What Is Tether And How Does It Work?

The cryptocurrency industry consists of many different projects, some of which can be labeled “stablecoins.” Tether is a project known for issuing such pegged currencies, with USDT being its most significant asset. 

A Brief Introduction To Tether

Among crypto enthusiasts, the term “Tether” applies to both the company associated with issuing USDT and the stablecoin itself. This confuses newcomers at first, even though one gets the hang of it relatively quickly. Instead of creating an actual cryptocurrency like Bitcoin, Tether is responsible for digitizing US Dollars through the USDT trading vehicle. 

Since its inception, the potential of stablecoins has risen significantly. This has allowed Tether to ascend the ranks very quickly, as it is now the third-biggest project in the industry by market capitalization. Demand for this company’s asset has been growing steadily and shows no sign of slowing down just yet.

The USDT Stablecoin

Tether’s core product in the crypto industry is the USDT stablecoin, a digital asset that always has its value pegged to US$1. Redeeming USDT is possible through exchanges or via Tether if need be. 

What makes USDT so appealing is how this was the first significant stablecoin to gain any hold in this industry. Interestingly enough, its initial name was Realcoin, launched in 2014 but changed into USDT later on. 

Some even argue that central banks looking to create their own digital currency have taken a page out of Tether’s book. Those rumours have never been confirmed to this day, however. 

Initially, USDT was issued on the Omni Layer, a protocol that runs on top of the Bitcoin blockchain. This approach has given rise to Tether’s initial success, but it quickly became a limiting factor. Bitcoin’s network is too slow to facilitate the rapid flow of assets on its blockchain, posing a hurdle to USDT adoption. 

Exploring Other Blockchains

To avoid any hindrance to adoption, Tether decided to explore other blockchains to issue its USDT stablecoin. Initial experiments confirmed Ethereum would be a good fit. In recent years, the USDT asset spans many different blockchains, including Tron, EOS, and Binance Smart Chain. The company may keep exploring other ecosystems if the need arises.

Despite existing across multiple blockchains, every USDT is interchangeable with these different ecosystems. Most exchanges and trading platforms allow users to deposit and withdraw this asset across any of the blockchains it currently exists on. Giving users this freedom is crucial, as different ecosystems maintain higher or lower transaction fees and transaction speeds. 

Initial USDT Volatility And Controversy

Whenever a new asset gains traction in the cryptocurrency world, there is plenty of skepticism to overcome. When that asset is a currency pegged to the US Dollar, many challenging questions need to be answered successfully.  

Tether’s foray into this industry has been marred by volatility and controversy. During the early months of USDT, its price proved anything but pegged to $1. Instead, it even hit $1.2, creating an appealing arbitrage opportunity for those willing to take a few risks. 

Controversy-wise, parent company iFinex Inc ended up in the crosshairs of NYAG Letitiaie James in 2020 over the alleged “hiding a loss of $800 million”. Those claims were never proven, as the company appears to do everything by the books. Even so, many industry enthusiasts remain doubtful over iFinex’s reserves, especially given the astronomic rise in circulating USDT supply. 

The Inner Workings Of USDT

With all of the information in mind, now is an excellent time to look at how Tether’s asset works. Claiming it has a stable value of US$1 and ensuring that is the case are two different things. It is impossible to make it so by wishing hard enough, as it requires ample liquidity akin to the amount of USDT in circulation. 

Based on the Tether whitepaper, we can determine that every USDT can only be created if the company receives US$1 in their bank account for this purpose. With its current market cap of $29.37 billion, that means iFinex needs to own US$29.37 billion in its bank account(s). There is no reason to doubt this is the case, albeit some people may think otherwise. 

It is also crucial to point out that Tether isn’t backed by just US Dollars anymore. The team changed their approach a while ago to include collateral holding with real-world cash equivalents, assets, and receivables from loans. This approach allows the project to keep growing, even though it may trigger some debate and confusion. 

Despite these changes, the value of USDT remains on par with 1 US Dollar most of the time. Some microscopic fluctuations will occur from time to time, but seeing the value rise to $1.2 or drop to $0.8 is no longer possible today. One never knows what the future may hold for the company or this stablecoin. 

The Importance Of Tether’s USDT

In the current cryptocurrency landscape, no one can picture a world in which Tether wouldn’t exist. It has become a crucial aspect of trading, as it makes it much easier to get in and out of specific assets without using fiat currency directly. In a way, one can argue how USDT combines the best of cryptocurrency and fiat currency into one. 

Additionally, there is price stability to take into account. In an industry where extreme volatility is the norm rather than an exception, having one less factor to worry about is very appealing. As USDT trades against most other cryptocurrencies, tokens, assets, and other stablecoins, traders can explore many new markets with ease. 

Moreover, with the growing “competition” for USDT on different blockchains, it becomes easier to switch between ecosystems. As this asset is agnostic in value, traders can tap into Ethereum, TRON, EOS, OMG, and other options with a few clicks. It removes the need to convert between different markets multiple times, adding an extra layer of convenience and accessibility.

