Stablecoin Triptych

Arthur Hayes
12 min readJul 8, 2021


(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

The height of the northern hemispheric summer is here, and it’s vaxx-enabled party time. Don’t expect much in the way of volumes and/or volatility while traders get some well-earned time to spend their spoils.

Since the traders have taken much of the market intrigue with them as they frolic their way through the Mediterranean, I wanted to use this down time to explore one of the space’s most historically divisive topics — stablecoins. From Tether, to Facebook, to Central Bank Digital currencies, I’ll take this opportunity to riff on some of my biggest stablecoin pet peeves and thoughts on what the stablecoin future might hold. Enjoy.

The Achilles Heel of Crypto

When doubting the viability of the crypto capital markets, turn up some Tether FUD. I become quite irked when I read Mickey Mouse analysis that proclaims irreparable harm will visit the crypto markets should Tether break the buck. To demonstrate how ridiculously shallow this argument is, follow me through a very simple thought experiment.

As I write this, Tether (USDT) has a circulating supply of $62.5 billion (according to CoinGecko). This is also its market cap, because each USDT is backed by a physical US dollar … supposedly. For the sake of argument, let’s assume that one day, Tether discloses that it has exactly $0 in physical assets, rendering each USDT worth absolutely nothing. To keep this hypothetical simple, let’s also assume that the crypto capital markets consist only of Bitcoin and Ethereum. What would happen to our ecosystem when all USDT holders are rugged?


USDT is an ERC-20 token, which means it uses the Ethereum blockchain protocol to juke and jive. In this scenario, all USDT holders have lost everything — so what happens to the Ethereum protocol?

Will blocks continue to be produced approx. every 10 to 15 seconds?

Yes, the loss of USDT does not mean that Ethereum miners cannot complete proof-of-work puzzles. Ethereum mining has no USDT dependency.

This means that after losing $62.5 billion in value, participants may still use the Ethereum blockchain.

Will any other ERC-20 tokens cease to work?

It is possible that any ERC-20 token that used USDT as collateral underpinning its value will see a near total collapse. However, these tokens will be sold using the still functioning Ethereum blockchain. Again, and most importantly, the Ethereum protocol will continue to work as designed.

Can anyone double spend Ether (ETH)?

No. Remember, the Ethereum blockchain has no USDT dependency. Therefore, a malicious actor will not be able to double spend ETH just because all USDT holders get rickety rekt.

Can projects still launch new ERC-20 tokens?

Yes. Again, the Ethereum blockchain continues to work just as before.

Can the Ethereum protocol still be updated?

Yes. Just because USDT no longer exists doesn’t mean smart engineers can’t improve the protocol.


USDT started as a pseudo Bitcoin sidechain using the Omni protocol, but then migrated mostly to ERC-20. What happens to the Bitcoin protocol?

Will blocks continue to be produced approx every 10 minutes?

Yes, the loss of USDT does not mean that Bitcoin miners cannot complete proof-of-work puzzles. Bitcoin mining has no USDT dependency.

Can anyone double spend Bitcoin (BTC)?

No. Remember the Bitcoin blockchain has no USDT dependency.

Can the Bitcoin protocol still be updated?

Yes. Just because USDT no longer exists doesn’t mean engineers can’t improve the protocol.

This Q&A is starting to get a bit repetitive, so I’ll wrap it up here. My point is, the main functions of peer-to-peer, censorship resistant propagation and validation of unique cryptographic outputs would not change in any aspect if Tether suddenly ceased to exist. Therefore, the actual network activity that gives value to Bitcoin and Ethereum would not be affected, and there wouldn’t be any impact on the underlying value proposition of either the Bitcoin or the Ethereum protocol.

At this point, people usually argue that such a disruptive event and massive ensuing loss would inevitably cause the price to fall and disrupt the operations of exchanges — but let’s take a second to really think through what would actually happen to centralised exchanges (CEXs) if USDT goes poof.

CEXs use USDT to onboard fiat without having an explicit banking partner. It is also cheaper and faster to send USDT between traders than bank wires, so the majority of Bitcoin and Ether to fiat pairs use USDT. Let’s remove those capabilities from the equation — how would CEXs react?

There are other stablecoins that are similar to USDT in that they issue ERC-20 tokens they claim are backed by physical USD or USD near-cash equivalents (US Treasury bills, notes, and bonds). Without USDT, market participants would likely turn to USDC or any of the other USD physically-backed stablecoins. An exchange that no longer can use USDT can easily switch to another ERC-20 stablecoin such as USDC for Bitcoin and Ether to fiat pairs.

