What is Tether?
The idea behind Tether is really very simple; an asset-backed cryptocurrency pegged to the US dollar on a 1-to-1 basis. The value lies in its utility – the ability to act as a relatively stable store of wealth that is easy and cheap to facilitate digital trades anywhere in the world. For example, if you want to send US dollars to another country, you can simply convert the dollars to USDT, then send them instantly and very cheaply, then the recipient can easily exchange them back to US dollars. This completely bypasses the traditional financial system, like SWIFT, and its slow and expensive transfers.
The origins of Tether are inextricably linked to another crypto project called Mastercoin (since rebranded as Omni). The basic idea was the brainchild of J.R. Willet, and was tested with Mastercoin as early as 2012. Tether, which was largely based on technology developed for Mastercoin, was not launched until 2014. Brock Pierce, who had been a member of the Mastercoin Foundation, was one of Tether’s co-founders, while Craig Sellars, Tether founder, became CTO of the Mastercoin Foundation.
Despite this somewhat convoluted start, and plenty of subsequent controversies (more on that later, so keep reading), Tether has since been minted on ten protocols and blockchains, and become the world’s most popular stablecoin by a considerable margin. It is run by Tether Limited, which is owned by iFinix Inc. – which also owns the popular Bitfinex cryptocurrency exchange. iFinix Inc., was originally founded in Hong Kong, but is now registered in the British Virgin Islands.
|Did you know?|
Tether is a charter member of the Blockchain Alliance. This is a coalition of companies and organisations working together to make the global blockchain ecosystem more secure, and promote development.
Source: Blockchain Alliance
As previously mentioned, there are several different Tether tokens minted on different blockchains and protocols – however, all the tokens work essentially the same way.
There are actually five different Tether tokens.
- United States dollar tether as a token on Bitcoin’s Omni layer
- Euro tether on Bitcoin’s Omni layer
- United States dollar tether as an ERC-20 token
- Euro tether as an ERC-20 token
- United States dollar as a TRC-20 token on TRON network
Tether Minting and Supply
Unlike most cryptocurrencies, Tether is entirely centralised. New tokens are not mined or minted for stakers, instead, they are centrally issued by iFinix Inc. The company has always claimed to have assets to literally back the amount of issued Tether on a 1-to-1 basis in US dollars, and tokens are burned (destroyed) when users convert Tether back into fiat currencies.
Tether Adoption & Usability
Since launching, USDT has grown to become by far the biggest stablecoin by market cap. According to Coingecko, at the start of October 2022, USDT had a market capitalisation of almost US$68 billion – around $20 billion more than its closest rival, USD Coin.
Stablecoins like USDT have several compelling use cases, including:
- Wealth protection – Because it is pegged to the US dollar, USDT can be used as a safe haven asset. This is especially useful for people in countries suffering from very high inflation.
- Improving financial accessibility – Millions of people around the world are effectively locked out of the traditional banking system for one reason or another. But, anyone with internet access can set up a wallet and use stablecoins like USDT.
- Trading solutions – As previously mentioned, USDT is a great solution for traders and exchanges who want to avoid the cost of fiat onramps and off-ramps.
- Business Payments – By accepting stablecoins like USDT for payments, businesses can avoid the hefty transaction fees charged by legacy financial processors, while still benefiting from price stability.
- International Payments and Remittance – By using stablecoins like USDT, people can send money overseas while avoiding the high fees charged by traditional providers.
- Settlements – By paying settlements in stablecoins like USDT, parties don’t have to be delayed by banking hours.
- Lending – Because there is such high institutional demand for stablecoins, holders can earn significant interest by lending their USDT on decentralised crypto lending platforms.
Tether Network Fees & Speed
As explained previously, USDT is minted on several blockchains, including Bitcoin’s Omni layer, Ethereum and TRON. Because of this, you’ll need to pay network transaction fees in the base currency of the blockchain in question, e.g. Ethereum. Likewise, the speed of transactions will be dependent on the specific blockchain in use.
|Did you know?|
Although USDT is normally worth almost exactly 1 US dollar, it did briefly hit $1.06 in 2020 and $0.90 in 2018.
Source: the ascent – A Motley Fool Service
Tether Security and Safety
Considering the vast amount of Tether changing hands every day, it has proven to be a very safe and secure stablecoin – something reflected in the scale of its institutional adoption.
However, over the years, many have questioned if Tether actually holds sufficient reserves to back each issued USDT with a real US dollar. 2017 was a challenging year for Tether. First, it reportedly wasn’t able to meet all withdrawal requirements, and in November of the same year, $31 million worth of USDT was stolen. This resulted in the company implementing an emergency hard fork which made all the tokens identified as stolen untradeable.
In 2018, questions were again raised about the veracity of Tether’s claims that all USDT stablecoins were backed by real dollars. Much of the speculation appears to have stemmed from the fact that Tether had hired law firm Freech, Sporkin & Sullivan LLP (FSS) to conduct an audit, rather than one of the ‘big four’ auditing firms – who, according to Tether’s general counsel, weren’t willing to work with the industry at the time.
Then, between April 2019 and February 2021, Tether’s parent company, iFinix, was embroiled in a complicated and costly legal case filed by New York’s Attorney General. The convoluted proceedings involved a Panamanian payment processing firm, all sorts of allegations, and the government of Poland of all places. In the end, the case was settled by iFinex for $18.5M, with iFinex, Bitfinex, and with Tether not admitting any wrongdoing.
Tether Limited also had to stump up $41.6M to the US Commodity Futures Trading Commission (CFTC) for inaccurately claiming 100% of the minted USDT was backed by fiat US dollars. It turned out that only 74% was backed by actual dollars, with the remainder backed by a variety of other assets.
All in all, Tether’s experience was typical of many businesses blazing trails in uncharted territory. But, by 2022, the regulatory space had become a little clearer, and checks and processes were in place to ensure things were running more smoothly – ensuring USDT was safer and more secure than ever.
Security and safety tips:
- Don’t leave your USDT on exchanges. Use exchanges for buying and selling only. Always transfer your crypto to a local wallet for short-term storage.
- For long-term storage, keep your crypto in a hard wallet.
- Always keep your wallet keys in multiple safe places – they cannot be recovered.
- Never tell anyone about your crypto holdings. No matter how secure your storage is, if you or your loved ones are physically threatened, you’ll probably hand over your personal keys.
Because it is a stablecoin, pegged on a 1-to-1 basis with the US dollar, USDT is inherently stable compared to other cryptocurrencies. The system of backing USDT with actual fiat currency and other real assets means it is unlikely to suffer the same fate as TerraUSD – the algorithmic stablecoin that crashed the Terra LUNA ecosystem and tanked the entire crypto market in mid-2022.
Final Word on USDT
Despite encountering its fair share of challenges in its early years, USDT has emerged as the most stable of stablecoins, and is now a key part of the global crypto ecosystem. As the importance of digital assets increases over the coming years, we expect the adoption of Tether to grow exponentially and think there’s a good chance it will remain the world’s most popular stablecoin for the foreseeable future.
Similar Cryptos to Tether
Tether’s main rival is USDC, the stablecoin managed by a consortium called Circle – which includes Coinbase and Bitmain. Like Tether, it is pegged to the US dollar on a 1-to-1 basis, minted on several different blockchains, and is backed by fiat US dollars and other assets. The next biggest stablecoin after USDC is Binance USD, which is gaining in market share thanks to the support of Binance, which is the world’s biggest crypto exchange by volume.