Tether’s game of musical chairs is a risky business – we need more sustainable models
by Ian Smith, CTO of Efiko and former Linux instructor at NASA
You might be familiar with games, but perhaps not game theory. Unlike Monopoly or poker, game theory models the relationship between two people or entities, known as radical agents, that exhibit conflicting, overlapping or differing interests from one another, with the aim of bringing both agents towards what’s ultimately the “optimal solution” (referred to Nash Equilibrium for the Game Theory pros out there).
Often cited in game theory, the concept of “zero-sum game” refers to a mathematical representation where the interests of one radical agent are equal to the other’s loss. In essence, options and futures are examples of zero-sum games where every dollar “earned” is someone else’s dollar “lost,” with the net result still equating to zero for the economy as a whole.
Well, I believe that until crypto services extend beyond just acting as means of payment, the entire economy will continue to play a zero-sum game – and no one but a select few will benefit from such a scenario.
Let’s take Tether as an example: in a zero-sum game economy, centralization becomes extremely risky and Tether has discovered how to control the game. Here is how: it does so by printing USDT from a faucet in smart contracts, and its reserves ensure that its tokens are 100% backed and pegged at 1-to-1 with a matching fiat currency. The smart contract issues new tokens on a regular basis, which will then be used to purchase “backed assets” on chain and in exchanges.
But the sudden injection of large amounts of something-used-as-capital to purchase crypto assets will create higher prices and increased market volatility, whereby the winners and losers are not easily identifiable and all roles are blurred together.
We know that the market correlation between printing new tokens and subsequent price movement is very high, and to attest to this, we can look at a BDC Consulting study in which “analysts ran correlation tests on 20+ indicators and found that USDT supply does feature a strong and statistically significant correlation with the BTC price”.
However, there’s a key difference to mark here: it’s not the price of Tether that’s correlated to the price of Bitcoin, but the very issuance of any new Tether tokens that sparks the price jump.
Now, imagine a poker game with a $1,000 buy-in at the table. Every player starts with the same amount of money. A player (in this case, Tether) will add $500 (Tether tokens) to the game each turn. For each round of play, the total market value of the power game will increase by $500 – but as the Tether player only bets Tether tokens, they get to keep all of the USD winnings. With such a concentration of power in Tether’s hands, this scenario highlights the unfair advantage that the company has in the crypto market, as it has the power to control supply and demand and influence over the whole space.
With such a simple strategy, Tether is essentially turning the initial zero-sum game scenario on its head, making it more alike to something like a round of musical chairs. But make no mistake: this is entirely for the benefit of a single player, in this case Tether, and to the detriment of the rest of us participating in the game. In this scenario, the crypto market will have one to three chairs left at its choosing and everyone else has little to no value.
I wouldn’t call it a wise strategy, nor something that should be encouraged, but the entire economy running on a zero-sum game premise is not advisable, either. Unless we move towards a deeper creation of value for the crypto market as a whole, we’ll find ourselves stuck either in a zero-sum game or playing with the systemic risks of a Tether-like model.
I believe that the only way out of it would see crypto reinventing itself as something more than just a payments service and transitioning into an efficiency-driven service.
By creating solid, real world value available for every ‘player’, in keeping with the game metaphor, it would create more of a direct link between its value and the more extensive background of traditional finance, which would also benefit everyone involved. A great example of this is Centrifuge, a protocol bringing real world assets to DeFi.
If we want to build an inclusive and reliable crypto economy, we need to better understand the potential at hand, and aim for more sustainable and efficiency-driven models that provide real-world value without leaving anyone high and dry, as in the case of Tether. Looking at the current state of things, I believe that is the only path forward for these new systems of trust and their concrete appeal to the masses.