Cryptonomics: Tether Explained

Tether USD (USDT) maintains the worlds’ biggest stable coin, with over $26 Billion in market capitalization. Users of Solana can now trade USDT in the SPL token standard on Solana.

Wilfred Victor
April 22, 2021

What is Tether

Tether is the most widely adopted coin in circulation. USDT was the first-ever stable coin introduced to the market; it is designed to peg its issued coin 1-to-1 with the Dollar. Tether was one of the first stable coins issued in several blockchains, available on the Tron, ETH, Omni, EOS, Algorand, Solana, and the Binance Smart Chain networks. It has received mass adoption as the reserve currency for most traders as it doesn’t fluctuate like typical crypto coins. 

Tether enforces its peg through collateralizing every Tether minted; for every issued USDT, there is a reserve in the bank backing it.

It was first released in 2014 under its first name, “Realcoin” by Bitcoin investor Brock Pierce, entrepreneur Reeve Collins, and software developer Craig Sellers. Since then, it has developed into the project we know today.

How does Tether work?

For many traders, stablecoins like USDT serve as a hedge during market corrections. It serves as a lifeboat type that allows investors to rotate into a Fiat pegged coin without cash out in real-world Fiat. This has proven to be quite useful, especially since Fiat still dominates other currency types like crypto in most countries’ economies. The stable coin utility is still very much tied to its stability as opposed to traditional crypto assets. Overall, Tether allows users to exchange in stablecoins seamlessly, with no worries about fiat-crypto onramps.

In the original Tether Whitepaper abstract, the accountability measure is explained in this way;

“To maintain accountability and to ensure stability in exchange price, we propose a method to maintain a 1-to-1 reserve ratio between a cryptocurrency token, called tethers, and its associated real­world asset, fiat currency. This method uses the Bitcoin blockchain, Proof of Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all times”.

Although the first blockchain used was the Bitcoin Omni blockchain, it has been deployed on other chains, with Ethereum becoming its biggest network. This can be attributed to the De-Fi boom experienced on the ETH network. Originally, USDT was pegged 1:1 to USD, but it later included collateral as other real-world cash equivalents, assets, and receivable loans. Users of the Solana Program Library (SPL) can trade their tokens for USDT, making Tether even more popular on the Solana blockchain.

Why is Tether Significant?

Before its launch in July 2014 and its first use on cryptocurrency exchange Bitfinex in February of 2015, traders did not have a means or a hedge to protect their crypto assets against the volatility experienced in traditional crypto assets. The introduction of stablecoins increased the adoption of cryptocurrencies as traders now have the confidence of hedging and realizing profits to a pegged stable coin. By providing stability, traders can hold an asset equivalent to a real-world fiat currency, allowing seamless crypto trading.

Why Should I use Tether?

Tether’s largest use cases are its reserve tendencies, cross-chain interoperability with a growing list of different blockchain types accepting and integrating the stable coins. In the case of a sharp fall of the market, Tether acts as a safety net guiding against loss.

Weakness of Tether

Tether’s weakness remains its ability to constantly find itself in various controversies with each new phase of crypto market growth, one that continually creates doubt in users' minds about its alleged pegged real-world fiat holdings. For example, in 2018, $100 million USDT was stolen from Bitfinex, the parent company and exchange of the stable coin and the largest holder of the coin, and was sent to an unidentified address.

In April 2019, New York Attorney General Letitia James accused the company of hiding an $850 million loss of a co-mingled client and corporate funds from investors. Court filings would later find out that these funds were given to a Panamanian entity called Crypto Capital Corp. without a formal contract or agreement to handle withdrawal requests. Bitfinex allegedly took a minimum of $700 million from Tether’s treasury reserves to cover the loss once the money went missing.

And in 2021, the rumors and speculations about its legitimacy and reserve aren’t going away; the community is afraid of a bubble getting burst for the most significant stable coin in today’s market.

Closing Thoughts

Tether as a stable coin in the market still retains its relevance despite its many controversies and concerns over legitimacy. However, a lot needs to be done by the team to raise the confidence level of traders and investors, who often, over time, have called for more transparency and external audits of the firm. Overall, Tether plays an integral role in the cryptocurrency space, receiving mass adoption for nearly all crypto users. The increasingly large amount of dApps is only perpetuating USDT’s case as we see an influx of Tether being minted on a daily basis. As the bull market continues, we can expect to see the trend of more users investing in the coin, trading tokens on the market.

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Wilfred Victor

Ace finds himself as a blockchain enthusiast who is focused on growing with the entire crypto sector. He is an energetic and passionate writer who believes that all things are achievable.