Wednesday, March 31, 2021

From Circle-of-Gold to Mega$Nets to Bitcoin

We tend to dismiss chain letters as mere scams or frauds. In this post I want to get readers thinking about chain letters as a type of financial innovation, one that has been steadily updated over the decades.

Chain letters are lists. That list is governed by a rule: the first people on the list are to be paid by the latecomers. The chain letter stop working, or paying out, when no one else wants to join up.

The amount of money flowing to early-birds who joined the list is equal to the amount arriving from latecomers. No additional value gets created. That's why chain letters are zero-sum games.

The greatest technological strength of a chain letter is its decentralization. Each node, or participant, is independently responsible for receiving, copying, updating, distributing, and marketing the chain letter. Without a central schemer to indict, it's almost impossible for the authorities to stop it from propagating. Think of chain letters as the honey badgers of the financial world: tough, indestructible, and durable.

One of the most famous chain letters was the Circle of Gold letter. It reportedly started out in San Francisco and ripped through the rest of the U.S. in 1978. Here's how it worked:

In brief, I'd buy a copy of the Circle of Gold letter from you for $50 cash, and then mail $50 to the name at the top of the list, for a total outlay of $100. I'd then make two copies (removing the name at the top of the list an inserting my own at the bottom) and sell each for $50 to friends/family, for a total of $100, thus breaking even. The buyers in turn made copies and sold them on, the chain continuing. At some point my name would arrive at the top of the list and the money would begin to arrive in my mailbox.

Law enforcement declared the Circle of Gold letter to be illegal. But there was little they could actually do to stop it.

Chain letters like Circle of Gold may be difficult to eradicate, but they suffer from two big problems. I'll explain each of these problems, and also show how they were eventually fixed.

If decentralization is a chain letter's greatest strength, it is also the root cause of its main weakness. A buyer of a Circle of Gold letter had an incentive to break the rules by sneaking their name to the top of the list. Without a centralized administrator, there is no single authority who is powerful enough to prevent players from cheating.

Let's call this the dishonesty problem of chain letters. The dishonesty problem undermines a chain letter's credibility. If everyone knows that cheating will be rampant, why bother getting involved at all. Thus the odds of a letter widely propagating itself is always going to be quite low.

To help make a chain letter more transmissible, what is needed is some sort of procedure that solves the dishonesty problem while preserving decentralization.

Enter Mega$Nets.

Mega$Nets was an ingenious 1990s-era chain letter that relied on software to prevent cheating. Here's how it worked:

I buy a $20 Mega$Nets disk $20 from you
After booting up the software I'd be asked to input my name and address, which was now locked into the program
Before I could make copies of the disk, I had to mail $20 in cash to five others above me on the list. Once the $20 was received, these people would mail a code back to me.
Only after I had entered the codes into the software could I duplicate the disk and sell it for $20. If the chain grew and my name worked up the list, I'd eventually start receiving a stream of $20 payments in the mail.

Thus Mega$Nets software prevented names and addresses from being erased and preserved the list order. Importantly, it solved the dishonesty problem without compromising the decentralized nature of a chain letter. After all, Mega$Nets software ran independently on each individual machine, not from a central server.

Source: Donald Watrous's chain letter links

If Mega$Nets solved the dishonesty problem of chain letters, it didn't stay around very long. Eventually a programmer hacked Mega$Nets and figured out how to cheat the system. To undermine trust in the chain letter, he published his crack to the internet so that others could download it.

But even if a chain letter manages to solve the honesty problem, it still suffers from another big weakness: lack of fungibility.

Fungibility is the idea that all members of a population are perfectly interchangeable with each other. Rice is fungible because one grain of rice is pretty much identical to another. My Tesla shares are fungible with yours. Dollar bills are fungible.

But positions in a chain letter like Mega$Nets are not fungible. A spot at the top of a chain is more valuable than a spot further down. And a spot on branch A of the Mega$Nets chain may have a different value than a spot at an equivalent height on branch B of Mega$Nets.

This lack of fungibility impinges on a players' ability to sell their spot in the chain letter to someone else. With every position in a chain letter being radically different, it's a huge chore for potential buyers to evaluate the market value of any single spot. And so a healthy resale market for chain letter spots can never develop.

