Tether issues one of the most popular and widely used cryptocurrencies in the crypto market, a stablecoin called Tether (USDT).
The Tether protocol is closely related to the Bitfinex crypto exchange as it has the same parent company, iFinex Inc, which was founded in Hong Kong in 2012 and is registered in the British Virgin Islands.
Tether's history dates back to 2014, when it first issued a dollar-backed digital currency called realcoin on the Bitcoin network to support the transfer of fiat currencies on the blockchain. Later that year, realcoin was renamed tether. (Tether refers to the issuing company, while tether, or USDT, is the token).
Since then, Tether has expanded to numerous blockchains, launched various tokens, and skyrocketed in popularity. At the end of May 2022, all outstanding USDT tokens were worth $73 billion, making it the third largest cryptocurrency by market cap.
How does Tether's USDT work?
Tether cryptocurrencies belong to a special subset of digital assets called stablecoins, which means that their prices are tied to a less volatile asset.
Stablecoins serve as an important link between the real world and cryptocurrencies. Because their prices are tied to a stable asset such as a central bank-issued (fiat) currency like the U.S. dollar, stablecoins promise to protect cryptocurrency holders from volatility and are well suited for transactions and trading on and between blockchains.
Tether issues several fiat stablecoins and a stablecoin pegged to gold. The most widely used among them is the USDT stablecoin, which is pegged to the U.S. dollar and has a circulating supply of about 73 billion tokens.
Other stablecoins issued by Tether include:
- Tether Gold (AUXT): linked to the gold price
- Tether Euro (EURT): pegged to the common currency of the European Union
- Tether Peso (MXNT): pegged to the Mexican peso
- Tether Yuan (CNHT): pegged to the Chinese yuan abroad
Tether does not have its own blockchain. Instead, users can trade USDT on and through some of the larger blockchain platforms such as Tether:
- Ethereum
- Tron
- Algorand
- Solana
- Avalanche
- Polygon
USDT is not mined and is not decentralized. There is a centralized entity, the company Tether, that issues (mints) and destroys (burns) USDT tokens to match the supply of coins to user demand.
What is the value of USDT supported by?
Tether claims that the value of its stablecoins is always 100% backed by assets in its reserve to ensure the one-to-one exchange ratio to the currency (or asset) to which their prices are tied. Similar to how a casino must have enough cash in the vault to cover every chip in play, the reserve serves as a guarantee that anyone who wants to exchange USDT for fiat can do so.
Tether publishes a quarterly statement - which is not the same as an audit - on its website that breaks down reserves by asset class, and updates the total value of assets daily.
According to the latest report, Tether's reserve contains a diverse mix of:
- Cash
- Cash equivalents (money market funds, U.S. government bonds)
- Commercial paper
- Corporate bonds
- Loans
- Other investments, including digital currencies
Why USDT's support is controversialThe transparency
and authenticity of the reserve has been questioned from time to time in the crypto world.
Tether only began publishing reports on its assets in early 2021, but still does not specify exactly what assets it holds. The certificate is not verified by an independent auditor.
Most of the attention has been on non-cash holdings, including what they are, how they are valued, and how easily Tether can convert them to cash if stablecoin holders want to immediately redeem their initial investment.
In 2019, the New York Attorney General's Office (NYAG) launched an investigation into whether cryptocurrency exchange Bitfinex attempted to cover up the loss of $850 million in customer and company funds held by Tether, the payment processor.
After nearly two years, Tether and Bitfinex reached a settlement with the NYAG in February 2021 to pay $18.5 million in fines and publish a quarterly report describing the composition of the reserve for the next two years. (Note: CoinDesk has joined a lawsuit involving the NYAG, Tether, and its parent company iFinex to shed light on the reserves that support stablecoins.)
How USDT differs from other
stablecoinsTether's USDT
once dominated
the stablecoin market, but now there is a wide range of stablecoins
.
They are differentiated by the issuer, the collateral backing the value, and the way they peg their prices to a fiat currency or other asset, among other things. Tether follows the IOU (I owe you) model. This means that a central authority backs the value of Stablecoin with assets, and the issuer promises that you can repay your investment at any time at a 1:1 exchange rate.
USDT vs. Algorithmic StablecoinsAlgorithmicStablecoinslike Tron's USDD or Waves' USDN maintain the exchange rate by trading incentives and automatically minting and burning tokens using a twin token to absorb volatility without an external reserve asset. USDT does not work this way because Tether, not an algorithm, decides when tokens are burned or minted depending on demand.
USDT vs. DAIDAI, MakerDAO's stablecoin, is also backed by assets in a reserve, but it is over-collateralized - meaning the reserve holds more assets in reserve than DAI's total value - and only holds cryptocurrencies like Ether and USDC. In addition, MakerDAO does not have a centralized governing body - governance is distributed among MakerDAO governance token holders - unlike Tether's centralized entity.
USDT vs. USDCSothTether's USDT and Circle's USDC are backed by real assets and issued by a centralized entity, but the main difference between them is the composition of reserves. USDC holds only cash and short-term U.S. government bonds, as shown in its monthly report. Therefore, USDC is perceived as a safer and more transparent asset.
How to buy and hold USDTThe easiest
way for the average investor to buy and sell Tether stablecoins is through a cryptocurrency exchange. USDT is used by many traders and is available on most crypto exchanges.
Since stablecoins are digital currencies, you can hold your USDT in any type of crypto wallet, hot or cold.
Large crypto holders such as institutional investors and crypto exchanges can access USDT and other Tether-issued Stablecoins directly from Tether. They can buy Stablecoins by depositing cash and redeem their investments by returning the virtual coins at the 1:1 exchange rate that Tether promises.
Average investors can observe that the USDT rate on crypto exchanges changes from time to time. For example, when one of the most popular stablecoins, Terra's UST, collapsed in May 2022, the prices of other stablecoins on exchanges fluctuated and USDT dropped to 97 cents for a short period of time as people pulled out their money in panic. More recently, the price has rebounded to just under $1.