Is Tether's USDT Safe?' - Paolo Ardoino

Paolo Ardoino

The hack was one of the pivotal moments of Bitfinex. That was incredible. I think by in seven months, I think by April 2017, all the outstanding VFX tokens were either converted, redeemed, or converted in equity. The really simple idea around tether was, okay, let's reuse the incredible technology that bitcoin created called blockchain. Let's just put the US dollar because it's the most used currency in the world.

I always say that before 2022, we never had even a marketing team for tether. So Tether USDT has becoming really important for hundreds of millions of people across the world, especially in emerging markets and developing countries.

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Welcome to Appcenter, the show which talks about the technology, projects and people driving decentralization and the blockchain revolution. I'm Brian Crane and I'm today here with Federica Ernst. Today we're speaking with Paulo Ardoino, who is the CEO and co founder of Tether and CTO of Bitfinex, and also working on another new thing called Hole Punch, which we'll talk about. So, of course, some enormously influential projects in the crypto space. Most of this tethers are really excited to get into this.

Paolo Ardoino

Paul, thanks so much for coming on. It's really great to have you. Thank you for having me. We get right into it. I mean, you've been in crypto for a really long time and have worked on many different things, but how did it all start?

How did you become interested in crypto and what triggered your imagination? So 2024 is my 10th year in business in crypto. I discovered bitcoin in 2013. So I've been a developer all my life. Now I'm focusing more on business and strategy.

Paolo Ardoino

But I was born as a developer since I was eight years old. I was coding. I was living in a really small town outside of the city and didn't have many friends around, so I spent almost all of my afternoons with a computer. So fast forward, went to the UT Genoa in Italy and studied math, applied to computer science, and I'm also a big Sci-Fi fan. So my dream and my interest in technology was all about building things, building technological solutions that would be resistant to apocalypse.

Right? So in how Sci-Fi there's always problems for the world, things going for the worst. You have either wars or you have aliens, or you have to abandon the earth and go somewhere else, and so on. So that thing always was sticking to my mind on how whatever we do, whatever we build, should not be built for the best case scenario, but should be built for the worst case scenario. And so I started as soon as I graduated from the university.

I got one of the most interesting jobs ever as a researcher at the university. So I was building resilient telecommunication systems for distressed situations like battlefields. And that taught me how you can build really resilient networks that are really critical and crucial in certain moments. Then, as most of the time happens in Italy, you don't paid, you don't get paid too much. So, you know, that's the unfortunately situation of Italy.

So I decided to move to a field that I thought was more rewarding, at least in economical pay. That was finance. So I got my first job in finance, actually in Switzerland. And then I decided to move to London to open my startup to build the financial software. So in 2012, I opened this startup, and in 2013, I, I was already really annoyed by the outdated technology that the financial system was relying on.

If you haven't worked with banks or hedge funds and so on, you know that every time they trade, anytime a trader trades for an institution for a hedge fund, at the end of the day, you have to reconcile all the positions, all the trades, all the cash balances, across multiple trading venues, across multiple banks and custodians, and all that is speaking tens of different protocols, is kept together by rubber and benz, is all really outdated. Feels like it's all still written in cobalt 40 years ago. So in 2013, I got the chance to learn about bitcoin. And the first thing that I thought about bitcoin was, okay, this is really cool. This is not just, I didn't get immediately, honestly, the humanitarian and social implications, but I got the technology aspect and I thought that bitcoin could be the solution for the financial board in terms of having a common settlement network across all the institutions, across all the governments.

The beautiful thing about bitcoin as a blockchain is that everyone that has a synced node sees the same thing. So you cannot have errors in reconciliation and so on. So it's beautiful. Prevents double spending and so on. So I was really excited about it.

And then at the end of 2013, I thought, really, I was really deep in the rabbit hole. And so I started understanding more how bitcoin is actually a game changer as a currency, and its social impact could be incredible. So, long story short, in 2014, I got the chance of working for Bitfinex. So, Bitfinex was one of the first trading platforms, was really one of probably the only first trading platform that at the time was offering margin trading, bitcoin. And so the CFO, Giancarlo Diwazzini of Bitfinex contacted me through common friend, and he asked my help in making sure that Bitfinex could scale with the demand.

Right. 2014 is not 2024. Of course, we are seeing today that the huge demand of bitcoin brought by ETF's and so on. But in 2014, still, there was and increasing demand for accessing bitcoin trading. And so most of the exchanges in 2014 were built by amateur is not the right term.

It's not about being, but we're mostly almost e commerce is for bitcoin rather than high performance trading platforms. Today, we are used to have super low latency, high frequency trading and so on. But back in time was kind of different. So I brought my expertise in building the Bitfinex platform and setting up a team. In 2016, I became the CTO of Bitfinex and in 2017, I became the CTO of also tether.

And then from there, I started working also on the stablecoin side for tether. And more recently, I started to care more about long term strategy, vision and growth of the teams and execution of the strategy for tether. While still I am the CTO for Bitfinex. So I take care of the tech platform and all the trading tools built around Bitfinex. So this just means in five minutes, probably more, but yeah, no, no.

Thank you so much for that. I'm curious, like, going a little bit into sort of the story of Bitfinex. What do you think it was that helped Bitfinex succeed? And actually there's maybe one episode I'd really be curious if you guys talk about. I think some people will still remember it, right, because once you guys had this massive hack and then you had this very interesting way of, like, dealing with the hack that I think ended up working out really well.

But I'd also love if you could sort of talk through that episode and what happened then. I think that's right. I think the hack was one of the pivotal moments of Bitfinex. Remember that? The word was coming.

Paolo Ardoino

Well, the bitcoin word was coming from a big hack. That was the Montgomery hack. Right? So at a time when bitcoin Phoenix was hacked, it was personally a devastating moment also for, of course, for the company, for our customers. But look, we had two choices.

Either let it go and let Bitfinex potentially die, or we could roll up our sleeves and make sure that our customers would get whole. So at a time when Bitfinex was hacked was the 2 August 2016 bitcoin was around $600. So the total loss of Bitfinex was around $72 million, around 119,000 bitcoin. So we decided. So I remember those days really well, because after the first day or so of assessment of what happened, how it could have happened, so on, we decided to come up with a plan to resume trading and make everyone whole.