Why would we want to be able to sell out of a chain letter? One of the big attractions of buying stocks, ETFs, bonds, gold, or currency is that we can resell these instruments, maybe two minutes later, maybe two decades later. If we are locked into an investment forever, we probably wouldn't want to invest very much in the first place. Likewise with chain letters. If a spot in a chain letter can be easily resold at a later time, then making an initial investment in the chain letter becomes a much more attractive proposition.

But is it possible to design a fungible chain letter? And if so, can we also solve the honesty problem while preserving decentralization? It sounds impossible.

Enter bitcoin, the world's first honest & fungible chain letter.

The novelty with bitcoin is that all the spots in the list are created at inception.* New players can only join by purchasing a pre-existing position in the chain.** This approach is different from a more traditional chain letter like Mega$Nets or Circle of Gold. With Mega$Nets, the list is dynamic, not static. It starts out small and expands organically as people join up, append their name, and generate a new spot in line. No need to buy someone's position out. Just add your own.

By creating all spots at t=0, no spot is superior or inferior to the others. All bitcoin positions are fungible from the get-go. Not so with traditional chain letters like Mega$Nets, which operate on the principle that new spots are subservient to old spots.

As with all chain letters, people "win" at Bitcoin by being early. The difference is that with bitcoin, winning is achieved by being one of the first to buy up a spot in a fixed non-hierarchical list. With a traditional chain letter like Mega$Nets, winning is achieved by creating one of the first entries in a hierarchical list that lengthens over time. Either way, the earlier one arrives, and the more latecomers who join up down the road, the richer one gets.

Because every single spot on the bitcoin list is fungible, buyers can easily appraise the worth of any single bitcoin (i.e. chain letter spot). And so a robust secondary market for bitcoins has developed where early bitcoin players fluidly auction off their positions to newer players. This marketability is one of the things that has turned bitcoin into such a contagious chain letter.

Bitcoin doesn't just solve the fungibility problem. It also fixes the honesty problem. Bitcoin software ensures that it is impossible for anyone to conjure up a new spot on the bitcoin list, or re-arrange the distribution of existing spots. (Some people describe this as solving the double-spending problem of electronic cash, but in this blog post it is the honesty problem of chain letters that is being fixed).

Finally, bitcoin achieves all this while being just as decentralized as its chain letter predecessors. 

Bitcoin is decentralized because individual participants can buy and sell bitcoin (i.e. spots in the list) in bilateral pairwise meetings. No need to rely on a central planner to distribute funds from late entrants to early birds. Secondly, much like Mega$Nets software, bitcoin software is deployed on thousands of computers all over the world. No central server. So like its traditional chain letter predecessors, bitcoin is very difficult for the authorities to attack.

In conclusion...

At first blush bitcoin seems like an entirely novel financial technology. But as I suggested in my post, it's just a meaner & badder version of chain letters like Circle of Gold and Mega$nets. 

What is revolutionary about bitcoin is how it has modified the chain letter model in order to solve the honesty and fungibility problems. Until bitcoin arrived in 2009, we had never seen the full capabilities of the chain letter model. Sure, chain letters regularly popped up, but they never lasted for more than a year or two. If anyone played them, it was weirdos like Uncle Bob's cousin's strange friend.

By solving the dishonesty and fungibility problems, bitcoin has radically dialed up the contagion factor for chain letter technology to a degree never experienced before. Bitcoin has become the first chain letter to go mainstream. It is the first chain letter to go global. Your sister is playing, your cousins are in, and so is your neighbour. We've almost arrived at the point where the normies are the folks who play bitcoin. The abnormal ones are those who haven't secured a spot in line.


*Bitcoin has a 21 million cap. These 21 million coins were not created at inception. However, the protocol sets out the rules for their creation ahead of time.

** Players can also join by "mining" bitcoins. Mining is one of the processes that updates & secures the chain letter. Computers that engage in mining are rewarded with new bitcoins and/or a small fee out of the existing stock of bitcoins.

Monday, March 15, 2021


1. Over the last month or two I've been following an interesting archaeological debate over the discovery of coinage. I thought I'd share it with you.

2. It's generally accepted by archaeologists and numismatists that the first coins were invented in Lydia, modern day western Turkey, in the 7th Century B.C.E. (i.e. 610 B.C.E. or so). The idea quickly spread to Greece. The Lydians used electrum, a strange silver/gold mix, to make their discs. (I wrote about electrum coins here). I've included an example below.

Electrum coin from Ephesus, 625–600 BC [Source]

We don't know exactly why the Lydians used electrum, or even if they treated their discs in the same way that future generations would use coins. But when the Greek city states copied Lydian coinage in the 6th Century, they didn't use electrum. Their coins were pure silver.

