Tether

Article byKumar Rahul
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Tether (USDT)?

Tether (USDT) is a type of cryptocurrency known as a stable coin. The main idea behind Tether is to provide a digital currency that preserves a stable value by being pegged to a reserve of traditional fiat currencies, such as the U.S. dollar.

Tether

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The initial purpose of Tether was to provide a digital representation of fiat money that could be transferred and traded on the blockchain. Tether’s value is equal to one unit of the corresponding fiat currency. This stability reserves the underlying fiat currency to back each USDT token in circulation.  

Key Takeaways

  • Tether (USDT) is a stablecoin that provides stability by being pegged to a reserve of fiat currencies. It operates on various blockchain platforms, including Bitcoin (Omni Layer) and Ethereum (ERC-20 standard).
  • It is widely supported on cryptocurrency exchanges, making it easily accessible for buying, selling, and trading. Its primary use cases include providing a stable medium of exchange and acting as a bridge between traditional fiat currencies and the cryptocurrency market.
  • Its stability makes it useful for traders and individuals who want to mitigate the volatility of other cryptocurrencies.

How Does Tether work?

Tether is a stablecoin that is pegged to a reserve of fiat currencies. Here’s a simplified explanation of how Tether works:

  1. Issuance: Tether Limited, the company behind Tether, creates new USDT tokens by receiving fiat currency deposits from users. These deposits are in reserve bank accounts.
  2. Token Creation: After confirming the fiat currency deposit, Tether Limited mints an equivalent amount of USDT tokens on the chosen blockchain platform, like Bitcoin or Ethereum. Each USDT token represents the value of one unit of the underlying fiat currency.
  3. Reserves and Transparency: Tether Limited claims to maintain sufficient funds to back all USDT tokens in circulation. These reserves assure users that each USDT is redeemable for the corresponding fiat currency at any time. However, there have been controversies and doubts regarding the transparency and auditing of these reserves.
  4. Redemption: Users can redeem their USDT tokens for the underlying fiat currency through the redemption process facilitated by Tether Limited. This process typically involves verifying the user’s identity and submitting a redemption request.
  5. Stability: The value of Tether remains stable at a 1:1 ratio with the underlying fiat currency it represents. If the market price of USDT deviates from this ratio, arbitrage opportunities may arise, encouraging traders to buy or sell USDT to bring the price back in line with the pegged value.
  6. Transfer and Trading: Tether is freely transferable and traded on various cryptocurrency exchanges and platforms, similar to other digital currencies. Its stable value makes it a popular choice for traders who wish to move funds out of more volatile cryptocurrencies temporarily.

History

Tether was put to sea in 2014 by Tether Limited, which shares joint management with the cryptocurrency exchange Bitfinex. Here is a summary of Tether’s history:

  1. Introduction: Tether was introduced as a stablecoin designed to represent fiat currency on the blockchain digitally. It was to address the volatility issues other cryptocurrencies like Bitcoin and Ethereum face.
  2. Early Years: In its early years, Tether primarily operated on the Bitcoin blockchain using the Omni Layer protocol. It gained traction to transfer value between cryptocurrency exchanges and act as a stable store of value during market downturns.
  3. Expansion to Other Blockchains: As demand for Tether grew, the company expanded its operations to other blockchain platforms, including Ethereum and Tron. This allowed users to access Tether on different networks, providing increased flexibility and accessibility.
  4. Controversies and Scrutiny: Tether has faced controversies and scrutiny throughout history. In 2017, it severed ties with its auditing firm, leading to questions about the transparency of its reserves. However, Tether Limited has consistently claimed to maintain accounts to back each USDT token.
  5. Legal Issues: In 2019, the New York Attorney General’s office blamed Tether Limited and Bitfinex for covering the loss of $850 million in customer funds. The case alleged that Tether was being used to manipulate the cryptocurrency market. Tether Limited and Bitfinex settled with the Attorney General’s office in 2021, agreeing to pay an $18.5 million fine and to submit regular reports on their financial operations.
  6. Market Dominance: Despite the controversies, Tether has maintained its position as the most used stablecoin in the cryptocurrency market. It has consistently had the highest trading volume and market capitalization among stablecoins, significantly facilitating trading and liquidity in the cryptocurrency ecosystem.