The way that we used was actually new and I think was extremely intelligent and forward thinking. So we dolarized the $72 million and we issued the so called BFX tokens. And we distributed the BFX tokens across pro rata, across the users. And so also we opened a market for these BFX tokens so that people could trade their basically these ious. The interesting thing is that these tokens had multiple functions, right?

So people could take these tokens and convert them into equity if they believed that Bitfinex would be successful in long term, they could trade them on the market. So sell them, for example, and they could also wait for the redemption. So we committed to redeeming those tokens at $1 face value with the revenues of the exchange. So as soon as the market started, so after one week, so it took one week to bring back the platform up and running. I remember that probably slept 2 hours in a week.

I was completely destroyed after seven days. But we had to make it. We had to put everything, we had to start trading again, because if you weigh too much, you don't have, people will just disappear, will go away, and there is no chance of success anymore. We knew that we had to restart trading within one week. As soon as we started trading, the BFX token, people started selling their BFX tokens, and the price went from one to $0.20, you know, that they thought, well, these guys will never make it.

But after the first days, we had, the first days, we had a huge outflow of bitcoin from the platform. You know, customers, of course, were withdrawing in panic. But after a few days, after ten days, 15 days, we were back. The first exchange by trading volume. So at the end of June, at the end of August, we were the first, again, the biggest exchange by trading volume.

And so by the end of September, we redeemed the first GFX tokens. So people were like, holy cow, these guys are making money. They are buying back the tokens. And so the price on the secondary market for DCBFX tokens started to go up. And so then October came, November came.

We kept making more money because also that coincided with the bull run, the start of bull run by the end of 2016, going to 2017, that was one of the most incredible years for bitcoin and the crypto ecosystem. So we were making really good profits buying back BFX tokens. So more and more people start to convert their BFX tokens into equity. So that's how basically, we got almost 300 shareholders for ifinex. And that was incredible.

I think in seven months, I think by April 2017, all the outstanding VFX tokens were either, you know, converted, redeemed, or converted in equity. So I really like and love to think about that part of the story, because I think that in these moments of weakness is how you really assess the team. And I must say that no one in our team left the company. Everyone was focused on make sure that the platform would be profitable, to make everyone bold. Yeah.

To this day, it's one of the biggest comebacks in crypto history. And I also really appreciated the story of the BFX token. How kind of, you use crypto economics to kind of make it work for you guys. So, yeah, tipping my head to you guys. So you talked about kind of switching out the financial rails and kind of settling things on blockchain because it makes sense, and I concur 100%.

So kind of. We have recently started building financial infrastructure that kind of crosses the chasm from blockchain to legacy finance with gnosis, pay and other such integrations. And I was absolutely flabbergasted at the stack that kind of like the financial world runs on. It's unbelievable. So you guys, in that vein, you guys started a decentralized exchange in 2017, back when these were kind of still fairly marginal.

So it was ethfinex and later rebranded to diversify, and then now rhinofy. How do you juggle this? So, basically, in terms of trustlessness and so on, obviously, having a dex is preferable to having a centralized exchange in some sense, because kind of like everything is transparent, kind of the spirit is there. So how do you see the coexistence of both of these branches? So I think that the beauty of Bitfinex and this group that is always there is this meme of being in for the tech.

Paolo Ardoino

So then you have people with big gold chains and so on. But we have been always really in this field for the tech. We always try to push the boundaries of tech. Even when dexs were not a thing, we thought how we could make sure that people, if people are not comfortable leaving their tokens and their money on the exchanges, how we can make the experience, their user experience, great in a sense that centralized exchanges have the advantage of being extremely fast in execution, because the. Think about the fact that now the average latency of an order on Bitfinex is around, in the internal system is around ten microseconds, between ten and 20 microseconds, right?

So that's how you scale. You can handle any sort of volume and so on. And you can only do that through a centralized platform, because even the fastest blockchains, like Solana, they have a block time of 400 milliseconds. So that is incredibly, incredibly longer, is like an eternity compared to the latency that you have in a centralized system. But the problem there is just something in physics called the speed of light.

The information goes to the speed of light, and so you cannot move information. If you have multiple nodes that have to concur to the same information, they have to agree, they have to exchange information that speed is the speed of light, and so as fast as it can be, if you have to, have to different, do different round trips around the world, because one node could be Tokyo, one could be in Switzerland, the other one could be in the US, then you get to 400, 500 milliseconds of a minimum time that is needed for blockchain and so forth. Dax, in terms of latency, the way we approach this is what are the pros and cons of a DAX compared to a centralized exchange. And for us, the most important part was having the ability of keeping your own custody while trading. So being able to trade as fast as you can with the normal centralized user experience, but at the same time keeping control over your custody.

I think that is the holy grail of finance, if I have to think it through. Of course, the other important part is the transparency, right? So you want to make sure that people don't front around you and so on. But I think that the transparency can be on one side. Of course, on the Daxis you have transparency, but you have enormous latency.

So you can also. We had. There were also cases in which people were front run because, you know, they looking at the mempool, looking at, you know, the, you know, have even the validators, for example, who can front run people because they receive transactions a little bit sooner. So there are also problems like that in Dax. To me, the holy grail and the big advantage of a DAX is the ability of letting people control their own funds.

So that's why we started FNX in that way. As of today, I think the. There is another, or there was another interesting kind of advantage of Dexs versus centralized exchanges, that is privacy or anonymity, if you will. So with Daxis, you usually log in with your metamask, and so whatever other wallet you have, and then you can start trading immediately. You don't have to go through Kyc, ML and so on.

But my opinion, as of today, seen also Mika and the other regulations, that part, that advantage of Daxis will come to an end, I think is, you know, regulators make it, made it abundantly clear that if you trade against someone else and that someone else is a person that is sanctioned, the fact that you are using a Dex is not going to save you or create a justification for you. So basically, what will end up, in my opinion, from what I gather, being the only advantage of Dexs that is still a great advantage is the ability of keeping your own custody of the funds and not being subject to potential exchange hacks. So we'll see the future will tell us how things, these things will develop. I wanted to ask another question that sort of relates a bit to the Bitfinex journey, but also more generally to your journey as an entrepreneur. I mean, you mentioned sort of like how the team sort of made it through all of that.

And you mentioned also how you have this focus on tech. I'm curious, how do you think about building an organization and company culture and what are sort of the main learnings. You'Ve had in that regard so far? Between Bitfinex and Tether, we had a really, really low number of defections. I think in, I don't know, in ten years we could count it less than two, 3% people stick here.