3. Lydia's electrum coins aren't the topic of this post. The debate that I'm going to describe revolves around the belief among some archaeologists that a form of proto-coinage had been invented prior to the Lydians and their electrum coins. This proto-coinage came in the form of sealed and regulated bags of hacksilver (more on hacksilver later).

Others archaeologists disagree. They are adamant that Lydia remains ground zero for coinage.

For lack of better terminology, I'll call the first group of archaeologists, those who think there was a predecessor sort of coin, the proto-coiners.

So relax and follow along.

4. By the way, mine is an outsider's account on the archaeology of money and coinage. I am not an archaeologist, so I will certainly get a few things wrong. Nevertheless, I am hoping that my regular monetary economics readership will enjoy learning how archaeologists attack the problem of money.

5. How popular was silver in ancient society?

"Silver served as the main measure of value, the means of payment and credit, and as an indirect form of exchange in Near Eastern economies from the mid-3rd millennium onward," write archaeologists Tzilla Eshell, Ayelet Gilboa, Naama Yahalom-Mack, and Ofir Tirosh (Eshel et al) in a 2018 article entitled Four Iron Age Silver Hoards from Southern Phoenicia. The Near East is a catch-all term for modern-day Israel, Iraq, Iran, Jordan, and Syria. I will return later to Eshel and coauthors' paper.

Morris Silver, an economist who researches ancient economies, describes Mesopotamian texts of the middle of the second half of the third millennium that show silver being used by street vendors, to pay rent, purchase dates, oil, barley, animals, slaves, and real estate.

According to archaeologists Seymour Gitin & Amir Golani (2004), Assyrian economic texts from the 7th C B.C. show that the majority of all types of payments were already being made in silver, including those for tribute, craftsmen obligations, and for conscription and labor commutations.

Cuneiform tablet, loan of silver [Source: The Met]

The Old Assyrian cuneiform tablet above from around 1900 B.C.E. says that 6 minas (c. 3 kg) of silver are owed by two men to the merchant Ashur-idi. One third of the loan must be paid by the next harvest and the rest at a later date. If it is not repaid by that time it will accrue interest charged at a monthly rate.

6. If silver had already become a sort of medium of exchange sometime between 3000 B.C.E. and 2000 B.C.E., it wasn't in coin form, but as hacksilver. By hacksilver, what is usually meant by archaeologists is silver ingots, hacked pieces of ingot, silver scrap, and cut up bits of silver jewellery.

Below are some examples of hacksilver:

7. One reason for the hacking or cutting-up of silver may have been to make small change. If 2 grams of silver was required to make a payment, but a payee only had a single 10 gram ingot, then a small part of it had to be cut off.

8. Another less obvious reason for hacking, suggested by Eshel & coauthors, is that it may have been a way for merchants to check for quality. Pure silver is soft. Mixing copper into silver makes for a harder ingot. A solid smash to the ingot may have been the accepted way of verifying whether an ingot was good silver or not.

9. It wasn't till 610 BC or so that the Lydians made the first coins. So for over a thousand years, silver circulated as a medium of exchange, in hacked form.

10. The big innovation with coins is the stamp. Because we trust the issuer's brand, we needn't weigh out or assay (i.e. smash/hack) silver prior to engaging in trade. So trade was much more fluid.

If you think about it, branding metal is a pretty big step for a society to take. It means that laws, norms, and institutions have become established enough for people to be confident in something as abstract as an issuer's emblem. Too much fraud, warfare, and lawlessness, and branding breaks down—you've got to go back to weighing and hacking silver yourself.  

11. The proto-coiners don't agree that Lydia was the first to "brand" silver. They suggest that bagged and sealed hacksilver was already circulating in a way similar to coins. Some authority, perhaps a government administrator or a merchant, pre-weighed a certain amount of good hacksilver, bagged it, and affixed their seal to it. And so anyone who was offered the bag in trade could treat it just as they would a coin. As a verified amount of silver, it needn't be weighed or hacked. The bag would have been accepted according to whatever information was inscribed on the seal.

12. If the proto-coiners are right, that means our ancestors were better monetary innovators than we originally thought. It pushes the effective date of coinage technology back by 500 or so years.  

