What's up everyone? Welcome back to On the Brink with Castle Island. I'm Nick Carter. Today we have another installment in our long-running crypto dollarization miniseries. So far in this series, we've talked to some of the entrepreneurs building stablecoin systems. We've talked to academics evaluating the stability mechanics of assets like Tether. We've talked to traders and OTC desks that actually employ and use this asset on an everyday basis. But what we were missing was of course commentary from the issuers of the number one stablecoin. I'm referring of course to Tether. So Tether on January 1st of this year had about 4.8 billion in capitalization. In the last 6 months it's exploded to 9.3 billion today. So a really dramatic increase which left a lot of onlookers scratching their heads. So, who better to weigh in on this than one of the administrators of the Tether system. Today, we're lucky to have Paolo Ardoino on the show. He is the CTO of Bitfinex and the CTO of Tether. So, he's an extremely busy man. Paolo in recent months has become kind of the public face of Tether. He often chimes in on Twitter when Tether issuance occurs to contextualize it and he has started doing more interviews. He was kind enough to agree to come on our show and discuss the growth of Tether with us. So today we talk about why in his view Tether exploded so much over the last 6 months, how much they really know about the usage traits of the Tether system, and why you would want to use crypto dollars instead of legacy financial rails. This is a super elucidating interview, especially if you're trying to learn more about the largest stablecoin and who its user base really is. So, let's dive right in.
Paolo Ardoino is the CTO of Bitfinex and the CTO of Tether. He's a very busy man. So I appreciate you making time. Thanks so much for coming on the show.
Thank you very much Nick for having me. It's a pleasure.
The main thing I wanted to talk about was the growth of Tether and you know some of the technical nuances there. But maybe before we do that, I want to talk about something interesting that's happening recently. We've seen since about March a massive outflow of BTC from Bitfinex and a big inflow of Ether. Is there any color you can provide on the factors behind that? Do you have an explanation for that?
Yes, sure. So, I cannot dive into many details but on the BTC side, Bitfinex has been subject to or has been the home of few big OTC deals. At the same time the BTC price, BTCUSD price on Bitfinex that for months if not for the last few years was above the competition in a significant amount, recently after the 12th, 13th of March is considerably below the competition. So it is easier for people, for traders to send cash to Bitfinex and buy on the cheap and sell somewhere else. So there has been an interesting inversion of trend in terms of price recently after the 12th, 13th of March. OTC deals as said, a few big BTC deals happen. I also commented that on Twitter. On the Ethereum side is that we have seen an I would say a really considerable inflow, more than 1 million Ethereum in still again since the last two months. It's harder to comment on that. I'm not sure if that is preparation for Ethereum 2.0 or such. But we have seen and we are monitoring the inflows and outflows. Also, you know, Bitfinex is a margin trading platform. So means that shorts on margin can be both on spot and withdrew. So there are plenty of dynamics that the listeners have to be aware of.
On the topic of Ethereum 2.0, you know, historically when there have been fork events, you've offered things like fork futures, which were really interesting because it allowed people to price potential catalysts. I believe you also had it for SegWit 2X if I'm not mistaken. Are you thinking of anything like that for Ethereum 2.0 given that there's a big possibility space around what could happen there?
So this is really interesting question, you know, and has different nuances. So of course we are interested to explore, we are interested in exploring our options there. I was talking to our legal team and the fact is that the difference is that the Ethereum, sorry, the SegWit 2X was a contentious hard fork. So there was a lot of noise and lot of different parties that had quite different interests. The Ethereum 2.0 should be a fairly, fairly simple upgrade, not simple as in technically simple but their interests are much more aligned. What we were interested to is to trying to find a solution in order to use our technology called Tron Spect tokens, is what you were referring to, referred to SegWit tokens, and explore how to offer the ability to our users to use that technology to signal the interest from their side to lock certain amount of Ethereum in order for us to start the staking process. So I think that Ethereum 2.0 article is more directly to the staking part and the chain token would have that component. So we are trying to understand with our legal team if that is feasible. And of course one key part of it since there will be a staking reward and a future staking reward, you might see how this can be characterized as a security and of course we are quite protected in that sense. So we don't want to have the risk to list something that can be considered a security. So there are different things, different considerations that could be taken in mind but we are definitely looking.
On the topic just briefly before we dive into the subject at hand. So on the topic of staking on behalf of users, there's a big drama recently with Steem where Binance was asked to make political decisions because in practice you have staking is not only a potentially yield generating function but it also involves in some cases making governance decisions over networks. Do you guys have a policy there of non-intervention or voting on behalf of users if you were to support staking for Ethereum and then that became a vector for governance decisions?
