What Is Tether (USDT)?
Tether (USDT) is a stablecoin designed to mirror the value of the United States dollar. Unlike traditional cryptocurrencies, tether’s value remains relatively stable as it is anchored to a fiat currency.
The primary goal of USDT is to provide stability and liquidity on blockchain networks, allowing users to seamlessly transfer assets without being affected by price fluctuations commonly associated with other cryptocurrencies.
Tether (USDT) Explained
USDT is a digital currency that exists on a blockchain. Specifically, it exists on the Omni Layer protocol built on top of the Bitcoin blockchain and various other blockchains, including Ethereum and Tron.
Each USDT token is intended to represent 1 US dollar, as claimed by Tether Limited, the company behind Tether.
Who Created Tether?
Tether Limited, a company founded in 2014, is responsible for creating and managing tether. Initially, tether was known as realcoin before it rebranded in November 2014.
The founders of tether include Brock Pierce, Reeve Collins, and Craig Sellars. Though Tether Limited claims that it aims for transparency, it has faced criticism regarding its previously pseudonymous team and the lack of clarity surrounding its team members. The Paradise Papers leak revealed much of the inside workings of the company and showed that its parent company also owned the crypto exchange Bitfinex.
How Does Tether Work?
Tether operates on the concept of reserves, where each USDT token is intended to be fully backed by an equivalent value of USD and other safe assets held in reserve by Tether Limited.
This approach supposedly ensures that the value of tether remains stable, as holders can redeem their USDT for its equivalent value in fiat currency directly from Tether Limited.
What You Can Do with USDT?
Tether’s stability and compatibility with various blockchain networks have made it extraordinarily popular among traders, investors, and businesses. USDT allows traders to hedge against volatile market conditions, offering a relatively safe harbor to escape market turbulence.
Moreover, USDT provides a bridge between traditional finance and the crypto space by enabling users to transfer value across borders quickly and efficiently.
History and Controversies of Tether
Over the years, tether has faced its fair share of allegations and controversies. One of the most significant concerns surrounding it is the issue of its backing. The company claimed that each unit of tether is backed by 1 USD for years after this was no longer the case.
The Attorney General of New York found that it was lying about the content of its reserves, fined it $18 million, and forced it to release regular reports detailing its actual reserves.
Additionally, Tether has faced scrutiny for its association with the crypto exchange Bitfinex. One of the biggest controversies was over its suspicious comingling of funds. Tether was criticized for years over its lack of a reserve audit and a general lack of transparency, so it decided to have a third party attest to its reserves. On the morning of the attestation, Bitfinex transferred $382 million into Tether’s bank account.
Despite these controversies, tether remains a crucial player in the cryptocurrency space. Its release of regular reserve breakdowns has helped significantly in building trust with the community again.
How Is Tether Backed?
Tether Limited has claimed that each USDT token is fully backed by an equivalent amount of fiat currency reserves in the past, but now it mostly holds cash equivalents such as US Treasury Bills, overnight repurchase agreements, and money market funds. A significant percentage of its reserves also include precious metals, corporate loans, and even bitcoin.
Even though the company releases regular reports on its reserves on its website, it still doesn’t release much proof that the documents are accurate and resist full 3rd party audits.
This lack of verifiable evidence has raised doubts about the validity of tether’s claims and its ability to maintain the promised 1:1 backing.
Advantages of USDT
Despite controversies, Tether offers several advantages, including:
- Stability: One of the primary advantages of tether is its stability. As a stablecoin, it is designed to maintain a fixed value relative to a traditional currency, typically the U.S. dollar.
- Reduced Risk: Holding USDT can be like holding the U.S. dollar, which is the world’s primary reserve currency. This can help reduce the exposure to the risks associated with holding other fiat currencies, such as inflation and devaluation.
- Liquidity: Tether has a significant presence in the cryptocurrency market, with high trading volumes and widespread acceptance on most crypto exchanges. This makes USDT very liquid, allowing users to easily convert it to other cryptocurrencies or fiat currencies when needed.
- Global Availability: USDT is accessible to users worldwide without any geographic restrictions. This allows individuals across borders to transact in a stable digital currency and bypass the challenges associated with international money transfers.
- Accessibility: Tether can be easily integrated into various cryptocurrency wallets, platforms, and decentralized applications (dApps). Its compatibility with multiple blockchain networks offers users flexibility and convenience in utilizing USDT for various purposes.
Disadvantages of USDT
Meanwhile, there are also some downsides to USDT, some of which include:
- Centralized control: USDT is issued and managed by a single company, Tether Limited, which means they have complete control over the supply and management of USDT. This centralized control raises concerns about transparency, accountability, and the potential for manipulation.
- Lack of regulatory oversight: USDT operates outside of traditional banking and financial regulations, making it susceptible to potential regulatory risks. This also means that its financials aren’t regularly audited.
- Counterparty risk: USDT involves a significant degree of counterparty risk, as it relies on the trustworthiness and solvency of Tether Limited. If Tether Limited were to face financial difficulties or default, it could potentially lead to the loss of value for USDT holders.
- Lack of transparency: Tether Limited has faced criticism for its lack of transparency regarding the reserves backing USDT, mainly for its past controversies and refusal to attain 3rd party audits.
- Potential for money laundering and fraud: The anonymous and pseudonymous nature of using USDT can facilitate illicit activities like money laundering or fraudulent transactions. As USDT operates outside of traditional financial systems and regulatory oversight, it can be attractive to those engaging in illegal activities.
Can Tether Stand the Test of Time?
Tether has emerged as the leading stablecoin in the market, with a circulating supply of more than $82 billion. Despite its popularity, USDT has faced controversies and scrutiny in the past regarding transparency, reserves to back its coins, and regulatory compliance, all of which have sparked debates over its long-term viability.
Sustaining its position in the market will likely depend on various factors. Tether’s response to regulatory requirements, increased transparency, and building trust within the cryptocurrency community will be vital. Additionally, competition from other stablecoins and potential advancements in decentralized finance (DeFi) may also impact tether’s future.