So, that’s likely not enough disruption to tank the whole industry. But, for the sake of argument, let’s assume that banking institutions have stopped allowing all stablecoin issuers to rent their balance sheets and issue stablecoins to the crypto capital markets. That would, admittedly, be seriously disruptive to CEX platforms. They either must get a bank account — very difficult — or remove the fiat-to-crypto on-and off-ramps from their platform. Bitcoin and Ethereum prices would likely crater, at least initially. However, the ecosystem would still have the means to withstand this doomsday scenario in the long-term.

Take, for example, MakerDAO. It is the best example of a fully reserved bank that issues its own currency (DAI) pegged 1:1 with the US Dollar and holds zero physical USD to back it. Instead, MakerDAO brings DAI into existence by accepting 150% ETH collateral. Users can mint $100 DAI, but they have to stake $150 ETH at the prevailing ETH/USD exchange rate. The market must then price its view on whether DAI’s collateral can maintain a 1:1 USD peg irrespective of the ETH/USD exchange rate. During episodes when ETH/USD tanked, the market does briefly trade DAI below $1; however, MakerDAO has made good on all DAI redemptions into ETH worth at least $1 for 1 DAI. Therefore, when DAI dips below $1, historically that has been a great buy.

This is all to say, CEX platforms can switch to BTC/DAI and ETH/DAI, or any other fully-reserved crypto banking liability token, to enable crypto to fiat trading in the absence of any physically-backed fiat stablecoin.

For Decentralised Exchanges (DEX), the conversion is even easier. Adding a BTC/DAI and or ETH/DAI liquidity pool has either already been done, or just takes an enterprising user to create instantaneously. Trading will go on.

Whether or not Tether or any other physically-backed fiat stablecoin has the assets they claim, does not impact the viability of the crypto capital markets. If you believe it does, you don’t understand the value proposition. Put another way, if the Bitcoin and Ethereum ecosystem cannot function without a fiat stablecoin, why are we even wasting our time holding, trading, and improving crypto protocols? We should all just go and buy an equity index comprised of commercial banks.

A Few Notes for the Record

I believe that Tether can meet all redemptions into USD cash in an appropriate time window. I know too many large trading shops that create and redeem large amounts of USDT on a frequent basis.

It might look sketchy that USDT is using a no-name bank to store cash. But why would a large commercial bank that has no need for additional USD deposits underwrite a protocol that aims to disintermediate its money transfer and FX trading businesses. Any large bank CEO that does get that should be fired.

Network Power Struggle

What is more powerful: a nation-state or a social network? This is a very important question that many governments are grappling with.

Everything Is About Growing Users

Nation-states have historically grown their users through two primary means: war and sex. In our modern enlightened global civilisation, blatant territory grabs by hegemons are not viewed kindly and usually end in abject failure. It’s hard to convert the hearts and minds of a conquered people without violence and/or slavery. Both of these measures are viewed as uncouth today. The preferred method is having more babies. The global “user bases” of various governments has exploded as subjects had more kids, and those kids have survived.

Social networks, on the other hand, typically grow their user-bases by offering a service that users deem valuable. Usually this is something that helps us better connect with our fellow Homo sapien — as is the case with Facebook, Twitter, Gmail, Instagram, TikTok, WeChat, QQ, etc.

Here is a list of the social networks with over 1 billion users:

(Source: Statista)

There are only two nation-states, China and India, that have over 1 billion users.

It is quite obvious that Mark Zuckerberg, viewed purely on a number-of-users basis, is the most powerful person in the world. He does not control a nuclear arsenal, nor any sort of military, but captures the attention of close to half the human population.

He is so powerful that alongside other platforms such as Twitter, he effectively cancelled a sitting US president — someone who does have a nuclear arsenal and military at his disposal — by taking away his Facebook account.

Politics is all about messaging. You have to show and tell the people what to think and how to behave. Communication is the bedrock of any regime. If you cannot communicate with your subjects, irrespective of the political “ism” practiced, your regime will not exist. Facebook, at least outside of China, controls the most effective and direct means of communication with the most economically active users globally.

There is one network that is even more powerful than Facebook, and that is the US Dollar. The USD is the reserve currency of the world, and most trade is still priced in dollars. Even if your country has a different local domestic currency, any imports usually touch the dollar in some way. The USD potentially has a user base of every human that consumes any sort of manufactured product.

The problem with the USD is its transmission network is upheld by a cartel of inefficient legacy financial institutions. But, there is opportunity for a tech-native network to usurp it. The biggest contender for a network that, through its own or an affiliated value token, could establish or replace the USD, is Facebook. Diem, Libra, or whatever Facebook ends up naming its value token, will from day-one have almost half the human population as potential users.