13. It's a fascinating debate, especially because it invokes a set of mysterious old hoards that archaeologists have discovered over the years. These hoards are typically hidden in clay jars underneath the floors of houses by their owners, probably for safekeeping. And then they were forgotten or some disaster befell their owner, only to be rediscovered thousands of years later. Who were these people? Why did their hoard get forgotten?

14. One of the key hoards around which the debate revolves is the Tel Dor hoard, which was found north of Haifa in Israel. It was excavated in the 1990s by Ephraim Stern, an Israeli archaeologist at the Hebrew University of Jerusalem. One element of the Dor hoard is an old jug filled with silver, below.

The Tel Dor hoard (a) as displayed in The Israel Museum and (b) in situ, looking east [Source: Eshel et al]

15. Stern's description of this jug (published in this 2001 paper) quickly filtered into the archaeological community. Christine Thompson, archaeologist and co-founder of the Hacksilber Project, used Stern's findings to build a proto-coinage argument. It's worth getting into the details of her argument (and subsequent rebuttals) to see how archaeologists think. You can find it in her 2003 paper, Sealed Silver in Iron Age Cisjordan and the ‘Invention’ of Coinage.

Thompson (channeling Stern) tells us that the Tel Dor hoard dates to somewhere between 1000 B.C.E and 900 B.C.E. The hoard consists of a jug containing 17 bundles of hacksilver wrapped up by linen cloth (see photo of one of the bundles below).

16. Together the silver weighs 8.5 kilograms, which at today's silver price is worth around $8,000. But that's not a great way to think about how much this hoard was worth. According to a very readable article by Tzilla Eshel, a half-gram of silver was equivalent to a day-worker's wage. So the entire hoard was the equivalent of forty-six years of labour. In modern day terms, that would value the purchasing power of the hoard at well above $1 million.

17. Stern has speculated that the hoard may have belonged to a Phoenician merchant who used the silver to build and equip ships, or to buy merchandise for eventual exchange with countries in the western Mediterranean.

18. Most of the linen wrapping in the Tel Dor hoard has long since disintegrated. Thompson notes that the bundles were closed with bullae, or clay seals. (See below). But these seals do not contain a name, just a pattern.

One of the silver bundles found at Tel Dor, and an illustration of a clay bulla, or seal. Source: Ephraim Stern in The Silver Hoard from Tel Dor [pdf]

19. If the bundles found in the Dor hoard were treated by their owner as coins, then one would expect them to weigh a standard amount, just like all modern nickels and quarters weigh the same. And that is the gist of Thompson's argument. According to her, the 17 bundles all appear to be the same weight. .
20. One of these bundles had been removed by Stern to be weighed. It registered at 490.5 grams. Thompson suggests that this 490.5 grams might align with usage of the Babylonian shekel unit of account. Under this archaic weight standard, each shekel weighed 8.3g, and 60 shekels was worth 1 mina. Thus a mina would have weighed 500 grams.

So the 490.5 gram bundle found at Dor comes close to an even mina. It's as if the bundle was a very large denomination mina coin. Thompson attributes the missing 10 or so grams to loss of a few small pieces due to disintegration of the cloth.

21. The purity of the Dor hoard is quite high, notes Thompson, suggesting that the bagged silver, like a coin, had been checked and regulated.

22. Thus Thompson has created a plausible theory about bags of silver being treated as coins. Like a coin, the sealed bags of hacksilver found at Dor had a certain purity and weight. Presumably people who received them in payment didn't have to weigh the silver. Nor did they have to assay the silver by hacking or smashing it.

23. It's a convincing theory. Now for the counter-theory.

24. Raz Kletter, an archaeologist at University of Helsinki, is not convinced by the idea of a proto-coinage. In a 2004 paper, he points to the nearby Tell Keisan hoard, dated to around 1000 B.C., which also contained wrapped hacksilver bundles. The hoard includes 6 or 7 bags of cloth, says Kletter. Two of them weighed in at 24.5 and 25 grams, suggesting that they may have conformed to the same denomination. But two of the other bags measured at a 32 and 100 grams respectfully, which muddies the waters. Moreover, Kletter says that the weights of the bags does not correspond clearly to any known standard of weights and measures.

25. Tel Dor hadn't finished telling its story, either. Recall that at the time Thompson was writing, 2003, only one of Dor's 17 bundles had been weighed. It came in at 490.5 grams, and Thompson ascribed to this bundle the possible value of a clean mina of 500 grams, less a few grams due to thousands of years of wear and tear.

