What is Tether?
Tether, previously known as RealCoin, was launched in 2014 and is the largest Stable Coin in the crypto world. This cryptocurrency is blockchain based, like Bitcoin, but it is pegged to everyday currencies, or fiat money, like the US dollar, the Euro and the Japanese Yen. It’s closer to something like XRP than to Polkadot (head to our ‘What is Ripple?‘ page for more info).
Fiat money (and since 2019 “other reserves”) is held in a bank account to match the value of the coins in circulation, the idea being that the coin price follows the currency price very closely. Hence the name: the coin is “tethered” or “anchored” to the dollar.
US Tether tokens trade under the USDT symbol. Today, Teher Ltd run 3 other stablecoins, the Chinese Yuan (CNHT), the Euro (EURT), plus a stablecoin backed by 1 oz. of gold (XAUT).
No More Swings
One of the drawbacks of cryptocurrencies has been their volatility. The price of Bitcoin, Ether, Litecoin and other cryptocurrencies has swung wildly on occasions and this creates a problem when making payments over the short term. It limits the market appeal. Have a read of our “What is Bitcoin?’ page for a deeper understanding of what is driving that.
Tether is known as a fiat collateralised stablecoin in that everyday currencies are used as the collateral. There are also crypto-collateralised stablecoins which use other cryptocurrencies to back up their reserves.
Pegged to the Dollar
The whole point of Tether is to act as a conduit between everyday currencies and cryptocurrencies in a transparent, efficient way. So a stable cryptocurrency with low transaction charges. The coin has achieved efficiency. Transparency not so much, but more on that below.
It is important to note that although Tether is pegged to the US dollar, Tether Ltd do not guarantee that you will be able to exchange your Tethers for US Dollars. So, that statement on UK banknotes that says “Promises to bear the holder… a sum of Ten pounds” would never be found on a Tether banknote if they existed in a physical form. There is trust involved and experience over time, but that is true of all forms of money, even the dollar.
The whole Tether business model depends on this trust and there is plenty about: it is thought that eight out of every ten dollars spent trading on Bitcoin is done with Tethers.
Not all Plain Sailing
The Tether stablecoin has travelled a bumpy road from its launch to now. In 2017, it was alleged that a big hack had taken place on the network and $31 million worth of Tether was stolen. And in 2018, Tether Ltd sacked its auditing firm leading to suspicions that there were not sufficient reserves to back up the Tether tokens that were in circulation at the time.
Then in 2019, the New York Attorney General accused the owner of Tether: iFinex Inc (who also run cryptocurrency exchange Bitfinex), of concealing a loss of $850 million dollars of client and corporate funds from investors.
How Does Tether Work?
Once a USDT is newly minted and issued (being backed up in the reserves), it can be transferred, stored and spent in a variety of ways (at exchanges, wallets, financial services).
Tether Limited accepts fiat deposits and is responsible for minting and destroying Tether tokens to match the reserves they are administering.
Tether began its life on the Bitcoin blockchain via the Omni Layer, a platform used for creating and trading digital assets on top of Bitcoin.
This technology allows Tether to mint and burn Tether tokens based on the amount under their control. The circulation of Tethers is transparent and can be tracked and reported via the protocol.
Tether’s records (ledger) are stored on the Bitcoin blockchain on the Omni layer, and users can view verified transactions there. Tethers are also available on Liquid, a Bitcoin sidechain.
Tether is also now available on other blockchains, including Ethereum (ETH), Tron (TRX) and EOSIO (EOS), which allow for the creation of new tokens on their blockchains.
At the time of writing, the largest market for USDT is on the Ethereum blockchain.
What is the Point of Tether?
If we already have the US Dollar, what is the point of Tether?
Stablecoins are useful because they offer people a powerful way of hedging against the volatility of the cryptocurrency markets.
By trading Bitcoin into USDT, of example, you can reduce your exposure to a sudden drop in the Bitcoin price.
Trading back and forwards into USDT (rather than the U.S. dollar) minimises the cost of the transactions and maximises the speed of the trade.
On exchanges offering currency pairs, you will often see that Tether is used to offer more currency pairs, especially in those markets where trading in the US dollar (for example) is not available.
With USDT you can buy a coin that has a more stable value like USD, even when you are using an exchange that doesn’t allow fiat transactions.
Is it Always 1:1 to the Dollar?
No. The aim is to maintain parity with the dollar, but there have been times when the price has deviated off that, driven mostly by market confidence on whether all of the Tethers in circulation are backed by the fiat reserves at Tether Limited.
One of the frequent criticisms of Tether is that it is essentially a centralised system (that uses a blockchain).
The system isn’t 100% transparent: for example, there is no way for an outsider to completely verify the system through their documentation, the public blockchain, and public audits. These information sources get you most of the way but not all of the way
Tether Ltd uses blockchain technology, but in fact they are a centralised company run by individuals.
This set up is not necessarily a bad thing (most crypto exchanges are centralised), but it does mean that Tether is closer to Ripple than Bitcoin. They are an enabler.
So Tether has its Pros and Cons like all coins, but it is still a very useful asset, especially for short term moves, and a very successful token.