Tether (USDT) is known as a special stablecoin, and has a long history as a cryptocurrency as it has been used by traders for years. It has less volatility on the modern crypto market. By acquiring USDT, it allows investors to maintain value because it’s unaffected by the price of Bitcoin and the fluctuations of the crypto markets throughout the year.
Liquidity is the main reason traders and investors use Tether, which allows investors to get in and out without as much risk involved. Within a 24-hour period, it has reported $38 billion in trading volume, which allows it to be the most liquid cryptocurrency available. It’s even more liquid than Bitcoin and currently has a market cap of $60 billion.
Tether is also the largest stablecoin and is one of the largest cryptocurrencies by market cap. It’s never mined but is created whenever Tether Limited chooses to create more at any time. The new Tether coins can be created for other cryptocurrencies.
It’s easy to track who has acquired Tether because it’s on the Ethereum network. Currently, many large exchanges that consist of Binance and Gemini hold a significant amount of Tether. A few decentralized apps also hold them, including Curb Finance and AAVE.
Because Tether is so large and is the third-largest cryptocurrency available to investors, it has the power to bring down the rest of the crypto market at any time. If the price of Tether skyrockets or drops, the liquidity pools can become vulnerable to attacks in the future. The attacks can cause too many people to cash out their cryptocurrencies for fiat.
The History of Tether
J.R. Willett proposed the idea of creating new cryptocurrencies on the Bitcoin protocol, which launched Mastercoin as it attempted to use a new second layer on the bitcoin blockchain. Mastercoin eventually moved on to become the technological foundation of the Tether cryptocurrency.
A few team members who worked on Mastercoin created their own startup, Tether Limited, in July of 2014, known as Realcoin, which used the same second layer technology, named “Omni Layer Protocol.” It was renamed as Tether, which referenced its connections to fiat currency.
As a sister company of Tether, Bitfinex states that all of the tethers are backed by their reserves, including cash equivalents, traditional currency, and even receivables and assets from loans from Tether to other third parties. This can also include affiliated entities.
All of the tethers are also one-to-one pegged to the dollar, allowing 1 USD to be valued by Tether at 1 USD for added convenience. This makes it valuable for obvious reasons and allows it to have a lot less volatility and less risk for traders. As a stablecoin, it’s unique because it exists on multiple blockchains. It’s easy to find a Tether Token on Ethereum, Tron, EOS, and the Omni Bitcoin platform. The main differences between the four coins relate to the properties inherent to the blockchain that is hosting Tether.
Some traders prefer the Bitcoin Omni version of Tether due to the maximum safety and immutability that is offered. Some investors even prefer the ERC20 Tether token because it’s capable of being used in DeFi and can allow traders to generate passive income over time. Not many investors are interested in holding their Tether on the Tron platform.
The technology of Tether consists of a three-layer stack, which consists of the Bitcoin blockchain, Tether Unlimited, and the Omni layer protocol. The bottom layer is the Bitcoin blockchain, allowing it to serve as the transactional ledger as it runs the consensus algorithm. Omni is the second layer as it creates and destroys digital Tether coins as it reports and tracks the different coins that are currently circulating. Tether Limited is the third layer, which is responsible for managing fiat deposits and withdrawals directly from the Tether reserve, alongside the management of Tether’s compliance logistics and web wallet.
When investors and traders deposit fiat currency into their Tether Limited’s reserve, the tokens can be exchanged, sent, or stored. For $100, the investor receives 100 tether tokens. The coins are destroyed and fully removed from circulation when they’re exchanged for fiat currency.
The popularity of Tether can be accredited to Bitcoin’s secure blockchain and the effect of its network, making it more common than similar stablecoins on various blockchains.
In August 2019, the Omni version was surpassed by the ERC20 version in the number of transactions that were performed. It was also surpassed in market capitalization the same year.
Today, the ERC20 version is a well-known leader in the market cap with approximately $10 billion. The Omni version has $1.33 billion. This move garnered criticism as many experts claim the high volume of USDT transactions is prone to saturating the Ethereum network and causing transaction fees to increase. Many exchanges switched to ERC20 from Omni in July and August of 2019 as there were 17 times more trades than the gridlock of Ethereum in 2017.
There are two additional versions of USDT, which are built on top of two different blockchains and are smart-contract oriented, and include EOS and Tron. There’s also a future USDT token on the Algorand network. The ERC20 version of the token is supported by Exodus, which makes it easier for investors to have access to a faster and more accurate coin. Additional coins that can be used in the Exodus wallet include PAX, DAI, TrueUSD, USDC, and GUSD.
Legal Issues and Controversies
Today, USDT is now the most used stablecoin available and has a considerable lead in volume, especially compared to USDC. It’s been a controversial form of currency because it’s been accused of price manipulation and has a lot of issues with security and liquidity on the market. In 2017, it was also hacked, which caused $31 million to be stolen. Additionally, the stolen funds weren’t traceable because a hard fork was implemented, which led to more skepticism.
Both Tether and Bitfinex are currently being sued where plaintiffs say that the USDT reserves were used to manipulate the price of Bitcoin at the end of 2017. iFinex, the parent company of Bitfinex and Tether, is accused by the New York Attorney General of hiding a loss of $850 million. iFinex continues to deny both of the claims, but anyone in New York can not currently buy any of the Tether due to laws that are in place to protect investors.
The main controversy surrounding Tether is if the reserves are enough to cover the supply of USDT coins that are in circulation. Unfortunately, the reserves have yet to be audited because it’s not located in the United States and is in the British Virgin Islands, which makes many people become more skeptical about how much true cash Tether really has in its reserves. In 2019, the company also altered its claim that the coins are backed by the same amount of cash and now states that the USDT is backed by cash and cash equivalents.
On March 31, 2021, Tether announced they currently had 2.9% of cash in their reserves. 12.5% is made up of loans, 10% is corporate bonds and precious metals, and 50% is commercial paper, which is additional loans.
If everyone who owns Tether planned to cash in their stablecoins at the same time, it’s likely there may not be enough available, which also occurred in the 1930s when everyone wanted to withdraw their money from the bank.
This is problematic because the only thing that makes a currency valuable is its perceived value, which is what is holding Tether up. The inherent value of a blockchain token isn’t a lot.
The Future of USDT
Although there are different controversies surrounding Tether, it’s unlikely to go out of business any time in the near future. It’s been in existence since 2015 and has a bright future due to its stability and low risk as the largest stablecoin.
There are still a few ways it can improve, which include having more transparency. As the third-largest cryptocurrency, it needs to undergo in-depth audits and questions need to be answered. Their funds should also be verified via a third party.
It’s also important for bridging to be allowed, connecting the real world to the crypto world by allowing USD to be transferred to USDT. This would improve Tether and could allow investors to obtain Tether directly from Tether Limited online without background checks or restrictions. Cashing out the Tether without waiting periods or involvement of the IRS would also be effective.
Holding most of the reserves in cash instead of using gold or loans would also offer more peace of mind to traders and investors.
The lack of audit performed on Tether can affect its longevity, but if its popularity is sustained, this may not remain as much of a factor over time. The technology surrounding blockchains will also continue to become more advanced in the coming years, which can also work in Tether’s favor.
- What is Stablecoin?
- Binance for Beginners
- Binance Coin (BNB) for Beginners
- Is Investing in Crypto Right for You?
- What To Expect With Cryptocurrency In 2022