Paolo Ardoino

I think the reason is the culture. The culture is really about openness, kindness. There is a first rule that we have, so myself and a couple other people in the chief positions, we do every single final interview. So we still do all the final interviews, although we are growing. The number one rule is never hire.

Don't hire a toxic person. So you sometimes have amazing talent, but behaviorally could be challenging for the team, right? You don't. If you hire the wrong person, that person will affect ten people around them. Right?

So the ability sometimes, you know, and as I said, I, being a developer, sometimes you see developers that get all cocky because they are right and everyone else is wrong, or because they have, they are the only ones that have the truth on how things should be. Architect. And so we are really careful in hiring people that understand the value of collaboration within the teams. And that's something that so far, over time, allowed Bitfinex to remain one of the top platforms in the crypto ecosystem, while having probably one 10th to one fifth of the head count of other platforms. So that's something about creating a healthy team, healthy responsibilities and chain of responsibilities.

People really committed to the success of the company. I think the biggest takeaway from my career is focus on the team, focus on the people, and you will have success. I really appreciate you sharing that. Let's talk about tether. How did Tether get started?

Tether started in 2014 as a really simple product, a simple idea. In 2014, there were just few exchanges, right? You could count, you know, the exchange, the cryptocurrency exchanges on the fingers of two hands. There was Bitfinex, of course, Bitstamp, Kraken, Coinbase. There was Okeecoin and BTCC, not many others, at least not many relevant others.

And so there was, at the end of 2013 was also the first moment in history that bitcoin broke $1,000 in price. And across multiple trading venues, you had maybe $1.2 thousand. At any point in time, there was a huge spread across exchanges, up to 20%. So some exchanges were at 1.2k, others were at 950, others were at 1000. There isn't is that by then the work of the arbitrageurs was not possible.

The arbitrageurs are those kind of traders that sell bitcoin where on the exchange, where the price is higher, they sell it for dollars, they take the dollars, they move the dollars on the exchange where the price is lower. They use these dollars to buy bitcoin, and then send the bitcoin on the exchange where the price is higher, and so on and so forth. They do it in the loop so that the spread across these exchanges will go down and they all get aligned. In order to do this, you need to be able to move bitcoin from one exchange to the other. But also you need to be able to move dollars from one exchange to another.

But moving bitcoin takes ten minutes, right? The average block time of bitcoin is ten minutes, but moving dollars is extremely more difficult. Sometimes, you know, international wires might take one days, two days, three days, seven days, and there, there is the weekend. So your trading opportunity, your arbitrage opportunity, is long gone if you wait so much. So the really simple idea around tether was, okay, let's reuse the incredible technology that bitcoin created called blockchain.

Let's just put the US dollar because it's the most used currency in the world. Simple as that. Back in, at that time, there was no ethereum yet. So the way to do it, the only platform that allowed that was called omni layer. That is a color coin system that is based on bitcoin.

So tether was born on omni layer. Fast forward many years. And tether started as a simple project to allow to make more efficient crypto trading. But in 2019, 2020, with the pandemic, something changed with the economies of the world, especially in emerging markets in developing countries, they started to have big issues. Whereas in Argentina, Turkey, Vietnam, Venezuela, so many others, all these national currencies are devaluating against the dollar really, really quickly.

In some cases, I think that Argentina pesos lost 98% against the US dollar in five years, and more than 80% was lost by the turkish leader. So all the people living in those countries where these people needed solution, needed a way out, needed a way to save their wealth. Who is not about speculation here is about a father of a family that works an entire year to earn. For example, turkish liras at the end of the year is poorer compared to the beginning of the year, just because his national currency went down the beam. And so people have a survival instinct, and so they started to look at solutions, and USDT was already the most used solution that could help them.

So USDT became basically this currency that the world started to use and to build on in all the merchant markets. Now, if you go in Argentina and Buenos Aires, you have find ton of places where you can pay USDT. Same happens in Venezuela and so many other countries. And I must say, we didn't envision that. We didn't think about it when we created tether was really a simple idea.

And so we are humbled by the success of USDT. I always say that before 2022, we never had even a marketing team for tether. And so people started using our product in the way they sold more fit, and in the way that was more helpful to them. So that is really exciting. Can you give us an idea of how it's used today?

So kind of in percentage. Kind of like what percentage is kind of like what I would call Normie use. So kind of like the turkish father, or the argentinian family mother, who kind of keeps their salary in tether in order to spend it as efficiently a couple of months later. So it's really just to say, it's really hard to pinpoint the exact figures, because we are living in a decentralized world, and so information is scattered. But as of today, I think that at least 50% of the tether in circulation, the USDT in circulations in circulation are kept as savings and not necessarily used for trading.

Paolo Ardoino

So that is a great achievement, because I think it changed. It happened in four years. In four years, people had this incredible bad situation of suffering, financial suffering. And I always say that we are kind of in a weird situation at tether, because we see that if we have more success, means that the world is going towards a worse place, right? Because that's the reason for all these countries to look at the dollar, is because something is not working in their own country.

And the easiest way to have access to the dollar is USDT. So in one way, someone could see, of course, is a success for a company. But it's saddening to see that, to understand that success is also determined by imparting competency from financial management of many countries, and the inability to preserve wealth from government in these countries, that led people to fly towards a more safer currency. You've moved stack or you have kind of added stacks over the last couple of years. So as you said, you guys started out on omni and then you added ethereum.

And now you see USCT is natively issued on a number of networks. How do you determine which chains to issue natively on? So basically, if you look at payments on chain, Tether on Tron is kind of where it's at at the moment. So how do you kind of see these movements? How do they happen?

Do you plan them? Yeah, we listen to communities, and every time we deploy USDT on the chain, we do enormous amount of divisions that goes from the security of the blockchain. So how is, you know, the technology is built to the interest of a real community and the actual ecosystem around such blockchain. Right. Is pointless to listen to add USDT to a chain that doesn't have users or interests, because then we expose ourselves to risks while not getting any benefit in terms of adoption.

Paolo Ardoino

And I get this question a lot. The interesting thing about TrON is that we launched first Ethereum. Well, first there was Tether Omni, then there was USDT was launched on Ethereum and then was launched on TroN. People choose whatever they want, right? So people choose the transport layer of USD they want.

We, just to be clear, we are a centralized stablecoin. So all our features and capabilities are shared across the different blockchains. For example, we can freeze assets, it's public, right? We can freeze wallets. Working with law enforcement, that is something that applies to all the different blockchains.

