USDT Still Hasn't Returned to $1 Mark After 1-Month Depeg

Kaiko analysts have proposed a solution to help Tether swiftly address the USDT depeg issue by considering adjustments to redemption fees and minimum conversion amounts.

USDT Still Hasn't Returned to $1 Mark After 1-Month Depeg

Extended Reasons for USDT Depeg

According to a recent study by Kaiko, the largest market-cap stablecoin in the cryptocurrency space, Tether (USDT), experienced a prolonged period of price depegging throughout August 2023.

Stablecoins, also known as stablecoins, are a type of digital currency pegged to another stable asset, such as gold or fiat currency (USD, EUR, GBP). However, during extreme volatility periods, they can deviate from the asset they represent. In the case of USDT, the stablecoin was depegged when it failed to maintain the $1 USD mark.

Historically, instances of USDT depegging from USD are linked to various factors, including:

• Decreased market liquidity;
• Fees users have to pay to convert stablecoin into fiat;
• Minimum value of stablecoin that users can convert into fiat.

Kaiko analyst Riyad Carey introduced a new factor based on the total trading volume of the stablecoin called the "Depeg Threshold." This factor indicates the severity of depegging, which decreases as trading volume increases, and the value of depegging is higher when the stablecoin's trading volume is low.

Although other stablecoins like TUSD, BUSD, and USDC also experienced depegging events throughout 2023, reports show they remained relatively stable and less sensitive to depeg events compared to USD-pegged stablecoins.

Further Recommendations to Reduce USDT Conversion Fees

According to the report, the most severe incident for USDT since the beginning of 2023 occurred following the Curve incident. This depegging event saw approximately $500 million USDT being "dumped" on major cryptocurrency exchanges such as Binance, Huobi, and Uniswap.

Kaiko's analyst suggests:

"USDT faces stability issues. Reducing redemption fees and its minimum amount is reasonable for USDT holders selling in the market, rather than converting USDT to USD. When liquidity is depleted, the market cannot absorb the sale of USDT."

The analyst also noted that USDT depegging events do not significantly impact its value, but "its stable discount rate is a cause for concern and could seriously undermine trust if it persists."

Carey proposed that Tether consider eliminating redemption fees and minimum requirements.

"The solution is for Tether to eliminate redemption fees and minimums. Tether reported over $1 billion in profit in Q2 2023, so removing fees would not significantly affect this profit unless the company believes reducing redemption fees would significantly reduce the supply of USDT."

Currently, Tether charges a 0.1% fee for fiat withdrawals over $1,000, meaning USDT is redeemed at $0.99, with a minimum fiat deposit or withdrawal of $100,000 USD.

Additionally, users must pay a non-refundable "verification fee" of $150 to "ensure that only serious individuals want to create a new account."

This is not the first time USDT has depegged in 2023. In June, the largest stablecoin in the cryptocurrency market depegged to $0.9959 USD due to negative information surrounding confidential documents released by the New York State (USA) government in 2021. In March, USDT also depegged but increased to $1.0077 USD due to the USDC competitor linked to the US banking crisis.

The current depegging of Tether is ongoing and shows no signs of resolution, as the USDT price on the evening of 01/09/2023 briefly dropped to $0.9989 USD.

Chart showing USDT price fluctuations over the past month, captured at 08:55 PM on 01/09/2023. Image: Coingecko