Systemic Problems within the Cryptocurrency Ecosystem

The main reason Tether has been a point of contention for so long is that — not only are the individuals in charge untrustworthy, but — Tether itself is a central point of failure. Every aspect of Tether is centralized: from a few key executives and their assurances being the only correspondence in regard to prints, logs, and history, to the fact that any Tether can be frozen at any time for any reason. One of the driving forces behind my crusade against Tether is precisely how centralized it makes the ecosystem. And to my dismay, I believe that centralization has continued full-force.

In late November of 2018 I came to the conclusion that the cryptocurrency ecosystem was decentralizing. Skip over the picture for the TL; DR.

My reasoning was: more stablecoins were being introduced, more exchanges were stealing volume from the big boys, and even if Bitfinex were taken down, Tether could still, someway, somehow, continue unimpeded.

Some of this has proven to be true. Indeed, Bitfinex has a fraction of the volume it once had. Yes, many stablecoins have been introduced in the past two years. Bitfinex and Tether are, technically, still, different companies. But that isn’t a fair representation of the decentralization of the ecosystem.

Dismay

Seeing how DeFi is working has made me reconsider everything. Concepts proven to be faulty are being retried and retried again — credit default swaps on the blockchain, derivatives of derivatives on the blockchain, smart contracts with pump and dump mechanics, it’s-not-finance-it’s-art-it’s-a-game-it’s-a-joke-it’s-a-smart-contract. It’s history, literally and unfortunately, repeating itself.

The problem with many ICOs, IEOs, smart contracts, and cryptocurrencies is they immediately need to be valued. Seeing as how we no longer live in the Dark Ages, the most efficient way to value anything is to use money. Now, people are happy to claim Bitcoin or Ethereum are money, but they aren’t valuing their shitcoins, art projects, and derivatives on the value compared to Bitcoin or ETH. They’re valuing it in d̶o̶l̶l̶a̶r̶s̶ — scratch that. They’re valuing ALMOST EVERYTHING in Tethers or other dollar derivatives, and Tethers and other dollar derivatives aren’t dollars.

Four of the top seven traded coins on Uniswap are dollar derivatives

This is failing to mention that there are “synthetic” and “wrapped” versions of coins (basically derivatives of derivatives, but this time a smart contract derivative of a blockchain derivative) which only compound any problems that may be present in the coins they’re mimicking.

Regardless, over the last year Tether has continued unimpeded. If you look at the charts, Tether actually controls more marketcap and volume YOY:

Tether compared to other stablecoins in May of 2019 (via stablecoinswars). They controlled 97.29% of total stablecoin volume and 75.62% of total stablecoin marketcap.
Tether compared to other stablecoins as of September 4th, 2020 (via stablecoinswars). They currently control 97.62% of total stablecoin volume and 82.28% of total stablecoin marketcap.

So, yeah. I’m a little disheartened and a bit dismayed. I no longer worry for mom-and-pop, who I know have absolutely-zero-f*cking-interest in synthetic ETH or wrapped Bitcoin or yield farming food coins. But I worry about the ability of the projects I do enjoy to weather the storm that is sure to come when any of these concepts blows-the-f*ck-up.

Not If, When

I’ll be the first to admit that a complete seizure or collapse of Tether would be a massive black swan event and is unlikely. But remind me: how often does a “black swan event” seem to occur in the cryptocurrency realm? Without searching, I can recall (this year) two 51% attacks on Ethereum Classic, a raid on Bithumb, and the disappearance of a Chinese exchange founder. We’re just over halfway through the year.

It only takes one. Maybe there’s some funky code in DAI. Maybe a hacker gets into Binance. Maybe BitMex gets raided. Maybe Tether gets seized.

This is to say “black swan events” are commonplace in this realm. Exchanges exit scam. Founders disappear. The SEC files lawsuits.

At this point, maybe, just maybe, the compounding risk is as troubling as the compounding interest is enticing.

Stay skeptical, friends.

Fraud. Fraud everywhere.