And so people just choose the transport layer. So the blockchain for USDT, that is more fitting to them. And 99% of the people would always choose something that is faster and something that is cheaper. Let's think about what I said before. So Tether USDT has becoming really important for hundreds of millions of people across the world, especially in emerging markets and developing countries.

You know, we don't support us customers, and I don't think Europeans need stablecoins either. That is my take. So the vast majority of tether users is all in emerging markets in developing countries, countries that, as we said, their national currency is losing really quickly against the dollar and where every dollar or transaction fee is extremely important. We have seen after 2017, how many times the Ethereum gas fees, they grew from two dollars to fifty dollars to one hundred dollars. Every time there is some excitement, the gas fees go crazy high.

And so Tron had really low gas fees for a long time. Tron had, this is more centralized as this system of validators and for a long time had proof of stake compared to proof of work. Ethereum moved from proof of work to proof of stake more recently. So the Tron was a simplified approach to EVM that was extremely effectful because all this, think about Africa and South America and Central America, certain countries of Asia, you know, even fifty cents of transaction fees are really high, right? So maybe they earn fifty dollars to two hundred dollars in a month.

And if they have to spend $5 every time they send a transaction that is not a product for them. The interesting and sometimes, you know, the, the ethereal community criticize us a little bit because, you know, the Tron is still heavily used. The reality is that Ethereum had for Ethereum took four years to come up with layer two solutions that would bring down the fees to a variable value, right. For the vast majority of the users of blockchain. And so for, if you give to a competitor, that would be true in this case, four years of first mover advantage.

Of course, it's really hard to take it back, especially when also all these layers, two solutions built on Ethereum are completely, are anyway competing with each other as well. It's like the Simpson meme where with the Scots, where basically in the end everyone ate each other. And the reality is that we are seeing, we think that is really important for usctomy to be more diversified on different blockchains. It is important that although these blockchains will start to grow, an ecosystem will keep transaction fees low and will keep the transaction speed high in order to fulfill the interest and the need of emerging markets populations. Tron transaction fees have moved up significantly though, right?

So we see TRC 20 transfer currencies around $1.50. So it should be impacting the people that are served best by tether. Yes, exactly. And that's why we are seeing opportunities on launching other chains. Recently we launched on Celo.

Paolo Ardoino

Well, two days ago we launched on Celo that has lower transaction fees, is VM compatible, and we are also looking at Polygon and other layer tools. What I'm saying is that now that hundreds, well, actually tens of thousands of integrators like merchants payment solutions have adopted Tron is really hard for the layer two solutions on Ethereum to compete. They had four years of first mover advantage.

You started kind of focusing on this arbitrage use case and now there is, you know, kind of tether is like branched out and there's a lot of this, you know, payments use cases or people using it as a store of value. I heard in some interview you talked about tether as a sort of over collateralized bank account. I'm curious if you think of like, the long term vision for tether. Like, where do you see it going? So tether evolved a lot.

Paolo Ardoino

I mean, we. We were the black sheep of crypto. Maybe we still are, and I'm not realizing it, but we were the black sheep of crypto for a long time. You know, I think the mistake we made is that we thought that keeping your head down and not entering in public disputes and not being present on Twitter and so on would work for us. It's like, okay, if I keep my head down and do a good job, people will be okay with me, will be happy.

And we realized that we are good people. And then that didn't work well. And we started to understand that people needed heavy quantities of transparency, and I think it's rightful to ask for that. And so we changed, I think, heavily in the last years. The amount of information that we publish, the way we managed our services, much more publicly, we came up, we were the first ones to come up with an attestation, with a breakdown of the reserve showing how much we have in different things.

We were subject to many critics that we took well, and we applied to the company so that we could improve also ourselves. I'm sure you remember the commercial paper part, although there was a lot of nonsense, like we had ever grande and all the chinese papers and so on. That was really stupid. But anyway, we proved that we could convert everything, or almost everything in UST bills as of today. So the community was asking us to do changes and we always listened to the community.

We made these changes. As of today, I think we have. Well, as the 31 December 2023, we had $80.3 billion in us treasury bills. That would put us at the 20th as the 20th country in the world as owners of us debt. And when it comes, I think to the three months treasury bills owners, we are the third one as in terms of holdings.

So the majority of our tbils are all short terms, like within 90 days. And so nowadays, in the last attestation, we published other numbers like we had 5.2 billion on top of the 100% reserves that are covering all the issued USDT tokens. So, meaning that we had tether is making good money, right? In a quarter, we made almost $3 billion. And we could have dividended any other company, any other normal company.

Imagine a bank that would make $3 billion in profit. Oh my God. They would distribute these profits left and right to all the shareholders, up to the last cent. But no, with Tether, we decided to keep the vast majority of these profits within the company up to 5.2 billion as the last quarter. So that Ren Tether ended up in being 5.2 billion over collateralized.

So of course, banks are upset because banks are lending out 90% of their portfolio and their balance sheet, and tether instead is doing the opposite, is actually accruing more money and keeping it. To show that you can build something that is safe, you can build a financial tool that is safe and doesn't need to lend out people's money. And so that's what I like about tether, this ability of revolutionizing how know some certain things in finance are not. So the yield on us treasury bills has gone up enormously over the last year or so. Have you ever thought about kind of making USDT in some form, yield bearing, and letting people who actually use it and hold it participate in that windfall?

So that is a really interesting one, right? So I get this a lot as well. The reason why there are two different reasons why we cannot do it and doesn't make sense for us to do it, is the first one is that if you start giving out interest and share interest, that becomes a financial product that then becomes a security. So that's something that is, I don't think is a good approach. So I think that many other products that are the stable coins that are trying to do a stable coin that provides an interest, are going to end up in having some issues with the.

With the US regulators and other regulators. But also, you know, I'm a, I consider myself a scientific person. And when I create a product, I always think how for whom this product is created for and who is going to use this product. If you live in Argentina, where the intraday volatility of the Argentina pesos is higher than four to 5%, does it really matter that at the end of the year you get 4%? And on the other side, if we get that 4%, we can create a really incredible stable product that is helping hundreds of millions of people.

So that's why I think if you are in the US, you have already the best banking rails. You have already the US dollar. So if you put money in a stable coin, you expect to receive an interest, right? Because that's a concept of a saving account and a checking account. On a saving account, you want to have an interest.

