- What Is Tether?
- How do Tether tokens work?
- How Is Tether Backed?
- How USDT is different from other stablecoins
- Is Tether a Good Investment?
What Is Tether?
Tether aims to provide a “safe” digital asset that maintains a stable valuation. That’s what makes USDC a stablecoin, whose value is pegged to the price of the U.S. dollar. The goal is that Tether should always maintain the same value as its peg.
“The idea is that 1 Tether can always be traded for $1, regardless of market conditions,” says Steve Bumbera, chief operating officer of Many Worlds Token.
Tether’s stablecoin competitors include USD Coin (USDC), Dai (DAI) and Pax Dollar (USDP), to name a few.
Crypto traders use Tether to provide steady, reliable liquidity to get in and out of other cryptocurrency trades without facing unpredictable losses (or gains) from volatile price changes.
Tether had a 24-hour trading volume of $64 billion at the time of this writing. That makes Tether the most liquid cryptocurrency—beating even crypto market stalwarts Bitcoin (BTC) and Ethereum (ETH). It’s also among the top three largest cryptos by market capitalization.
If you want to buy a stablecoin tied to Canadian currency instead of U.S. dollars, then QCAD is one to consider.
How do Tether tokens work?
Tether tokens exist as digital tokens built on several leading blockchains, including Algorand, Avalanche, Bitcoin Cash’s Simple Ledger Protocol (SLP), Ethereum, EOS, Liquid Network, Omni, Polygon, Tezos, Tron, Solana and Statemine. These transport protocols consist of open source software that interface with blockchains to allow for the issuance and redemption of Tether tokens.
Every Tether token is 100% backed by our reserves, which includes traditional currency and cash equivalents, and may include other assets and receivables from loans made by Tether to third parties.
The Tether platform is fully reserved when the sum of all Tether tokens in circulation is less than or equal to the value of our reserves. Through our Transparency page, anyone can view both of these numbers on a daily basis.
Tether was originally created to use the Bitcoin network as its transport protocol—specifically, the Omni Layer—to allow transactions of tokenised traditional currency. Since this original version of Tether uses the Bitcoin blockchain, it inherits the inherent stability and security of the longest established blockchain network.
Tether on the Ethereum blockchain, as an ERC20 token, is a newer transport layer, which now makes Tether tokens available in Ethereum smart contracts or decentralized applications on Ethereum. As a standard ERC20 token it can also be sent to any Ethereum address.
Since Tether tokens are currently available using different transport protocols, when users send Tether tokens to other addresses, they need to carefully check the destination address to confirm they are selecting the correct transport protocol.
How Is Tether Backed?
Despite stablecoins being a popular choice among crypto traders, Tether has some additional controversies regarding liquidity issues and whether its reserves are adequate to cover the number of USDT tokens in circulation.
According to Tether’s website in 2019, the site claimed the stablecoin was backed by reserves in traditional currency and cash equivalents (and sometimes other assets from affiliated entities).
That’s a bit more detail than what is cited today. Today, Tether’s site states that “All Tether tokens are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves.”
Adam Carlton, CEO of crypto wallet Pink Panda, says Tether’s history of being transparent about how the coin is backed hasn’t always been clear or consistent.
“It has a very questionable legal past, and to this day, its actual reserves are still quite opaque and believed to be substantially composed of unknown sources of commercial paper,” Carlton says.
Other crypto experts say it’s somewhat accepted that Tether isn’t “fully” collateralized in the crypto marketplace. And that it was an issue of controversy more than a year ago.
“Markets have worked through that concept of how comfortable they are – it’s very clear Tether is not backed by dollars,” says James Putra, vice president of product strategy at TradeStation Crypto.
What backs USDT’s value?Tether claims its stablecoins’ value 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 anchored. Similar to how a casino has to have enough cash in its vault to cover every chip in play, the reserve serves as a guarantee that if everyone wanted to convert USDT into fiat, they could.Tether publishes a quarterly attestation – which is not the same as an audit – breaking down its reserves by asset classes on its website, and updates total value of the assets every day.According to its latest report, Tether’s reserve contains a diverse mix of:cash
- cash equivalents (money market funds, U.S. Treasury bills)
- commercial paper
- corporate bonds
- other investments including digital currencies
Why USDT’s backing is controversialThe transparency and authenticity of the reserve has been called into question from time to time in the crypto world.Tether only started to publish reports on their assets in early 2021, but still does not specify exactly what assets it holds. The attestation is not verified by an independent auditor.The most scrutiny has been on the non-cash holdings including what they are, how they are valued and how easily Tether can convert them into cash if stablecoin holders want to redeem their initial investment at once.In 2019, New York Attorney General’s office (NYAG) launched a probe into whether the cryptocurrency exchange Bitfinex sought to cover up the loss of $850 million in customer and corporate funds held by Tether, the payment processor.After almost two years, Tether and Bitfinex reached a settlement with NYAG in February 2021 to pay $18.5 million in fines and to release a quarterly report describing the reserve’s composition for the next two years. (Note: CoinDesk has joined a legal proceeding involving the NYAG, Tether and its parent company iFinex as part of the effort to shed light on the reserves backing the stablecoins.)
How USDT is different from other stablecoins
Once Tether’s USDT dominated the stablecoin market, but now there is a wide selection of stablecoins available. Some of the ways they differ depends on the issuer entity, the collateral that backs the value and how they keep their prices pegged to the fiat currency or other asset. Tether follows the IOU (I owe you) model. This means that a central entity backs the value of stablecoin with assets, and the issuer promises that you can redeem your investment anytime at a one-to-one exchange rate.
