Tether (USDT) is a popular stablecoin that crypto enthusiasts have been using for years to leverage their cryptocurrency trades.
USDT is pegged to the US Dollar and should theoretically be unaffected by the market volatility that can so dramatically affect the valuation of other cryptocurrencies like Bitcoin.
Tether is a stable coin
Tether aims to provide a “safe” digital asset that maintains a stable valuation. This makes USDC a stablecoin whose value is linked to the price of the US dollar. The goal is for Tether to always keep the same value as its pin.
“The idea is that 1 tether can always trade for 1 USD 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 stable, reliable liquidity to get in and out of other cryptocurrency trades without incurring unpredictable losses (or gains) from volatile price changes.
Tether had a 24-hour trading volume of $58 billion (£47 billion) at the time of writing. This makes Tether the most liquid cryptocurrency and even beats the crypto market stars Bitcoin (BTC) and Ethereum (ETH). It is also among the top three cryptos by market cap.
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How does Tether work?
When a user deposits fiat currency into Tether’s reserve and sells fiat to buy USDT, Tether then tokenizes the corresponding digital amount. The USDT can then be sent, stored or exchanged.
If a user deposits $100 (£80) into the Tether Reserve, they will receive 100 Tether tokens according to a 1-to-1 dollar parity. Tether coins are destroyed and phased out when users redeem the tokens for fiat currency.
Tether, like many other digital currencies, moves via blockchains. Tether tokens are available on various blockchains, such as the original with Omni on the Bitcoin platform, as well as Liquid, alongside Ethereum (ETH) and TRON (TRX), among others.
A brief history of Tether
Tether’s roots go back a decade when JR Willet attempted to build new cryptocurrencies on top of the Bitcoin protocol. Willet implemented this idea with Mastercoin, and one of its original members later became a co-founder of Tether in 2014.
The use of Tether for liquidity began when it was added to the BitFinex exchange in January 2015.
How is Tether secured?
Although stablecoins are a popular choice among crypto traders, Tether has some additional controversies regarding liquidity issues and whether its reserves are sufficient to cover the number of USDT tokens in circulation.
According to Tether’s website in 2019, the site claimed that the stablecoin was backed by reserves in traditional currency and cash equivalents (and sometimes other assets held by affiliates).
That’s a little more detailed than what’s being quoted today. Today, Tether’s website states: “All Tether tokens are linked 1:1 to a matching fiat currency and are 100% backed by Tether’s reserves.”
Adam Carlton, CEO of crypto wallet Pink Panda, says Tether’s history of transparency about how the coin is secured hasn’t always been clear or consistent.
“It has a very questionable legal history and to this day its actual reserves are still quite opaque and are believed to consist essentially of unknown sources of commercial papers,” says Carlton.
Other crypto experts say it’s somewhat accepted that Tether isn’t “fully” collateralized in the crypto marketplace. And that it was controversial more than a year ago.
“Markets have worked through this concept of how comfortable they are – it is very clear that Tether is not backed by dollars,” says James Putra, vice president of product strategy at TradeStation Crypto.
Tether vs TerraUSD
Tether and TerraUSD (UST) are both stablecoins pegged to the US dollar, but the two cryptos use wildly different methods to hold their value.
Tether is a collateralized stablecoin backed by the company’s assets and reserves. When these 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 the programming language and parameters it sets for another token on the Terra protocol to support 1-to-1 US 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 instead of cash reserves has caused TerraUSD to lose its price peg amid market volatility. “If you own 1 UST, you would expect to be able to withdraw $1 at any time, but it’s lost its tie,” says Bumbera.
This has brought to light concerns about the future of such algorithmic stablecoins.
Binance, the world’s largest crypto exchange by trading volume, temporarily suspended spot trading for LUNA and UST on May 13 due to its volatility against its own stablecoin BUSD, with LUNA valued at $0.0001208 at the time of writing has dropped to almost zero.
“The current version of programmatic coins is definitely over,” Gupta said. “But there will always be room for innovation in a much better stablecoin.”
Tether’s price slipped below its peg to $0.9485 on May 12 on market moves related to the collapse of TerraUSD, but has since recovered near its 1-to-1 dollar parity.
Tether vs Bitcoin
The key difference between tether and bitcoin is that “tether is a stablecoin…pegged to a real commodity, the USD, while bitcoin is not pegged to any real commodity,” says Daniel Rodriguez, chief operating officer at Hill Wealth Strategies, an asset management firm in Richmond, Virginia.
Tether is a centralized crypto, while Bitcoin is decentralized by not being tied to real world currencies. For this reason, the value of tether should theoretically remain more stable than that of bitcoin.
Cryptocurrencies that are not linked to a real asset or currency are subject to market volatility. Most traditional cryptocurrencies like Ethereum, Bitcoin and Litecoin (LTC) will experience extreme swings and volatility with the market, inflation and interest rates.
“Tether seems a bit more stable because it stays close to USD 1, a few cents more or less,” says Rodriguez.
Another difference is that “Tether isn’t necessarily designed to make money, it’s more of a stable store of value,” he adds.
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Is Tether a good investment?
Stablecoins like Tether make little sense as an investment because they are not intended to increase in value. They only act as a store of value as one USDT should always equal one dollar.
Aside from being a useful store of value, the benefit of tether is that it’s a tool to do business in a much simpler way than bitcoin.
“A bitcoin today will not be priced the same as bitcoin tomorrow, making it incredibly difficult to create pricing schemes for businesses based solely on BTC,” says Bumbera.
A good reason to own a stablecoin like USDT, according to Bumbera, is if you want to keep your money in crypto but avoid volatility. But even pegged to the US dollar, Terra is far from a safe investment.
“The risk would be that Tether loses its value or the chosen staking platform is not legitimate,” says Bumbera.
While the company claims that to date, it “has not once missed a redemption request from any of its verified customers,” nothing is guaranteed when it comes to investments or cryptocurrencies.
Cryptocurrency users also need to be aware of the changing regulatory landscape surrounding digital assets.
“The future of Tether and other stablecoins depends on transparency (and) sufficient security and liquidity,” says LoPresti. “These characteristics will be the focus of regulators, who will no doubt focus their efforts on this sector of the digital asset economy due to the collapse of TerraUSD.”
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