But everywhere else, outside the UN, for all the people outside the UN's, the interest is in, especially the ones living in emerging markets and developing countries that are the actual users of a stablecoin, then that 4% is not really meaningful, because what they care about is to have something that protect themselves from a much worse situation. So I totally understand that reasoning. Of course, one thing that did happen a few years ago that sort of along these lines is that a lot of the usage of tether of USDT was that people hold it on exchanges by the trade. And then I think binance created their busd. And I think it was because they say, well, all these people holding USDT there, and of course, the sort of profits of that accrued with tether.

And they were like, okay, if we can swap this out with our own stablecoin, we can capture that. So I'm curious, do you think that might be a path where basically USDT would incentivize some of these large platforms where massive amounts of USDT get held, or do you see that as a sort of competitive threat? Well, I know that some of our biggest competitors are kind of doing that, right? So I know that from that some of our competitors are paying big institutions and exchanges to hold their stablecommit. Again, to me and to many legal teams that we talk to, that ends up in you are giving interest to someone else.

Paolo Ardoino

Hence can be considered security. So the point is that tether today is $102 billion in market cap. Maybe we'll go down, maybe someone else will create a better solution. But we are not. Look, again, we are in for the tech, we are keen for the innovation.

If we become the second biggest stable coin or third biggest stable coin, as long as it's safe, as long as it follows our ethos, that's fine. We are happy with it, right? So we don't have to be forever. The first we need, what we like is to leave a sign in terms of innovation and utility, and how with our technology, with our passion, we can, we can change the world. And if someone will create something better, that's fine.

But I believe that creating, trying to, you know, be, to compete and trying to reduce the security also in this case from the legal side. Right? So if you, if you start doing more and more things, if you can, if you keep adding flavors to the stablecoin and you start doing this and that, because you are scared to become the second or the third, or losing market cap or losing market share. Look, I mean, that's not us, right? So we believe that the simpler it is, the safer it is.

So if you start adding all these nuances eventually you will fall in an issue and that could endanger the stable coin. So again, tether has more than 300 million users across the world. And so the only thing we do care about is that it's safe. Your main USD stablecoin competitor is USDC. How do you see the differences between USDT and USDC?

Well, they are focusing mostly, and historically they have been focusing a lot on the US. To me and Europe. Now to me is if you look at the US and if you look at Europe or Switzerland, everyone has two credit cards in or debit cards in their pocket, have cash, have two bank accounts. You know, there is no need. To me, I always described like trying to sell an ice cream to an eskimo, right?

So there is no point when you create a product again, you have to create it for. For the people that really need it. And those are the ones that don't have access to a bank account. There are billions of people in the world, they don't have access to a bank account. There are billions of people that are not bad people.

They are really good people, they are nice people, but they are not really interesting for the banking system. Because for the banking system, if you are not profitable enough as a human being, you will not be on board. If you're not putting all your salary, and if your salary is not enough, is not big enough to justify their outdated financial infrastructure, then they will never accept you as a customer. For all those people, there is USD. We were clear.

When we saw the pandemic and all these emerging markets issues happening, we were clear. That is our crowd, that is the people we want to serve. We see our competitors always trying to play the game of Wall street and want to be the stablecoin of institutions. But institutions have already the best bank in rails. So the biggest difference in everything is strategy.

So we want to be the last stable coin, the dollar for the last mile, for the normal people. We think that bankers had already too much. What are your thoughts on decentralized staples? So basically things like dye, rye? So basically there's different flavors, right?

Like fully collateralized, collateralized with assets that may be difficult to get a price feed for, under collateralized algorithmic and so on. Do you see those gaining ground in any way? Because the way that centralized stablecoins work is you leverage heavily the existing financial infrastructure and kind of are exposed to financial infrastructure risk. That kind of pertains to the legacy system. How do you see that play out in the future?

Paolo Ardoino

Let's go with a little bit of history. While we think about algorithmic stablecoins, we think about terra Luna. We all know how it ended up, right? So I was quite vocal in the months before saying to many people, look, Terra Luna is gonna be gonna blow up. And many answer me.

Well, you are only saying that because Terra Luna is going to eat up all tether market share.

But the interesting part is that it's easy to create a stable coin that is 1 billion in market cap, 2 billion, 3 billion, 5 billion if you get to 10 billion, or I think 17 to 18 billion. Was terra Luna at the peak? The liquidity has to be there. You have to be able to pay out immediately. You have to be able to redeem.

In 2022 was April, May, when Terra Luna blew up. You could see the difference between an algorithmic stablecoin that was made through some weird incentivization mechanisms and tether. So tether would fell because they couldn't sustain heavy redemptions. So everything started blowing after Terra Luna blew up. Publicly, a group of hedge funds started to short USDT on the secondary markets.

So you could see, and recently I think DCG came out, or there were some, some disclosures during a class action, showing that also DCG shorted during those times USDT for $400 million. But there are other hedge funds like fear three and others. They shorted billions of dollars altogether across all these groups. In few days of USDT, they kept the price of USDT below $1 on the secondary markets. Why they did that?

Of course, they did that because they wanted to cause a bank run. That is what basically happened on terra Luna. So they wanted to close a bank run where people, if you keep the price of USDT below the dollar, or a stablecoin below, what happens is that market makers are coming in on the secondary markets and buying the stablecoin for cheap, going to the stable coin issuer, that is in this case, tether redeeming for $1, getting the dollar, moving the dollar back on the exchange, buying cheap stablecoin, going to the stable coin issuer, redeem it, and so on and so forth. That is in the banking world, the start of a bank run. So what happened with Tether in 2022, in May, was that tether was able to pay out in 48 hours, $7 billion.

That was 10% of our reserves. And in 20 days, we paid around $20 to $25 billion of redemptions. So that was 25% of our market cap. So there are a few banks in the history that have been subject to a bank run. Washington Mutual 2000, 810 percent redemption, they went belly up.

Silicon Valley Bank, Sinscher, Silvergate, all these guys didn't survive to bankrupts. You know, we are seeing recently also another bank in these days had issues. So the difference between a stable coin that is backed by liquid and real world assets, and an algorithmic stablecoin is enormous. I don't think an algorithm stablecoin makes sense that work can grow above a certain threshold, because otherwise become too risky, it becomes attackable by attackers. They tried with us, they couldn't make it, and they lost enormous amount of money because we were backed and we were solid.

