Tether (USDT) Paolo Ardoino on how Arbitrage was an Inspiration to The Formation of the Stable Coin

Paolo Ardoino, CTO of Tether during the CryptoCompare Digital Asset Summit took back to the company’s history.  The way he presented made one feel that Tether is really fascinating.

Paolo Ardoino clarifies that the story is his “Point of View” in terms of how he looks at the innovation and the technology. He started off the story with a disclaimer stating that he will not be answering any questions relating to legal matters. He also clarifies that his view need not necessarily represent the view of Bitfinex or Tether or anyone else.  The story started off as an expression in a lighter vein taking all defenses required before prompting the story.

Paolo spoke about how there are already plenty of stable coins now.  He recalled on how some stable coins are asset backed fully and how some are fully cash backed and some are mixed backed.

Tether (USDT) – The most important Stablecoin

He calls Tether as the most important stable coin.

He spoke about the journey of Tether with reference to the 2013 – 2014 cryptocurrency ecosystem.  It was a point in time when there were few Bitcoin crypto-exchanges in existence like the Bitfinex, Bitstamp, Kraken, OKCoin. 

There was slow and limited arbitrage opportunity resulting in widely inefficient markets.  The arbitrage mainly relied on bank wires.  There were 1 to 5 days settlement with a week end pause.  The banking concerns were that there were too many exchanges and that customers got their bank accounts closed.  The price of the Bitcoin spiked above $1.1K by the end of 2013.  The price was up by 20% and there was a price discrepancy between exchanges during the high market activity.

Sydney Ifergan, the crypto expert tweeted:  “Tether USDT facilitating the advantage of arbitrage to users. Arbitrage facilitates simultaneous buying and selling of securities in different markets or in derivative forms to take advantage of differing prices for same asset.”

Tether (USDT) – Market Makers Using Difference to Make Money

He recalled how there were mild price differences between exchanges. And, how there were market makers who were trying to use the difference to make money.

To close the price discrepancy it was important to send wires around. For instance, he said if Bitfinex price was 10% higher, then it was necessary to send the Bitcoin to Bitfinex, sell it and withdraw cash, and send that cash to an exchange that is lower, so that it is possible to buy back Bitcoin on that exchange where it was low.

If the cash is fiat it needs to be moved off the wires and that was painful. He recalled how it can take from one to five days and have a lot of banking frictions. He also spoke about how weekends were and about how when there is big movement around the weekends how really, really, hard it was to manage.

At some point in late 2013, the Bitcoin price went above $1000 for the first time and there were exchanges that were giving pretty huge different prices.  The prices were up to 20 to 30% of the discrepancy.  Therefore, a group of Bitcoin enthusiasts, visionaries, understood that this was a huge problem for mainstream adoption.  Arbitrage came in to place.  As price discovery arbitrage are really, really important for an institution for any fund and so on.