency the company made public their reserves balance sheets. The report revealed a gap of $1 million between the reserves and the value of the Tether tokens in circulation. This situation even gave rise to the speculation that the Tether issuer uses the fractional reserve method rather than 100% asset-backing. Whatever the case might be, it seems that all Tether holders cannot redeem their tokens for USD at the moment. Concerns grew again as it came to light that their white paper contains a disclaimer that it is not legally binding for the issuer of Tether to exchange tokens for fiat.

To further exacerbate the uneasy situation, since April this year all international wire transfers have been refused by the Taiwanese banks that Tether has partnered with. This move also affected the OKCoin and Bitfinex exchanges.

The holders can still convert their tokens to USD at Kraken for a hefty fee of 7% of the trade. The company has also said they are looking for additional banks to hold their dollar reserves in different jurisdictions. A much needed diversification in light of current events.

These difficulties resulted in the loosening of the peg as the value of USDT slid down to $0,91 per token. This spread has disappeared in the last few days settling down at parity again. It is interesting to note that the peg that had been stable since the beginning of issuance came loose temporarily as the market cap of Tether itself shot up during June and July to $318 million.

All the above-mentioned uncertainties did not prevent a rush into USDT which might have even been considered a speculative opportunity at $0,91. Fear of the oncoming 1 August Bitcoin resolution is likely also a factor here and we can expect much of the holdings to be transferred to Bitcoin once its fate has been decided.

 

COEXISTENCE OF TETHER AND X8CURRENCY

For the purpose of comparing USDT and X8 we shall disregard all the current difficulties USDT is facing and take it as the solid peg it was intended to be.

Both Tether and X8 are 100% asset-backed tokens. But this is as far as the similarities go. Whereas USDT is backed by a single currency, USD, X8 is backed by a basket of 8 major currencies and gold coins. The reason for the currency choice is their 100% convertibility into each other which brings us to the next point. The 100% convertibility is necessary for the continuous allocation of capital among those currencies. This task is performed by ARM AI, the technology embedded within X8, which makes its basket an active one. So we cannot speak of a simple peg or anything else implying passivity when it comes to X8. It is an expression of a unique technology targeting a small yearly return of 1-3% in real terms. And this is what makes X8 such a singular asset – it actively fights inflation.

A token tied to a single currency must share this currency’s fate – the ups and downs and, of course, inflation. While the ups and downs of a currency drag Tether to wherever the movement goes, X8 uses every micro volatility to its advantage in fighting inflation and creating yield generation. X8 will also be redeemable in all the currencies of its basket.

So, can USDT be more stable than X8? Yes, if the USD should persist in a very narrow band of movement for a longer period of time. Usually a major currency considered stable can experience a swing of up to 10% or even higher on a yearly basis. Can USDT outperform X8? Again yes, if it appreciates against other currencies more than 3% per year. There is some speculative potential to a single currency. Contributors themselves should estimate the likelihood of such trends persisting long enough to base their contributions on them.

 

SUMMARY

USDT offers some safety and some stability coupled with the speculative potential of a single currency. There is room for such a token offering a mixture of some protection and speculation. X8 will appeal to risk-averse contributors looking for maximum safety and stability available on the market who are also content to preserve the value of their holdings in real terms coupled with the likelihood of a small yield. It will be the next step in portfolio risk management. Therefore we can conclude there is room for both Tether and X8 in the developing crypto space.

David

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