They had. And when they tried to attack terra Luna, they succeeded. It blew up really, really fast. So when it comes to the other types, like collateralize, like dai, I think they're really interesting concepts. The issue is how you grow the market cap.

We having extremely volatile assets in your portfolio. Like if you have bitcoin and ethereum as part of your collateral, that becomes hard because we have seen how in the last four years, bitcoin and ethereum lost 80% of their value. So it's really, really tricky. So that pushed Dai, to my understanding, to move towards tbls as well. But, you know, if you start using tbils as part of your clutter, you are no different than tether or the other centralized stable coins.

So I think in a way, Dai decided to decided that the model of tether was probably the right one and more scalable one in the long term. Yeah, they added USDC as collateral first. So USDT, the Tiva is, I think this is something that's kind of slowly ramping up, but for some time, 70% of Dai collateral was actually USDC. And so it's just a proxy. Right?

So I think, look, the point is, and the question that people should ask themselves is why you need a stable coin. So what you want to get from a stable coin, because if you want to have an asset that is resistant to the wrath of God, that no one can take away from you and so on, that is bitcoin. Right? So you have already something that is digital, that is unconfiscatable, that is built to survive, to all the crazy monetary policies that word is going into. If you want a stable coin that quacks like a dollar, probably you are still bound to the fiat word.

So you need for a specific use case a dollar. So why you are forcing. Why we are trying to push all these crazy mechanisms to try to recreate a dollar and not using. If you want a dollar, if you're trying to recreate the dollar, it means you need the dollar for something, and you need at some point to exchange that dollar for a dollar, right. For a real world dollar.

So if you are in that situation, probably you just want something that has, that is backed by a dollar or backed by the closest proxy to a dollar that is USD bills. So why putting bitcoin in Ethereum? To recreate the dollar? I mean, when eventually that dollar that you created through bitcoin and Ethereum, you have to sell it for a dollar that is backed by the real dollars or by the US economy, that would be tether. You cannot cash out easily die.

You have to sell it for USD, you cannot redeem it directly for us dollars. And so that's the point of the stable coin, is to be able to have a link to the physical world or to the fiat world. So that's my small rant around the stable coins. It's just not that we didn't think about how we can create something better. Well, we have some ideas that are quite interesting, but the reality is that nothing is really proven to be able to become so big as USDT and maintain its stability no matter what.

That without using heavy amount of physical assets.

So us dollars, I mean, especially in this crowd, they are heavily criticized and kind of, they are often made out to be something that kind of could collapse any day now. Right. So have you thought about adding an additional product that kind of doesn't just use us dollars or treasury bills as the underlying collateral, but kind of having some sort of basket of currencies or kind of like special drawing rights and. Yeah. So basically adding like the swiss franc and the euro and the yen and so on to the mix.

Paolo Ardoino

So this is a great question and there is a lot to unpack. The thing is that, so again, if you are scared about the US dollar is probably you don't. The reason why you should be scared is that eventually, like in the Weimar Republic, you might be able to buy a loaf of bread with $1 billion. Right. But I can tell you, and if the dollar gets to that point, the euro is long gone.

And that's not about to speak about the japanese yen. Well, the swiss franc is probably the only thing that will remain and will survive, because swiss people understand finance better than anyone else. But there is no other basket. The only thing that would make sense is gold. What about a basket of kind of like stocks?

And, you know, in principle, I mean, you would ask yourself, where would the value go, right? And basically physical values would still be there. So kind of wouldn't you want like shares in companies and actual physical goods like gold, silver, and I mean, there are representations of those on chain as well, right? Well, if the dollar goes bust, that is the entire Nasdaq New York store exchange and all these, the american markets are the biggest ones. So do you want ready to have some stocks in the US market?

Paolo Ardoino

I think if we are thinking, and I like this thought, about what will happen if something happens to the US dollar, but that means that the entire world economy is going towards a reset. And there are only two things that will save you. Bitcoin and gold. So every humanity went through many resets and they always were done through gold, never through fiat currency. Now we have also bitcoin as a great alternative and gold on steroids.

But here's the thing, right? So USDT has to represent a dollar. So with one USDT, you shouldn't be able to buy more than $1, right? So for us, the USDT is a representation of dollar. That is a representation of the US economy.

If again, with the dollar you can buy, if you need $1 billion to buy a loaf of bread, you will need 1 billion USDT to buy a loaf of bread. It's not our business to make the dollar prettier and more solid than the dollar itself. It's just a representational dollar. If you really want something that is better, then you might want to use bitcoin or gold. Yeah, I mean, I think a huge part of the value of something like USDT is also, well, I mean, let's say in crypto, USDT or USDC is used a lot, right?

Like, let's say you invest in some company or do something like that, it's mostly done with stable coins. And of course, the nice thing is you will have a contract, and in a contract it says, oh, $50,000, $70,000, something like that. And you can just send 70,000 USDt. And there's no complexity, there's no conversion. Accounting is simple.

So I think even if you created some kind of other stable coin that, let's say, tracked inflation, and from a practical perspective, it would be less useful than something that just mirrors the dollar. I completely agree. The question that people should always ask themselves is what I'm using this for. So if you're using it to just to have a dollar, then you should go for the closest thing to a dollar that you can find, and that will quack as a dollar. And also in the accounting, as you said.

Paolo Ardoino

So for the rest, there is plenty of other options that, that we created in the last many years. Cool. Well, let's, let's maybe move on to the last topic because, I mean, we've talked about Bitfinex, we've talked about tether. So I mean, you already are doing a lot, but then I think you started another thing which is called hole punch, which is focused on building peer to peer applications. Can you talk a little bit about what is hole punch and the related things to hole punch and what's the vision behind that?

Sure. With tether we came from this enormous learning curve on how the world is going bust and it's not, not just us. Right. So then one of the main reasons of crypto is that we think, at least many of us think that economy is the real world economy is going towards a direction where, you know, countries are more and more at war among themselves, the economy is getting more unpredictable. And so we created a solution or to that that is, you know, bitcoin or blockchain based products and so on.

But you know, we have this concept in crypto that is called individual sovereignty, where you should be. Of course we all live in a society, but you should have financial freedom. So you need to, you want to have the direct to interact with whoever you want, but the individual sovereignty that through financial freedom is incomplete. You need also freedom of speech to achieve that. Because if you have individual sovereignty, but you cannot say anything to anyone because otherwise you get censored or go in jail, that doesn't matter much, right?

