Crypto Conversation: Tether's Recent Token Swap Explained

USDT announced a 'sizeable' swap to Ethereum.
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What's hot in crypto this week? 

Tether (USDT). It was launched in 2014 and originally built on top of the Bitcoin blockchain.

Why? 

Tether just announced a chain swap. Tether (USDT) is available on many blockchains, including Ethereum, Tron, Omni, EOSIO and Liquid. A chain swap is the process of moving USDT from one blockchain to another. 

In theory, each unit of Tether represents a dollar held in a bank. But the so-called stablecoin has had a rocky history with allegations of “printing” unbacked tokens, fraud, and criminal conspiracy. Despite that, Tether has grown into the most longstanding and widely used stablecoin in circulation, and is in fact 10-times larger than its next biggest competitor, the USDC, or USD Coin.

Tether on June 29 revealed that a “sizeable amount of USDT” would move from TRON to Ethereum. That same day, Binance exchanged 300 million USDT on TRON, for 300 million USDT on Ethereum. 

Looking at the on-chain activity of Tether (USDT) on both TRON and Ethereum on June 29, we can see that Binance sends all of its blue tokens (which are USDT on TRON) to Bitfinex, and receives the same amount in yellow (which are USDT on Ethereum). 

What's Flipside's take? 

There are two possible reasons for which Binance made that switch: Either TRON stopped paying Binance a premium. 

There could be a scenario in which the TRON blockchain was paying Binance a premium to have the cryptocurrency exchange keep its supply of USDT on TRON instead of another blockchain. Perhaps it stopped paying that fee on June 29? 

Or there is demand for ETH Tether for yield farming. 

"Yield farming” -- the hottest buzzword in crypto today -- allows people to earn fixed or variable interest by investing crypto in decentralized finance.

FlipsideCrypto_USDTonTRON_July2020

Compound and Aave are decentralized finance’s primary lending and borrowing protocols. They are both built on Ethereum. Accordingly, when looking at the on-chain activity of USDT, we only see activity in decentralized finance for USDT on Ethereum (in yellow). 

There is currently $977 million in assets supplied to Compound at the time of writing, and $361 million borrowed. This makes it the largest decentralized finance protocol in terms of total value locked. COMP is its governance token. 

The price of COMP has increased over 10-times since launch in February 2020. This is fully tied to Compound’s incentive mechanism. Anyone that lends or borrows on Compound earns a certain amount of COMP based on the amount of interest they earn or pay (or both, in most cases). This is on top of the yield of lending a crypto asset. 

A total of 2,880 COMP tokens are issued to users every day. At $215.55 per COMP at press time, this translates to $620,784 in extra rewards per day. No one expected the price of COMP to increase so dramatically. 

This created an important gap between the cost of yield farming and the returns -- making it very attractive for investors to game the system. 

A week ago, the Compound team put forward a proposal to change how this COMP gets distributed. Starting tomorrow, users will earn COMP on the dollar value of assets they have put in or borrowed, and no longer on interests earned. 

Compound’s new distribution rules are likely to drive investors toward stablecoins, to be less exposed to volatility. Since Compound is built on Ethereum, it would make sense for exchanges like Binance to want access to USDT on Ethereum and not TRON. 

(Bitfinex’s active supply of Tether on both TRON and Ethereum, it should be noted, doubled with the swap, from 306.5 million to 612.1 million tokens. IfInex, Bitfinex and Tether’s parent company, explains that they will either burn that extra USDT or retain them for future chain swaps. )

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