Combine Facebook-enabled online shops, a network currency, and messaging, and you have a circular sticky economy. At that point, there is no use for the USD. Facebook may decide its network token should be backed by the USD, but it isn’t entirely necessary. This is why “governments” weren’t pleased when Facebook announced the launch of Libra a few years back.

It’s unclear what form the Facebook network token will take, but something will happen. And then Google and Amazon will respond. What will the USG do?

The USG has all the natural advantages to modernise the USD and completely own the world (ex-China), but do they have political will? This leads me to my next panel on the political decision of how to structure a Central Bank Digital Currency (CDBC) that represents the US dollar.


Imagination time. If I had a magic wand, and a permanent throne at the Marriner Eccles building, this is how I would design the digital dollar — let’s call it FedCoin.


Anyone globally with any valid government-issued ID can have a digital wallet hosted directly by the US Federal Reserve. This wallet can store and transfer FedCoin tokens, which represent the liabilities of the Fed. It is free of charge to onboard with the Fed. All you need is an internet-enabled smartphone. Almost instantaneously, the whole world can now have a bank account with the issuer of the global reserve currency.


All deposits move from commercial banks to the Fed. The only way for a commercial bank to attract deposits is to pay a higher interest rate than the Fed. In order to allow the commercial banks to continue to exist, the Fed could explicitly peg its deposit rate below the private market. Commercial banks could only offer higher deposit rates if they engaged in loans to productive businesses. Woah, imagine if a real business could get a loan — maybe there would be some actual economic growth.

There would be no un- or underbanked persons with a smartphone. Everyone would have access to essentially free banking with a reputable institution.


There is a private blockchain that is interoperable with the major public blockchains such as Ethereum. It also has a permissionless, open API to power all types of FinTech applications.That means that FedCoins can be used natively in the DeFi ecosystem. You can stake and trade them with all the other DeFi tokens.


All physically-banked fiat stablecoins would vanish. There is no reason to use any other USD fiat stablecoin other than FedCoin, which would naturally be the most secure.


The Fed, and by extension the US government, has complete transparency into any and all transactions using FedCoin. However, FedCoin addresses are just numbers and characters. You are allowed to create as many public keys as you want, because the FedCoin wallet is a hierarchically deterministic wallet (HD Wallet). As a company, you may not want your competitors to be able to trace all your economic activity. As an individual, you wouldn’t want just anyone to be able to see all your financial activity.


Compliance is done at the Fed level, removing that cost from the ecosystem. Because all wallets are owned by real persons or businesses, there is no risk of obscuring who or what is transacting from the government. Individuals or businesses get privacy vis-a-vis other participants. This is just the same as the traditional banking system, but with FedCoin users don’t have to pay higher fees to cover the bank’s compliance costs.


If all the other major central banks architect a similar system to FedCoin, then cross-border FX trading becomes instantaneous and nearly free. Automated Market Makers on a DEX could easily swap FedCoin for ECBCoin, or any other fiat currency pair. Businesses could reduce the cost of procuring goods and pass those savings onto their customers (or not). But at least that tax would not be captured by rent-seeking banks.


Global commercial banks’ FX trading business would become obsolete. Is anyone sad about that?


The Fed would have a complete view on how value moves through the economy. Their theories about monetary velocity and how interest rate policy changes cascade through the system would become empirically testable — improving the quality of their policy making. Imagine if intentionally obtuse gobbledygook pseudo-science economic papers were replaced by A | B tested monetary experiments. Then you could elevate the study of economics to a type of science where results are the product of rigorous analysis. The Fed could also target specific constituencies directly with different credit opportunities.


Instead of using the inequality machine called quantitative easing / money printing in an attempt to move the economy to and fro, policymakers would finally have an empirically sound way to direct the flow of credit in the economy.

Special interest groups could receive more accommodative monetary policy to help them improve their lot in the economy. Rather than just politically-connected zombie companies receiving all the manna from heaven, the average worker could get credit when they need it from the government they support with their tax dollars.

Doesn’t this sound like a great future?

Everyone gets a bank account for free, the technology allows for limitless innovation, and commerce becomes faster and cheaper. Who loses, aside from commercial banks?

This is the political issue. The technology is there. The time is right for a purely electronic USD, issued directly by the Central Bank. If something isn’t launched soon, Facebook or another tech titan will capture all the users. The only thing stopping the Fed is the inherent conflict of interest between them and commercial banks. They would be directly competing with, and destroying, the very banks they regulate.

I don’t know the political outcome. But rest assured, if the Fed launches anything less than a permissionless, direct-to-consumer electronic USD, they will get Zucked. And Zuck doesn’t Zuck gently.



Arthur Hayes

Co-Founder of 100x. Trading and crypto enthusiast. Focused on helping spread financial literacy and educate investors.