And vice versa. If you have freedom of speech. But then you don't have financial freedom, whatever you say can be used to seize your funds or make sure that you are not really free to use your own money. Five, six years ago, myself and Mathias boos, both developers, both really enjoying the concept of peer to peer communications as we are enjoying the concept of bitcoin as peer to peer money. We both came from a background of file sharing system like BitTorrent and all the predecessors.

And there is an interesting aspect of file sharing systems that I think is really was comparable and is comparable to blockchains and money systems. So you might be familiar with Napster. The first file sharing system went bust closed. And all through different iterations, developers tried to create different solutions to make file sharing more decentralized, exactly as we tried to do with money. So different attempts, right from, you had line wire, you have kazam, you had a donkey, you have a mule, and then finally you had Bittorrent.

The difference across all these different approaches is that all the different approaches before BitTorrent they had a centralization point. They had, you know, if you were using Kazam or Limewire, you wanted to look for a movie, you had to connect to a centralized index or certain servers that had all the list of all the files you can find, download the files. All these centralized servers were shut down. So then people jumped to a next version, trying to decentralize file sharing a bit more and so on and so forth. There was this history of file sharing arrived to the point where with Bittorrent everything was really decentralized from the indexes.

So the list of all the files were decentralized through a system called distributed hash. Table DHT, you know, the file sharing itself, the exchange of the files was completely peer to peer and so on and so forth. Now, with Mathias myself really were fan of Bittorrent. And so we thought what if we took the very same technology around BitTorrent, but we improve it, we make it available for not only for five stream, but for real time streams in the world. Almost everything is a real time stream.

This chat on Riverside is a real time stream. So we have tensor streams, audio, video. When we browse the Internet is a real time stream. We thought if we can take those protocols and we can create a new set of protocols that are free, that are open source, that are private. So we took also all the learnings from blockchain to create identity, to use that encryption that we learned from blockchain to make it more secure than Bittorrent was.

And it is. We spent five years to recreate the basic protocol technology to create a better layer for Internet. I think personally when the, I'm a technologist and I think that something that really annoys me is the fact that Internet changed from the beginning, from the real purpose it was born for. When the Internet was born, was born to allow people to talk to each other and share information with each other. Every computer had an IP address and still today has an IP address so that every computer could directly interact with the others.

But more and more after the year 2000, centralized system were born like, and so Google of course, then email, super centralized and then WhatsApp, Telegram. All these communication systems are incredibly centralized. They are going actually against, and all the cloud providers are incredibly centralized now 70% of the entire traffic interned is provided by servers that are running on the top three cloud providers, AWS, Microsoft, Google. So is that really the future that we want? So what happens is, and now we go back to the beginning of this chat.

We are building Internet for the best case scenario. Where everyone is friendly to each other. What if tomorrow, and we should learn from history, what if tomorrow Italy and France will not be friends with each other? Or, I don't know, Germany and Spain, or, I don't know, the US and another country. So what if, and we built.

And, you know, the reality is that all these solutions, like WhatsApp, are built by a specific company, a single company, and is using data centers in specific locations, in specific geographical locations. You might see a future where data will be held hostage and used against other countries. If you live in Europe, you use WhatsApp. If you live in Rome, you know, if you use WhatsApp every single time, you send a small message, it will go through Frankfurt and go back to Rome, right? So 90% of the people, for 90% of their time are talking to people that are within, you know, 2 km from where they live.

Yet every time we chat, data travels thousands and thousands of miles just to go back, you know, to our neighbor or to be. To go back to be 2 km from us. Is that intelligent? Not of course. Imagine how much governments are spending in Internet infrastructure just to create beefier lines, bigger Internet lines for people that are talking for most of the time with their neighbors or with their families that are living in the same area.

That is really utterly stupid. Sorry to say that, but it is. And so this is done because centralized companies and big tech providers are needed. That amount of information every day to milk that information, to make money, to sustain additional growth on new data centers, is like a circle that goes around and keep growing is like. And it's feeding itself.

Without us sharing more information, more photos daily, they will never survive. The cost of maintaining their infrastructure will crush them. And so this long story to say that the reason why we created holpunching kit is to showcase that this interview could have been done through Keith completely peer to peer, without any central server. If Hol punch, the company that is building Keith would die tomorrow. Keith will keep working.

Imagine if you are in a country, right? So Keith is serverless, allows you to do chats. We created a bitcoin chat on Keith. There are 1.5 thousand people today. There is no central server.

They are talking real time. They're sharing files. You can share any size of file you want because there is no limit, it's just your bandwidth. You are interacting with each other. You don't need.

If you share a file on Zoom, you are limited to 100 megabyte, because otherwise if everyone was sharing two big files, then you would crash Telegram or Zoom or whatever. But with peer to peer you don't have those limitations. So what we wanted to create with Keith and hole Punch is we wanted to prove to the world and to all the developers that you can build peer to peer applications with a great user experience without having to have central servers. And so kit now is being used by many people, have much better video quality, much better audio quality, just because if you are talking to a person living in the same area, it feels like you have that person in front of you. Because the latency is the smallest it can ever be, because the messages, the data packets will find the shortest path between you and that person and that between, of course, you, the two devices.

It's not magic. Internet was built in that way, but there was never an incentive by anyone to build it, to use it in that way because the companies that had the most money had the incentive to make it centralized and all the rest, all the nerds, let's say like us, they never had the money to build highly successful applications to prove that Internet can be become server free in a way, or at least most of it can become server free. And so Ted, long story short, tether found recently as we chatted a little bit about it with an important profitability. So since we are, as I said, we are in for the technology, we wanted to create the freest free as in freedom chat solution that is unstoppable, that is private and doesn't need any central server. Super cool.

So I get key to this kind of basically decentralized peer to peer alternative to WhatsApp and Telegram. Do you see the same protocol also as a foundation for very different types of applications? Sure. On the same protocols you can build peer to peer Uber. One of the scariest things is imagine that these baby cams that you monitor, your children, they are all the data passed through a central server that you don't own.

Paolo Ardoino

How scary is that? You should be able to connect directly from your phone to your home device without crazy configure needing crazy configurations. All that is possible through hole punch. And you can build, you know, peer to peer mapping, you can whatever you think is built today, you can build a hole punch. You don't know how many.