Tether vs. TerraUSD
Tether and TerraUSD (UST) are both stablecoins pegged to the U.S. dollar, but the two cryptos maintain their value using completely different methods.
Tether is a collateralized stablecoin, backed by the company’s assets and reserves. When those reserves are equal to or less than the number of tokens in circulation, the Tether is said to be “fully reserved.” You can see Tether’s current balances on its transparency page.
Terra is an algorithmic stablecoin. Instead of cash reserves in a bank account, Terra relies on programmatic language and the parameters its sets for another token on the Terra protocol to support the 1-to-1 U.S. dollar parity.
Based on its creation, the TerraUSD stablecoin relies on supply and demand market forces and LUNA’s ability to absorb price volatility to maintain its price peg.
Relying on an algorithm rather than cash reserves is what caused TerraUSD to lose its price peg amid recent market volatility. “Owning 1 UST, you would expect to be able to cash out for $1 at any point, but it lost its peg,” Bumbera says.
This has brought to light concerns over the future of such algorithmic stablecoins.
Binance, the world’s largest crypto exchange in trade volume, suspended spot trading for LUNA and UST temporarily against its own stablecoin BUSD on May 13 because of its volatility, with LUNA’s value going down to near zero at $0.0001208, in May 2022.
“The current version of the programmatic coins is definitely over,” Gupta said. “But there will always be a space for innovation in a much better stablecoin.”
Tether’s price slipped below its peg to $0.9485 in market moves related to the collapse of TerraUSD on May 12 but has since rebounded close to its 1-to-1 dollar parity.
Tether vs. Bitcoin
The key difference between Tether and Bitcoin is that “Tether is a stablecoin … tied to a real-life commodity, the USD, while Bitcoin is not tied to any real-world commodity,” says Daniel Rodriguez, chief operating officer at Hill Wealth Strategies, a wealth management firm in Richmond, Virginia.
Tether is a centralized crypto, whereas Bitcoin is decentralized by not being linked to any real-world currencies. For that reason, in theory, Tether’s value should remain more stable than Bitcoin’s.
Cryptocurrencies that are not pegged to a real-world asset or currency are subject to market volatility. Most traditional cryptocurrencies like Ethereum, Bitcoin, and Litecoin (LTC) will see extreme fluctuations and volatility with the market, inflation and interest rates.
“Tether seems to be a little more stable because it stays close to the value of one USD, give or take a few cents,” Rodriguez says.
Another distinction is that “Tether isn’t designed to necessarily make money but rather be a stable store of value,” he adds.
Is Tether a Good Investment?
Stablecoins like Tether don’t make much sense as an investment because they aren’t meant to increase in value. They only operate as a store of value, since one USDT should always equal one dollar.
Besides being a useful store of value, the benefit of Tether is as a tool for conducting business in a far simpler manner than using Bitcoin.
“One Bitcoin today will not be the same price of Bitcoin tomorrow, making it incredibly difficult to create pricing schemas for companies based solely on BTC,” says Bumbera.
One good reason to own a stablecoin such as USDT, Bumbera says, is if you want to keep your money in crypto but want to avoid volatility. But even staked to the U.S. dollar, Terra is far from a safe investment.
“The risk would be Tether losing its value or the staking platform chosen is not legitimate,” Bumbera says.
While the company purports that it “never once failed to honor a redemption request from any of its verified customers” to date, nothing in investing or cryptocurrencies is guaranteed.
Cryptocurrency users also need to be aware of the changing regulatory landscape around digital assets.
“The future of Tether and other stablecoins depends on transparency, (and the) sufficiency of collateral and liquidity,” LoPresti says. “These features will be the focus of regulators, who will undoubtedly focus their efforts on this sector of the digital asset economy due to the collapse of TerraUSD.”
What is Tether?
Launched in 2014, Tether is a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner. Tether works to disrupt the conventional financial system via a more modern approach to money. Tether has made headway by giving customers the ability to transact with traditional currencies across the blockchain, without the inherent volatility and complexity typically associated with a digital currency. As the first blockchain-enabled platform to facilitate the digital use of traditional currencies (a familiar, stable accounting unit), Tether has democratised cross-border transactions across the blockchain.
What are Tether tokens?
Tether tokens are assets that move across the blockchain just as easily as other digital currencies but that are pegged to real-world currencies on a 1-to-1 basis.
Tether tokens are referred to as stablecoins because they offer price stability as they are pegged to a fiat currency. This offers traders, merchants and funds a low volatility solution when exiting positions in the market.
All Tether tokens are pegged at 1-to-1 with a matching fiat currency (e.g., 1 USD₮ = 1 USD) and are backed 100% by Tether’s reserves.
As a fully transparent company, we publish a daily record of the current total assets and reserves.
What currencies and commodities does Tether support?
Tether supports US dollars (USD), euros, Mexican peso, British Pound Sterling, offshore Chinese yuan, and Gold, with the following Tether tokens, respectively: USD₮, EUR₮, MXN₮, Tether GBP, CNH₮ and XAU₮.
Who can use Tether tokens?
Tether tokens enable businesses – including exchanges, wallets, payment processors, financial services and ATMs – to easily use fiat currencies on blockchains. Some of the largest businesses in the digital currency ecosystem have integrated Tether tokens.
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Individuals can also use Tether-enabled platforms to transact with Tether tokens.