Is Tether backed by fiat, or Schrödinger’s stablecoin and the metaphysics of quantum superposition
Stablecoins have brought tremendous flexibility and liquidity to cryptocurrency exchanges, and provide a haven for traders fearful of a downturn in prices. No such coin is more famous and infamous within the industry than USD Tether, Bitfinex’ stable coin introduced in early 2015. The coin was presented as a cryptocurrency not only pegged 1:1 to the value of the US dollar, but backed by dollars kept in the bank account of Tether Ltd. Tether has undeniably provided massively increased volume for Bitfinex and other exchanges, including Binance, Huobi and many more beyond. Over time one question has become more and more prominent, however — is Tether really backed by US dollars? Is there a dollar for all 1.9 billion Tether tokens in existence? When Tether Ltd. ‘prints’ more, do they also reserve fiat for each token created?
This is one of the most speculated upon subjects in cryptocurrency markets today. That should come as no surprise, as Tether is the 8th largest cryptocurrency in terms of its market cap, which also stands at $1.9 billion obviously enough, close to the same valuation as Vice Media and Ofo Bicycles in China. While speculating on the truth or falsity of Tether Inc.’s guarantee, the media has failed to think of the broader picture of what is at stake here.
In fact, the Tether question can teach us something about philosophy, quantum physics, and even reality itself. At present, Tether exists in a state which brought about the EPR Paradox — named after Einstein, Podolski and Rosen’s paper on the subject. These three iconic scientists battled with a problem in quantum physics: the idea that when it is impossible to see a particle which could be in one of two states, we have no choice but to describe it as being in both of those states and neither at the same time, in a state we now refer to as “superposition”.
Erwin Schrödinger famously constructed a now famous thought experiment to explain this phenomenon. A cat is put into a closed metal box with sufficient air, but also with a dangerous container of radioactive material which may or may not leak. If it were to leak, of course the cat would die. Until we open the box the cat may be dead or alive, and so it exists in a state of superposition — both dead and alive. Once we open the box and check, that problem is resolved and the superposition comes to an end.
This is exactly where Tether exists now, in a state of superposition. We (reasonably) know that there really were US dollars backing every Tether token when it was first launched. Indeed, Bloomberg suggested last week that they had seen documents proving the company had sufficient cash reserves for each token as late as January 2018. Nonetheless, almost four years have passed and no proper audit has taken place. By the description we have discussed, Tether is currently fully backed by dollars and not backed at all by dollars, and this superposition will end as soon as we see an audit. There are a number of ways to interpret such a state of affairs. We can follow the popular Copenhagen interpretation of superposition, which says that states themselves do not have real properties until they are measured, but that seems somewhat weak and leaves us back in the position where we cannot describe Tether’s present state at all. If we follow the many-worlds theory however, there are at least two branches of the universe or even full alternate universes — one for each of those outcomes and perhaps also 1.9 billion more universes where it is backed by dollars, but to various extents.
It’s pretty clear by all of this that Tether Inc. has an obligation not just to traders, but to the universe itself, to release an audit and allow this superposition to be resolved. In recent months speculation about its risk has has caused Tether’s value to fall below it’s stable price, as low as 88 cents in October 2018 — almost certainly a manifestation of the stress Tether’s superposition is having on the universe. All we need is a fair, objective audit and we can go back to relaxing, unless of course there are no dollars and our portfolios face a similar fate to that of an unlucky cat in a radioactive box.
Article by Byron Murphy, Editor at Viewnodes. For information on some of the services provided by Viewnodes, including our Tezos delegate, click here.