The Common Tether Use Cases 

Even though USDT is primarily a trading instrument, it can serve a few other use cases in the cryptocurrency world.

  • Arbitrage trading: USDT is the quickest way to transfer value between platforms, making it easier to explore certain assets’ price gaps.
  • Crypto-Only Trading: Even if a platform doesn’t support fiat currencies, they will likely support Tether’s USDT for trading. It makes for a quicker trading experience. 
  • Forex-Esque Trading: Albeit this option may seem weird, it is possible to exchange USDT against foreign currencies, like the EUR, GBP, or AUD. Those who want to explore forex trading can use Tether for that specific purpose. 

Storing USDT Safely

Normally, one would store cryptocurrencies or tokens in a compatible wallet. Bitcoin has numerous options, as does Ethereum or Litecoin. For Tether’s USDT, things are a bit difficult in this regard. It is not your average cryptocurrency or token, even though it can be stored in a lot of wallets as well.

The first and most straightforward option is to store USDT on exchanges and trading platforms. Trusting these third-party companies with one’s funds is not advisable for longer periods, but it can serve a purpose while trading. All of the top platforms support this stablecoin today.

One caveat to note is how withdrawing funds from an exchange to the wrong blockchain supporting Tether can be catastrophic and result in lost funds. Do your own research properly, and make sure to select the correct option. 

A second option comes from using mobile or desktop wallets, such as TrustWallet, Coinomi, or MetaMask, or using a hardware wallet such as Ledger. All of these options are viable for this purpose. It all comes down to finding a wallet compatible with the network you use for USDT, be it Ethereum, Tron, EOS, Binance Smart Chain, or anything else. 

Going Beyond A Digital Dollar

Most cryptocurrency enthusiasts know Tether as the company responsible for issuing USDT. It is the top stablecoin in the industry today, but there are many other options on the market as well. Some of these alternatives are issued by Tether too, albeit they have yet to gain any major traction.

Currently, Tether experiments with the following options besides USDT:

  • EURT: A digital Euro
  • CNHT: A digital Chinese Yuan
  • XAUT: A digital token pegged to physical gold. 

Of these currencies, only XAUT amounts to a decent market cap, currently valued at $113.4 million. That means over 61,300 of these tokens are circulating, and they trade primarily against the US Dollar and Bitcoin. It is an intriguing option to keep an eye on, albeit it remains to be seen how things will evolve.

Some Concerns To Consider

Even though most of the controversy surrounding Tether has evaporated, there are still some aspects everyone needs to keep in mind. 

First of all, redeeming USDT for fiat currency should always be possible. However, many people doubt that parent company iFinex can redeem all USDT in circulation for US Dollars if push comes to shove. A “bank run” on this stablecoin would be fascinating to behold, albeit the outcome may prove rather catastrophic. 

Such a “bank run” is unlikely to happen, even though Tether is gaining popularity at an increasing rate. As more money comes in, there will be more USDT assets to go around. A higher circulating supply also means a more significant demand to convert back to fiat currencies, which may become an issue later on. 

Second, iFinex tends to publish its financial reserves on the Tether website regularly. However, a full audit by an independent firm has not been executed yet, which has some people concerned. Whether those concerns are justifiable or merely speculative in nature is difficult to determine. 

Finally, the corporate aspect of Tether doesn’t sit too well with those who favor decentralization. A top-down corporate structure hardly works out well in the industry, but for now, it isn’t limiting the appeal of this stablecoin. 

One has to acknowledge that USDT has been a big boon for the broader cryptocurrency industry despite these concerns. It also paves the way for distinguishing between cryptocurrencies and digitized fiat currencies. Without a trading instrument like USDT, the industry wouldn’t be at the level or market capitalization it is today. 

Growing Competition In The Stablecoin Field

Even though Tether’s USDT has become the biggest stablecoin by market cap, there are many other projects acheiving a similar goal. Taking The Standard as an example, it removes every centralization aspect of a pegged fiat currency. Unlike Tether, the S-EUR does not rely on bank accounts or anything like that.

Instead, it is a currency issued by smart contracts letting users borrow directly against their savings, whether they are precious metals or crypto assets. The direct liquidity provided by The Standard can unlock trillions of Euros in savings and bring them into the DeFi world.

Additionally, The Standard’s borrowers do not have to sell their assets to gain the stablecoin. They borrow against assets, but retain control as long as they can pay back the S-EUR balance accordingly. Due to inflation decreasing the value of S-EUR, users will have a way to repay loans cheaper and quicker. It is a true example of financial freedom without strings attached.

Conclusion

Stablecoins remain intriguing trading vehicles in the cryptocurrency space, but they certainly serve a purpose. Instead of exploring BTC/USD or ETH/EUR trading, one can exchange USDT against all major cryptocurrencies, tokens, and assets on the market without friction. 

Removing the need to convert assets multiple times to get to a preferred trading pair makes the industry more appealing and lowers entry barriers. Although there are some serious concerns and questions regarding Tether’s status and behind-the-scenes operations, it seems to be doing everything correctly. 

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