But in 2018, Eshel & co-authors opened a second Dor bundle. They found that it measured just 420.6 grams, which doesn't conform as closely to a mina. So that undermined some of the arguments in favor of proto-coinage.

26. That's not all. Eshel & co-authors did a chemical analysis of four hoards including both Tel Dor and Tell Keisan. Recall that Thompson suggested that the purity of Tel Dor silver indicated a degree of regulation, much like a mint controls the silver content of a coin. But Eshel & co-authors found that the silver from Tell Keisan, though "piously" packed in sealed bundles, was not so pure. It contained large amounts of copper, suggesting that it was a forgery. (See photo below). If the whole point of bagging and sealing was to create a trustworthy medium of payment, the deliberately-alloyed Tell Keisan silver seems to contradict this.

A bundle of hacksilver from Tel Keisan. Its green colour betrays its copper content. When silver corrodes it tarnishes black, but copper produces a green rust. Source: The Torah

27. This collection of counter-observations somewhat weakens the argument for an early proto-coinage in the Near East. But there are probably plenty of yet-to-be discovered hoards. Who knows, perhaps the next one will contain bundles of provably standardized hacksilver. It certainly is a provocative idea.

28. If the role of bundling and sealing of hacksilver wasn't to create a proto-form of coinage, than what was its function? Eshel & co-authors suggest that bagging was little more than a convenient manner of storing one’s wealth. Taking out a single cloth bundle and weighing it would have been much less awkward than removing individual pieces one-by-one and weighing them. 

If you're interested in learning more about the ancient hacksilver economy, I'd suggest reading How Silver Was Used for Payment, recently published in The Torah. Tzilla Eshel, the archaeologist who co-authored one of the papers I cite in my blog post, is the author and has written it with the lay-person in mind.

Saturday, March 6, 2021

Tether, a bigger badder PayPal

My recent article on Tether, a stablecoin, was just published at Coindesk. In the article I commented on Tether's recent settlement with the New York Attorney General's office. Because the settlement forces Tether to adopt a bunch of new practices, I think it's a win for stablecoin consumers.

Why have I been focusing so much of my time on Tether stablecoins? Diligent readers will recall I wrote about it twice last month. (1 | 2 ).

First, I've been writing about stablecoins for a long time now, and Tether has always been the biggest of the bunch. So it merits our attention. But it isn't just the biggest stablecoin. These days it's also becoming big by regular fintech standards. According to its website, Tether recently passed $35 billion in deposits, ranking it above PayPal's $34 billion. Which means that by my estimates it is now the largest U.S. dollar non-bank payments platform in the world ranked by customer funds.

Tether imprints dollars onto a blockchain. PayPal registers dollars in a centralized database. But apart from that, they're technically the same beast. Both keep some dollars (or not) on deposit with their banker and then issue dollar IOUs to their customers. And customers can in turn use these IOUs to make payments amongst each other.

The second reason I've been writing about Tether is that it is dubious. As I wrote here, it avoids U.S. money transmitter regulation by locating itself offshore. And it has somehow managed to wrest first spot away from PayPal despite doing very dangerous things with its customers' funds.

Its impropriety is a matter of public record. Even before last month's settlement with the New York Attorney General we already knew that, among other things, the firm had invested millions of dollars of customer money in a fraudulent third-party payments processor, all the while informing users that Tethers were backed by dollars "safely deposited in our bank accounts." If you want to get into this in more detail, Bennett Tomlin has been exploring these things in far more detail than I.

I am fascinated by this strange combination of popularity and sketchiness. And I'm not the only one. Tether analysis is a growing sub-field of cryptocurrency analysis.  

Tether is imbued with an aura of Trumpian invincibility. Hey, look at all these bad things we do. But we're getting away with it. The market keeps buying. We're bigger than PayPal! Tether's success makes outside observers wonder whether up is down, or bad is actually good.

But I want to dispel some of this seeming invincibility.

As I suggested in my Coindesk article, much of Tether's stablecoin dominance is probably due to network effects. That is, Tether was the first stablecoin to market, and so a Tether standard of sorts emerged. Like any standard, once everyone plugs into it it's hard to move away to a better standard. New and safer stablecoins—ones that have been licensed under a financial regulatory framework—have certainly emerged, including Paxos Standard, TrueUSD, Gemini Dollar, Binance USD, and USD Coin. But Tether enjoyed a four-year head-start, and so even if it murdered someone in the middle of 5th Avenue it would still be the leading stablecoin.

For instance, Tether is the only stablecoin that doesn't provide regular attestations.

