Analysis of USDT Asset Reserves and Discussion on Stability

The asset reserve structure of USDT is similar to that of money market funds, primarily consisting of cash and high-quality short-term bonds. Looking back at the 2008 financial crisis, the largest money market fund at the time, Reserve Primary, triggered panic due to holding a small amount of Lehman Brothers short-term bonds, leading to a massive wave of redemptions. This event exposed the fragility of maintaining the 1:1 redemption promise and highlighted the similarities between stablecoins and money market funds.

Assessing the stability of USDT requires consideration of two key issues: how liquid are the asset reserves? Is there a possibility of facing a large-scale redemption similar to that of 2008?

From the perspective of asset reserve quality, USDT has been optimizing its structure. The proportion of commercial paper (CP) has gradually decreased, while the proportion of US short-term Treasury bills (T-Bill) has continuously increased. Data shows that the CP proportion fell from 49% in the second quarter of 2021 to 24% in the first quarter of 2022, while T-Bill rose from 24% to 48%. It is expected that the CP proportion may further decline to around 13% in the second quarter of 2022.

The quality of CP held in USDT is also improving, with the proportion of CP rated above 3A increasing from 93% in the second quarter of 2021 to 99% in the first quarter of 2022. This indicates that the security of USDT's asset reserves is continuously strengthening.

Recent market fluctuations have put liquidity pressure tests on USDT. In just over a month, USDT has completed approximately $17 billion in redemptions, reducing its circulation by 20%. During the most panicked period in the market (from May 12 to May 15), $10 billion in redemptions occurred alone. This fully demonstrates USDT's ability to handle large-scale redemptions.

However, if there is a large-scale redemption (such as redeeming more than 80% of the issuance within a week), USDT may face the risk of decoupling. However, the likelihood of such an extreme situation occurring is low. Unlike pure investment tools, USDT plays an important role in the cryptocurrency ecosystem, and many market participants must hold USDT to maintain operations, which accounts for about 20% of the total issuance.

In addition, the redemption mechanism of USDT limits the scope of direct redemptions, allowing only whitelist-verified institutions to trade directly with Tether. This alleviates redemption pressure to some extent in extreme situations.

85% of the USDT reserves are in cash and cash equivalents, with more than half being highly liquid T-Bills. Even in extreme situations, USDT has sufficient liquidity to meet redemption demands.

In summary, although the possibility of USDT decoupling cannot be completely ruled out, considering its optimized asset structure, market demand, and the stress tests it has already passed, the probability of a USDT collapse is relatively low. The panic in the market may stem more from speculative behavior rather than actual risk.