How To Buy?

To buy Tether (USDT), you can follow these general steps:

  1. Choose a Cryptocurrency Exchange: Select a reputable cryptocurrency exchange that supports Tether trading. Some popular deals where you can buy Tether include Binance, Coinbase, Kraken, Bitfinex, and Huobi. Ensure the business operates in your region and provides a suitable trading platform.
  2. Sign Up and Complete Verification: Create an account on the cryptocurrency exchange. Provide the required information and complete any verification process, including identity verification (KYC) and proof of address.
  3. Deposit Funds: Deposit funds into your exchange account. The options for depositing funds will depend on the exchange and may include bank transfers, credit/debit card payments, or cryptocurrency deposits.
  4. Locate USDT Trading Pair: After this, locate the trading pair that matches Tether (USDT) with your desired base currency. Common trading pairs include USDT/USD, USDT/BTC, and USDT/ETH.
  5. Place an Order: Choose the type of order you want to place. The two main types are market orders, which execute immediately at the current market price, and limit orders, where you specify the price you want to buy USDT. Enter the amount of USDT you wish to purchase and review the details before submitting the order.
  6. Execute the Trade: Once your order is placed, it will be matched with a suitable seller on the exchange. If it’s a market order, the trade will be executed immediately. If it’s a limit order, it will be executed when the market reaches the specific price.
  7. Securely Store Your Tether: The purchased USDT will be credited to the exchange wallet after the transaction. Moving your Tether to a secure wallet under your control ensures better security.  

Examples

Let us see some examples of the same.

Example #1

One example of Tether (USDT) in the news is the investigation of the New York Attorney General’s office into Tether Ltd. and Bitfinex.

In 2019, it was disclosed that the New York Attorney General’s office was investigating Tether Limited, the company behind USDT, and Bitfinex, a major cryptocurrency exchange. The investigation alleged that Bitfinex had lost access to around $850 million in customer funds and used Tether’s reserves to cover the shortfall without disclosing the situation to customers.

The New York Attorney General’s office claimed that Bitfinex and Tether engaged in a cover-up to hide the losses, mislead customers, and manipulate the cryptocurrency market.

The investigation led to legal proceedings and a legal battle between the New York Attorney General’s office and the companies involved. In addition, the case brought significant attention to Tether’s transparency and operational practices. It also raised concerns about the stability and legitimacy of the stablecoin.

In February 2021, Tether Limited and Bitfinex settled with the New York Attorney General’s office. In the settlement, they agreed to pay an $18.5 million fine and to submit to regular reporting of their reserves and business operations.

Example #2

Another example related to Tether (USDT) that was in the news is the Office of the Comptroller of the Currency announcement in the United States.

In July 2020, the OCC released a letter stating that national banks and federal savings associations could provide cryptocurrency custody services, including stablecoins like Tether. This announcement was significant because it offered regulatory clarity and recognition for stablecoins in the U.S. banking system.

The OCC’s decision was a positive development for Tether and other stablecoins, as it signaled increased acceptance and legitimacy for their use in the traditional financial sector. In addition, it opened the doors for national banks to hold and custody digital assets, including Tether, in the place of their customers.

Pros And Cons

Some of the advantages and disadvantages associated with Tether (USDT) are:

#1 – Pros

  1. Stability: Tether aims to maintain a stable value by being pegged to a reserve of fiat currencies. This stability makes it useful for traders and individuals who want to mitigate the volatility in other cryptocurrencies.
  2. Liquidity: Tether has high trading volumes. This liquidity makes buying, selling, and trading Tether easier than other cryptocurrencies.
  3. Accessibility: Tether provides users with flexibility and interoperability.
  4. Speed and Efficiency: Tether transactions are faster and more efficient than traditional banking systems. It allows for quick transfers and settlements, enabling the seamless movement of funds within the cryptocurrency ecosystem.