When I talk to other developers, I, I tell them, I showcase whole bunch. I showcase how you can build interaction between two devices without any middle server. Providing one device provides some services to another device without both phones, maybe without any central server. And even developers are mind blown. And that tells a lot about our education.

So as developers, when we go to the university, we are told that the client server model is the only moderate model existing. You always need a server for many clients. That's not true and we wanted to prove it. And we are going to invest a lot of money to make sure that education will pick up this new pattern because we want a horde of developers to build peer to peer applications that decentralize applications to reduce the dominance of the military, big tech companies.

I hear all of that and I'm a big fan. I will definitely check out hole punch. The one thing that kind of always got me about these peer to peer platforms like Bittorrent was that there was an incentive layer missing. So kind of people basically was very sensitive to kind of people who would, who would exploit it by kind of downloading and not seeding. So in principle, kind of like on any crypto infrastructure, you can kind of build in an incentive layer.

Is that happening with Holt Punch as well? No, not really. So I mean, Holt Punch is based protocols. It doesn't have a token, will never have a token because I believe that is a simple protocol that can, well this is quite complex, but is a protocol that can be taken by everyone and you can build whatever you want on it. Now I agree that there were with BitTorrent, most of the people wanted only to download, but never give up their upload bandwidth.

Paolo Ardoino

This completely true. But let's think about the other side. If you are building a peer to peer chat and you want to use a chat, your incentive is to talk to people. There is no actual cost for you. It's not that you are running a node that allow people to run their traffic through you.

So the difference between hole punch and a blockchain is that in a blockchain you have a global share state. So if you run node you will receive all the traffic, you will see the mempool data and so on. With the hole punch, you only choose to deal, to talk and to connect to the people you want to because you are creating a network with them. So Holbench is not a huge big network, but is a protocol to create your own small network with only the people you want to talk to because you are interacting with them without any central server. That's the only way to make something scalable.

Blockchains need to use a global share state because you need to make sure that no one is double spending. But you don't need that. You don't need. If you are creating a communication system, you don't want to receive messages from someone from the other side of the world to route them somewhere else. So it doesn't matter.

You shouldn't be a server yourself. There is now this other program project called Noster. They use relays, centralized relays. I always make the comparison between Noster and then Keith, as in with noster you have relays and so you need to provide incentives to people to run the relays. Otherwise nothing will work well with hole punch, you don't need relays, so hence you have a simpler, more simplified network.

And you don't have to have incentives because the incentive of people is already talking to each other. For example, now you are in, imagine that you were in UAE in Dubai. You cannot use Telegram or WhatsApp to call your friends and family because the telegram and WhatsApp are blocked. You can use Keith to talk to anyone and from there and to there, because the beauty of Keith is because it's peer to peer, in order to block Keith, you will need to block the entire Internet because it's not predictable where you connect to. Super interesting.

So is the underlying technology, is it some sort of whisper network or how does it work? It used the same concept of BitTorrent in order to find each other. We use the same concept of BitTorrent called DHT, the distributed hash table, so that the distributed hash table is in BitTorrent there are 210 million nodes in size at peak. So you have all these 10 million nodes that are acting as not connection points but are temporary. Databases is basically they are key value stores that are storing part of the global index in a really resilient way.

Paolo Ardoino

So if you shut down a part of the network, even 1 million nodes, the network will keep surviving and will adapt to the new set of nodes. So it's really the most sophisticated, resilient distributed database ever created. And we used it in order to allow people to find each other through for Keith, because if we added a centralized index to ket, that would be centralized. The point of centralization is that you cannot just add just a little bit of centralization. So either you are centralized or not, there is no in between because the moment you are a bit centralized, then you are centralized.

I'm curious, one of the projects I've been pretty deeply involved in for quite a while is a thing called urbit, which sort of envisions basically different architecture for like computing and an alternative to the Internet where basically all of the computers work in a kind of p two p way where, you know, applications run locally. Have you looked at orbit? Do you have any thoughts on the sort of trade offs between the hole punch approach versus that. So I really like orbit. I mean, I.

Paolo Ardoino

I played with it, I think, in 2017, 2018. I don't remember when, but I think is a really not old project in the sense of old, but is around since a long time. And the concept is great, I think. And the way it is designed is also. I really love it.

I think hole punch is creating protocols for the real world. Right. Doesn't try to change the world completely. Starting from scratch, we already have Internet. We have immediate needs that are creating a layer on top of Internet that is secure, that gives sovereignty to people.

And we are doing in the most simple way, in the most modular way, because with orbit, you had it the way I felt. It is a monolithic approach. You have to take it all, and everything should run on orbit. Otherwise it would, you know, what wouldn't work. But with hole punches, we have more than 100 GitHub projects and libraries.

You can take bitten pieces and use it and craft it for an integrated in your real application, your existing application already. So we are taking a different approach in order to change the Internet that is giving you the tools to do small steps toward decentralization, rather than forcing everyone in a new, completely different ecosystem. Yeah. No, absolutely. Absolutely.

I think that's a fair description in terms of the differences. Do you see Keith becoming some kind of business down the line, or is it just a sort of public service that you guys want to develop? I think it will remain public service. I mean, the point of kids is not making money. You know, there is this.

Paolo Ardoino

Sorry, making many references to memes, but, well, you know, the. From Batman, Joker is not that he said, it's not about the money. It's about sending a message. And for us, Keith, is that right? So we make good money with tether.

It's not that we have to make money every single time we do something. Sometimes it's important to send a message, and there is a pun intended, because kids send messages. I think this is a fantastic place to end because it is such an iconic message to go out on. I will definitely explore Keith and hold punch more. I think the entire interview was super fascinating, but somehow the whole punch part got me most as kind of like a peer to peer and decentralization.

Maxi, if people kind of want to learn more about hole punch, or indeed Bitfinex or tether, where can they go to? Where can we send them? So on axe. Until we replace Axe with something built on hole Punch. So just a disclaimer.

Paolo Ardoino

So you could go on ether to Oritfenix or at all punch to orit least IO ordoino so name is your name to find all my memes and something about everything that I do. Cool. Thanks so much for coming on. Paolo. Really enjoyed the conversation.

Thank you guys. Was super fun.

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Is Tether's USDT Safe?' - Paolo Ardoino

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1: Introduction and Background

2: The Role of Tether in Global Finance

3: Security and Recovery Strategies

4: Future of Digital Currencies

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