So we touched this topic with EOS. So, Bitfinex is a block producer and we decided to build a software stack that use a technology similar to Monero in order to allow our users to anonymously vote, signing their votes, confirming the amounts that they want to vote with and signing the block producers name they want to vote for. Although we gave this I believe really good and interesting and new technology to our users, only few really use it. So it seems like although users claim or say that they really want to be involved in the decisions, we had just few users really that were willing to take their time and understand the different options and vote and decide really for whom they want to vote for. That was kind of, you know, sad because we built an entire software for it and I think that it would be interesting and good if users would take active decisions. At the same time it can become a mess from the exchange point of view. Imagine if you have 10 different tokens and if you have to give the opportunity to users to vote for every single decision that happen for all the 10 different blockchains. It basically is a huge, huge work and it requires enormous amount of people. So it's hard to give the freedom to our users to still decide and vote independently from us but also use us as a simplified way to get rewards. So we are still thinking about it because of course we don't like to take complex and possibly breaking decisions on behalf of our users. So in case there will be that event we will probably reuse the same tool and trying to get a sense of what our users want.
Okay. So because there's this principal agent problem for certain proof of stake chains where exchanges have ownership, they're effectively the agents of users. You prefer not to make decisions on behalf of users. You prefer to equip them to make those decisions. But in practice, users don't often get involved in governance. It's not worth it for them.
Yes. So we had to push really hard and start pinging users, directing say look there is this tool please use it. I'm not telling you what to do but be aware that have this tool. And although we were pushing them it was hard to get engagement. Maybe they were doing once but not many times and so after the first time they were really forgetting about it. And you know EOS in the beginning had plenty of these cases where, you know, if you recall the migration between Ethereum and EOS required, there were many cases where users were scammed. So being a block producer meant to be involved in having to block or freeze addresses in order for the users to get back their funds. So there were plenty of these decisions. You know, there was that party that was trying to create a proper governance. I think that the project then failed in some way. But so that was a big opportunity and test run I believe and we didn't see much engagement. Maybe with Ethereum will be different. Hopefully the decisions will be a bit more lightweight. But in case there will be big decision and breaking decisions, we will reuse that tool because it would be unfair for us to take breaking decisions on behalf.
Yeah. I think the reluctance isn't that surprising to me. It's a little bit like retail investors that own public equity and they can vote at the AGM on, you know, the board of directors and so on. They have certain procedural matters they can vote on but in practice they tend not to and it's just the bigger funds that own a much larger portion of the stock that actually go to the effort to make those decisions and exert governance because it's only because there's a cost to that information and to determining the right answers to those governance questions. So they'll only do it if there's a payoff I guess.
Yeah. And you have to put a threshold like at least 30% of the AUM that you have in the wallets should vote otherwise I don't know you take no action or you decide it's tough right so it's all arbitrary numbers and it's tough to really find the right plans.
So moving on to the topic of the day. So from March to now, from early March to today, Tether has grown by about 4.5 to 5 billion. Correct me if I'm wrong there. Over $4 billion at least. Yeah. So you recently passed 9 billion in total monetary base on Tether.
Which is pretty astonishing and it's almost been a little overlooked. Like a few people have been posting the stats and showing the growth, but it's interesting because people were super focused on the growth of Tether in 2017 when it was still really, really small and then now in 2020 it's been somewhat overlooked. But what's interesting is the transactional volumes of Tether on-chain are outstripping all the other public blockchain the kind of native unit transactional volumes including Ethereum and then potentially soon Bitcoin. So we're sort of seeing like the tetherization or the dollarization of public blockchains. What do you make of this? What do you make of the fact that crypto dollarization seems to be occurring, that moving dollars around seems to be a massive use case today?
Well, I think that, you know, I was reading a report that 95% of wealth transfer on chain probably more than 95% was, is BTC pair and Ethereum. And you're right, I mean Tether grew massively in terms of market cap. It is astonishing also for us, for Tether itself. We know that we of course two months ago we were still by far the biggest one. But we didn't expect so much growth in such a short time. So it is refreshing and really good to see the interest, the trust that the community puts in Tether. We have seen growth in both Ethereum and Tron. In terms of blockchains, we have seen interest from many companies in Tether outside of the simple crypto trading use case. You know, we have seen mining pools interested in using Tether to buy equipment and pay the bills. Of course, the crypto trading remains the main use case. One thing that I want to underline here is that the Tether growth in the last months, so the four, five billion of growth doesn't necessarily mean new money coming into crypto per se. It can also mean that money that was sitting on crypto and fiat on realm crypto exchanges has been transferred, transformed in Tether. The reason I believe it's quite simple and obvious. So in the 12th and 13th of March when there was that huge drop, 50% in Bitcoin and other major currencies, we have seen people being stuck on fiat exchanges because they couldn't move fast enough their dollars in order to exploit the market conditions or protect themselves or whatever you want there. So I believe that, so this is what people said to us that we had Tether dollars and who could use those on Tether exchanges was able to react much better, much faster to the sudden changes of market condition predictions. So possibly this awareness made the difference and made the growth. And I believe that Tether is absorbing part of the cash wealth that is sitting in cash in bank accounts on many other exchanges. I believe that it's a great thing to see. It will allow many, so this growth on liquidity, the more liquidity there is in Tether since basically is becoming the common denominator for many exchanges will allow to have more markets, tied markets, more protection in terms of, you know, order books, more liquid. That is really important when, you know, Bitfinex traded $11 million in less than one minute during the crash in the 12th of March. I mean that type of liquidity is really important if we want to become a more and more solid asset class.