Why doesn't Tether make an effort to adopt an industry-wide practice? It could be that it is just too sketchy to be able to hire an accounting firm to provide attestations. Alternatively, maybe its position as the standard stablecoin means it needn't bother. It gets to coast while everyone else has to peddle.

But if it's difficult to move away from a given standard, its not impossible. The first example that pops to mind is how the international monetary system was on a British sterling standard in the 1800s, but now we use U.S. dollars. Somehow sterling dominance evaporated. The same can happen with Tether's dominance.

In fact, I'd argue that we're already seeing a movement away from the Tether standard, particularly in decentralized finance, the set of financial protocols established on the Ethereum network.

It's hard to underestimate how much decentralized finance, or DeFi, dislikes Tether. Consider the biggest DeFi lending platforms, Compound and Aave. Both platforms allow USD Coin stablecoins to serve as collateral. (USD Coin is the second largest stablecoin). But these platforms say no to Tether. That is, if you want to get a loan from Compound or Aave, you can't use your stash of Tether as security. As I pointed out in my article, Compound's decision is based on reports that Tether is “undercollateralized” and has the “potential to collapse at any time.”

MakerDAO, a combined stablecoin/lending protocol and one of the top-three DeFi tools, has also adopted a say-no-to-Tether policy . It sets a hawkish 8% borrowing rate and 150% collateralization ratio on anyone who wants to take out a Tether-backed loan. That may sound like gibberish, so let me translate. For a $100 loan from Maker you've got to lock-up a hefty $150 in Tethers. You'll pay 8% in interest each year on the loan.

But if you want to take out a USD Coin-backed loan (remember, USD Coin is one of the newer safer coins), Maker's terms are far more dovish. It'll cost 0% and 101%. So to get a $100 loan, you need only provide $101 in USD Coin. And the interest costs is nil.

Given Maker's policy, there's absolutely no reason why you'd take out a Tether-backed loan rather than a USD Coin one. And that's why to this day Maker has a measly $700 in Tether sitting in its smart contracts versus a massive $700,000,000 in USD Coin. Below is an abridged list of collateral that has been deposited in Maker as security. The top red circle highlights how much USD Coin (USDC), that it holds. And the bottom circle indicates its Tether (USDT) holdings.

Source: Makerburn

It's worthwhile to revisit the policy meetings where Maker originally established its Tether policy. Citing Tether's "history of opaqueness and fractional reserve," administrators recommended conservative parameters in order to "protect Maker." At the same time, looser parameters were suggested for Paxos Standard stablecoins because it was "significantly more transparent."

In another discussion, Maker community members disapprovingly cited a tweet in which Stuart Hoegner, Tether's lawyer, jokes about Tether's approach to safeguarding customer funds. I've screenshotted it below.

Source: MakerDAO forum

Maker voters went on to approve a stringent approach to policing Tether, and rightly so given Tether's cavalier approach to managing customer funds. Defi grew exponentially in 2020. So did Maker. But almost all of its thirst for stablecoins was directed into non-Tether stablecoins. That's why there's still just $700 in Tether in Maker.

A back-of-the envelope calculation reveals how much money Tether may have missed out on. Had Tether taken pains to become safer to consumers, say by providing regular attestations and/or applying for a money transmitter license (like USD Coin and other competitors have done), it might have around $300 million Tethers sitting in Maker right now. Assuming that it invested this extra $300 million at an interest rate of 1%, Tether would be earning $3 million more each a year. 

And that's just one platform. Do the same for Compound, Aave, and more, and Tether's reputation has cost it tens of millions of dollars in profit.

Below I've charted out the ratio of the total value of all Tether stablecoins in existence to the total value of all USD Coins.The Tether-to-USDC ratio typically registered around 10 Tethers to each USDC through 2019 and early 2020, but this month it fell below 4 for the first time. USD Coin is steadily catching up to Tether for the title of largest stablecoin.

We all like the idea of justice. If you shoot someone in the middle of 5th Avenue, people should be appalled. In the case of a financial company, if you manage your customers' funds in a reckless manner and avoid informing them about the mistakes you made (and then joke about it after), then the market should discipline you, not reward you.

In the case of Tether, that is happening. As the chart above illustrates, Tether's poor stewardship of customer funds means that it is inexorably being replaced by safer stablecoins. Gresham's law, the adage that bad money pushes out good money, does not apply. The good is slowly pushing out the bad.