#2 – Cons

  1. Centralization and Trust: Tether is issued and managed by a single entity, Tether Limited. This centralization has raised concerns about Tether’s reserves’ transparency, auditing, and backing. As a result, users must trust Tether Limited’s claims that fiat currency reserves adequately back each USDT token.
  2. Regulatory Uncertainty: Stablecoins like Tether exist in a regulatory gray area, and there is an ongoing debate about how they should be classified and regulated. Changes in regulations or legal actions could impact the stability and availability of Tether.
  3. Counterparty Risk: Holding Tether involves counterparty risk, as users rely on Tether Limited’s ability to maintain the reserves backing the USDT tokens. If Tether Limited faces financial difficulties or fails to honor redemption requests, it could impact the value and usability of Tether.
  4. Lack of Auditing: Tether Limited has faced criticism for not providing regular audits of its reserves. The lack of independent and transparent audits has contributed to concerns regarding the backing and stability of Tether.

Tether vs Ethereum

Tether (USDT) and Ethereum are prominent entities in the cryptocurrency ecosystem, but they serve different purposes and have distinct characteristics. Here’s a comparison between Tether and Ethereum:

#1 – Purpose And Functionality

Tether is a stablecoin that provides stability by being pegged to a reserve of fiat currencies. Its purpose is to facilitate transactions and provide a stable store of value within the cryptocurrency ecosystem.

Ethereum, on the other hand, enables the creation and execution of smart contracts. It is a blockchain-based operating system that supports various applications, decentralized finance (DeFi) protocols, and the development of new cryptocurrencies.

#2 – Stability vs Programmability

Tether’s main value proposition is stability. Each USDT token represents the value of one unit of the underlying fiat currency. It aims to maintain a 1:1 peg with fiat currencies, reducing volatility.

Ethereum, in contrast, is not a stablecoin. Its native cryptocurrency, Ether (ETH), represents volatility. Ethereum’s primary focus is programmability and providing developers with a platform to build decentralized applications (dApps) and execute smart contracts.

#3 – Use Cases

Tether acts as a medium of exchange and a bridge between traditional fiat currencies and the cryptocurrency market. In addition, it offers stability and liquidity, making it suitable for traders who want to temporarily move funds out of volatile cryptocurrencies.

Ethereum has a broader range of use cases. For example, it enables the creation of decentralized applications, the execution of complex smart contracts, the issuance of new cryptocurrencies (tokens), and the development of decentralized finance (DeFi) protocols, among other applications.

#4 – Blockchain Technology

Tether operates on various blockchain platforms, including Bitcoin (Omni Layer) and Ethereum (ERC-20 standard).

Ethereum, on the other hand, has its blockchain, the Ethereum Virtual Machine (EVM).

#5 – Decentralization

Tether has faced criticism regarding its level of decentralization. It raises concerns about transparency and control over the stablecoin.

Ethereum strives for decentralization, with its blockchain under maintenance and validation by a network of nodes worldwide. It operates on a consensus mechanism called Proof of Stake (PoS) to transition from Proof of Work (PoW) to PoS in Ethereum 2.0.

Frequently Asked Questions (FAQs)

1. How can I store Tether (USDT)?

Tether (USDT) can be stored in various types of wallets. For example, hold USDT as an ERC-20 token on the Ethereum blockchain. You can use wallets supporting ERC-20 tickets, such as MetaMask, and MyEtherWallet, or hardware wallets, like Ledger and Trezor. If you hold USDT on other blockchains, you will need wallets compatible with those specific blockchains.

2. What are the fees associated with Tether (USDT)?

The fees associated with Tether (USDT) can vary depending on the platform or exchange you use. Typical expenses include transaction fees for sending USDT, deposit and withdrawal payments, and potentially trading costs when buying or selling USDT.

3. Is Tether (USDT) audited?

Tether Limited, the company behind USDT, has faced scrutiny regarding auditing its reserves. While Tether has claimed to undergo periodic audits, there need to be more independent and transparent audits conducted by reputable third-party firms. This has raised concerns and questions about the actual backing of Tether’s reserves.

This has been a guide to what is Tether. Here, we explain its history, examples, pros, cons, how to buy it, and a comparison with Ethereum. You can learn more about it from the following articles –