So you're identifying a few phenomena here. So one is you're saying there's more and more kind of crypto-native business being transacted with Tether as a unit of account or actually as the medium of exchange rather, dollar as unit of account I guess. And maybe this would previously have been settling in Bitcoin but for convenience things like mining equipment purchase is settling in Tether. And then the other really interesting phenomenon is the crash on March 12th was a reminder to a lot of industry participants that they need crypto-native liquidity. They need on-chain liquidity that they can use to get access to these market venues. Dollars in bank accounts aren't good enough. They need to be ready. They need to be able to transact at short notice. And so you're saying they basically turned their balance sheet, which might have been dollars in a bank account into dollars on chain so they could be ready to act at a moment's notice.
That is correct. I think that is the key factor at least in my opinion. That so this awareness made Tether even more popular. So we have seen OTC desks that started dealing massively in Tether as well.
Is there a credibility acquisition that occurs with time? Is there kind of a Lindy effect when it comes to Tether? I mean you guys have been around for, well Bitfinex has been around for a long time too but Tether has been around since 2014. Is that right? 2014, 15.
Is that a significant advantage, you would say? The fact that you've been around for over five years now?
Yes, we have been around since five years. I think that we don't want to hide behind a finger. We have a massive first mover advantage. That including the fact that we decided to support many blockchains and many communities is giving us and keeping, is keeping giving us a big edge against competition. So I think that we are gaining more and more trust. I think that people understand that Tether is solid and the space anyway needs a solution like that because you cannot, so it is naive to think that you can trade Bitcoin without an asset, a base asset that moves at the same pace of Bitcoin. So wires are not moving at the same pace, in the same speed. So that was the full reason why Tether was born in 2014. So there was a massive spread between exchanges even 20 and 30% at some point. And in order to cover those spreads if you send Bitcoin in 10 minutes you need to send the equivalent dollars in 10 minutes or faster. So there's no other way around otherwise you will always have spreads and discrepancies and latency.
And wires just in practice they settle much more slowly I guess.
Yes, I mean if let's say that if you have two trading venues that use the same bank and you have intra, you know, you can have intra settlement procedure that is super fast, right, maybe even one second. But this works only if let's say a couple or two exchanges use the same underlying bank. But that is in crypto is not the case. Exchanges are popping around. There are many, there are many in Asia, in US, in Europe and so on. So you cannot use the same underlying bank. In traditional finance, by saying properly the time of settlement between, you know, moving around stocks between exchanges and wires is kind of insane. While in crypto that works pretty well because speed is the same. So you have to have the same conditions in crypto and Tether allows you to do that. There are other stablecoins that have the same speed factor, but they just came later. They don't have the same edge of innovation. Simple as that.
So now that Tether exists, it's ubiquitous in virtually every crypto exchange. I mean most crypto exchanges really. It's highly liquid as we know and there's, you know, 9 billion or so in monetary base. Would you say, you know, crypto dollars are just functionally a more efficient way to send value worldwide than using the traditional banking system? Like has that flippening occurred effectively?
I think so. Of course the number of, you know, gateways that accept Tether is infinitely lower than who accept credit cards and, you know, wires and SWIFT or ACH. So it is still a really long run before getting Tether to real mass adoption but, you know, year after year we will get there. We are seeing Tether used as a remittance system and used by travel agencies and, you know, paying bills and paying salaries. So, you know, you always want things to go as fast as possible and it's always annoying to wait but, you know, adoption takes time and I think that no one, even us, could think that in mid 2020 we would be already at 9 billion dollars given that at the beginning of the year we were around four. So, you know, things can change quite quickly especially if the conditions of the world will change. And the fact that there were stricter rules recently in terms of travel, in terms of cash management, you can in plenty of places you couldn't even, I mean the bank notes were not allowed as a mean of payment. So these type of conditions are really fertile for capital growth.
Totally. And, you know, with the monetary, we've seen a lot of devaluations recently in various sovereign currencies, weaker currencies devaluing against the dollar. This has been accompanied by capital controls, new capital controls in places like Lebanon which is having a banking crisis. So you can certainly see why people would turn to crypto dollars which are just fundamentally less encumbered and offer them more transactional freedom.
Yeah. And you can keep control of your wealth. No, you have, so in crypto you have your private keys and you can keep control of your wealth and move it as fast as you want. So that is a big hedge as well. Right. So there is recently there was a big, also with the COVID situation there was concerns about, you know, the banks having fractional reserve and so on, right. So you want to move pretty fast. If you want to move really fast Tether is an interesting solution then.
So one thing you alluded to is Tether's existence on multiple chains which I find very interesting because, and actually most Tether has moved from Omni which is on Bitcoin to Ethereum recently and then a lot has moved on to Tron as well. So this kind of validates a hypothesis that lots of people have had about chain agnosticism among popular applications basically. I guess it helps because Tether isn't particularly idiosyncratic in terms of the way it uses the chain given that it's just a token. But, Tether is moving around on multiple blockchains frictionlessly, which is kind of an interesting new phenomenon. I don't think we've really seen something like that before.
