delta neutral synthetic dollar? mcd overcollateralized institutional lending strategy. that’s right, more mcd

? “we made a contract that deposits usdc into aave” wow 😂

breaking it down for the crypto ppls reserves = cash equivalent assets (eg. bank deposits, tbills, overnight repo) that are immediately able to be liquidated to process redemptions the reserve ratio is a measure of liquidity, or whether an issuer/bank can meet redemption requests on demand without long delays or incurring losses by being forced to get rid of illiquid assets in a fire sale this is entirely separate from the question of whether a stablecoin/bank is fully backed, which is a matter of solvency (whether total assets exceed total liabilities) there is a lot of confusion because the term "reserves" is used inconsistently across the industry, often being used to refer to total assets backing a stablecoin, not just the liquidity/cash equivalent portion there's further confusion because many centralized stablecoins adopt a 100% reserve ratio for their backing, where they hold all of their assets in cash equivalents. this is required by GENIUS and other upcoming stablecoin regulations for regulated centralized stablecoins. on the other hand, banks explicitly do NOT hold 100% reserves, in most cases they hold a mixed portfolio of cash equivalents, loans to individuals and businesses, and corp or govt bonds (fractional reserve banking). tinfoil hat wearers sometimes make note of recent (past 10-20 years) trend where central banks have progressively reduced and even eliminated reserve requirements for banks. but this is a bit of a nonsequitur, as while these reserve reqs were partly intended to protect customers against bank runs where a bank didnt have enough liquidity, the main use case was a lever to control monetary policy (increasing reserve ratio reduces the "money multiplier" of loans being issued in the economy, thereby reducing m2 money supply, increasing cost of credit, and reducing inflation). however we are now operating in an ample reserves regime due to QE and other cash injections, so the reserve ratio is no longer used as a tool for monetary policy so where does this leave @Tether_to? it has over 50% reserves, which is quite high compared to commercial banks, but of course much less than the 100% required of onshore centralized stablecoin issuers or money market funds. purely looking at tether's reserve ratio, there's no problem, tether is just operating like a fractional reserve bank the issue with tether is the composition of their other assets, which include a mix of collateralized loans, bitcoin, and gold. because these assets are not cash equivalent/risk free, there is some possibility that tether will lose money with the result that they become technically insolvent (assets<liabilities) in the banking industry, this solvency risk is addressed with capital requirements- basically, banks need to hold a certain percent of additional assets vs their liabilities depending on the risk profile of their portfolio. so for example, an AA rated corporate bond may require 1% equity to be held against it, while a lower rated BBB bond or a commercial real estate loan might require much higher capital like 3-5%. these assets have some default risk, but they are USD denominated so if you have a diversified pool of borrowers the chance of them all defaulting at the same time is low (not zero tho, see 2008 mortgage crisis). this diversification justifies single digit capital requirements per asset, even if each individual asset has some chance of failing/potentially even going to 0 on the other side of the risk spectrum, direct holdings of volatile assets like stocks, metals, or crypto are not USD denominated and have significant price volatility. in many cases, banks may be required to hold high double digit capital against these exposure (in the case of crypto, banks usually must hold 100% capital against the asset, basically banks cant use user deposit liabilities to fund crypto purchases for their balance sheet). tether's holding of gold, bitcoin, and "other investments" (assumed to be volatile/illiquid/non-USD denominated, otherwise they would explain what they are) as part of the $USDT backing violates this principle of sound banking where amount of equity buffer should scale up with the riskiness of the portfolio. theyre basically operating as an offshore bank without any prudential regulatory requirements to force them to limit risk or increase their equity buffer. overall, not great that being said, there are some important mitigating factors in tether's case: - the USDT deposit base is incredibly sticky, so even if they technically became insolvent for some period due to price drops in btc/gold/other investments, they can continue operating as long as they dont face significant redemption demands. its likely that there are billions or maybe even 10s of billions of USDT capital that may never be redeemed (lost keys, long dormant wallets, etc) - tether is highly profitable, and could retain profits to shore up their balance sheet if their volatile investments lose money - tether holds additional capital off the USDT balance sheet, for example their interests in btc mining, ai datacenters, farmland, rumble, juventus fc, etc. if usdt was at serious risk of insolvency, one would expect them to bring some of these funds back into the USDT entity to plug the gap so what's my conclusion from all this? - tether is taking unnecessary risk with their balance sheet, but is highly unlikely to fail any time soon - still, the risk adjusted return of holding USDT is definitely worse than many alternative stablecoins, and imo it only makes sense to deal in USDT if you have some pressing reason to do so (eg counterparty only accepts tether) - lets stop confusing terms. reserves = liquidity, asset backing = solvency. there's nothing inherently wrong with fractional reserves, it just requires a prudent approach to risk management including scaling capital requirements up to match portfolio risk the key measures of a successful fractional reserve stablecoin are: - reserves > redemption requests (able to keep the peg in the short term) - assets > liabilities (able to keep the peg in the long term) imo the @SkyEcosystem is far and away the most advanced approach for fractional reserve stablecoin issuers, allowing subdaos like @sparkdotfi and @grovedotfinance to allocate capital efficiently while imposing sensible capital and liquidity requirements to keep $USDS securely pegged to USD