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Opium will be introducing credit default swaps (CDS) against the world’s largest stable coin USDT throwing a great measure of doubt on Tether Limited’s solvency.
As per the reports, the new product will be reliant on the Ethereum smart contracts which will ensure the holders just in case USDT’s issuing company fails to complete its obligation. We all are aware that when such a thing happens, the crypto scene suffers and in turn, the holders will. So the new product counts as a risk management tool is a great benefit to the holders in the traditional market where regulators have incessantly warned investors against overt engagements. The rolling out of CDS at a time against the largest stablecoin USDT with a market cap of more than $13 billion wouldn’t have come at a better time as the crypto market pulls back after a big boost.
Opium is a derivatives exchange and CDS is already quite a popular tool in the investment zone. The product is already considered as the bulwark in the wall street, attributed to the Great Financial Crisis (GFC) of 2008-09. The product is a good old insurance product wherein the seller is guaranteeing the buyer that it will cover losses when there is a credit shock leading to a downgrading of the issuing company. The present arrangement is such that if USDT moves from the current peg to a preset value like $0.90, the underwriters will cover the difference once the contract expires. But if USDT becomes steady then the issuer’s believers will receive a premium.
Opium founder Andrey Belyakov said in an interview,
“A CDS is a “transfer of the insurance from people who know and are confident to people who’d like to be insured. Derivatives are just about transferring the risk. Some people would like to have the risk and get paid, some people would like to pay to get rid of the risk.”
He also said,
“The derivative should also function as insurance for long-tail risks of rare events which are common to DeFi applications and should be soon available for stablecoins USDC, BUSD and even algorithmic stablecoin DAI.”
In a blog post published on Thursday Opium said,
“You can use it to protect yourself against (or speculate on) a systemic failure of the most widely used stablecoin in crypto. It also allows you to earn interest on your capital in case you are willing to bet on the quality and sustainability of USDT.”
Tether has a crucial role to play in crypto. It acts as a shield against volatility especially when the market goes down the doom. The price of it can both contract and expand depending on the status of demand. In the present circumstance, it is available at a premium, becoming smaller and smaller when risk-off periods exist. It also is a premium when crypto prices trend the way it has been in the last few weeks. Tether has already attracted some criticism for not allowing any audits for its reserve.