Introduction
Tether, known by its ticker symbol USDT. A stablecoin is pegged to a fiat Dollar, meaning it’s unaffected by the price of Bitcoin and the wild swings of the crypto markets.
Why Tether?
The reason investors and traders use Tether is liquidity, or the ability to get in and out of cryptocurrency positions without huge changes in price. In the last 24 hours Tether has reported 38 billion in trading volume, making it the most liquid cryptocurrency, even more liquid than Bitcoin. Not only is it the largest stablecoin, but it’s also one of the largest cryptocurrencies by market cap.
The History of Tether
Stick around as we tear into the nuts and bolts of USDT and find out what makes it tick. We’re going to jump in the way back machine and dial in January of 2012, when a fellow by the name of J.R. Willett proposed the idea of building new currencies on the Bitcoin protocol. This idea materialized into Mastercoin, which aimed to utilize a new “second layer” on the bitcoin blockchain.
Mastercoin would eventually become the technological foundation of the Tether cryptocurrency. In July of 2014, a few team members from the Mastercoin project established their own startup called Realcoin, using the same second layer technology renamed as the “Omni Layer Protocol”. Later that year, Realcoin was renamed to Tether, referencing its ties to fiat currency.
What Does Tether Mean?
By definition, a tether is a line tied to an object to restrict its range of movement. This connection is represented digitally, meaning each Tether coin is equivalent to one US dollar or alternate reserve currency essentially. Making it a “digital dollar.” Bitfinex, which is a sister company of Tether, claims: “Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities. Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”
How Does Tether Work?
So… How does Tether work? First off we need to point out that Tether, besides being a stablecoin is a unique cryptocurrency in that it “exists” on several different blockchains. Currently there is a Tether token on the Omni Bitcoin platform, Ethereum, EOS and on Tron.
The difference between the four coins has to do with the properties inherent to the blockchain hosting Tether. For instance, for maximum safety and immutability some investors may prefer the Bitcoin Omni version of Tether. Other investors might prefer the ERC20 Tether token as it can be used in DeFi to earn a passive income.
Apparently very few investors want to hold their Tether on the Tron network. We’ll go over both the ERC20 flavor which is the most popular, but first, let’s begin with the OMNI layer OG version which is based on Bitcoin. Tether’s technology consists of a 3-layer stack: the Bitcoin blockchain, the Omni layer protocol, and Tether Limited.
The Bitcoin blockchain is the bottom layer that serves as a transactional ledger and runs the consensus algorithm. The second layer, Omni, is used to create and destroy digital Tether coins, as well as track and report the tokens in circulation. This layer also enables users to send and store these tokens securely and anonymously.
The third layer, Tether Limited, is the business entity that manages fiat deposits and withdrawals from the Tether reserve, along with management of Tether’s web wallet and compliance logistics. When a user deposits fiat currency into Tether Limited’s reserve, by selling fiat to buy USDT, the business generates and issues the corresponding amount of digital dollar tokens to the user that can then be sent, stored or exchanged.
If a user deposits $100 USD, they will receive 100 tether tokens. These Tether coins are destroyed and removed from circulation when the user redeems the tokens for fiat currency. Bitcoin’s secure blockchain and its network effect helped Tether gain popularity over other stablecoins operating on different blockchains.
ERC20 vs. Omni
In August 2019, the ERC20 version surpassed the Omni version in number of transactions and in October of the same year it surpassed it in market capitalization too and never looked back. Today, the ERC20 version is the indisputable leader in market cap between the two, with a little over $10 billion dollars, compared to $1.33 billion in the Omni version.
That move wasn’t without criticism, however, and critics claim the high volume of USDT transactions saturates the Ethereum network and increases the transaction fees. In fact, in July and August last year, when most exchanges made the switch from Omni to ERC20, the over-saturation of the trades was 17 times higher than it was during the Ethereum gridlock of Nov 2017.
Other Versions and Controversies
USDT has two more versions, built on top of two more blockchains that are smart-contract oriented, Tron and EOS as well as a future USDT token on the Algorand network. Exodus supports the ERC20 version of the USDT token, providing our users with the faster, most popular and most convenient form of the coin.
Other stablecoins available in the Exodus wallet include TrueUSD, USDC, DAI, PAX and GUSD as well as a home to additional 100 cryptocurrencies and crypto apps. If you would like to store any of them on your mobile device or your desktop, click the link above to learn more and download Exodus today. USDT has proven to be the most used stablecoin in the ecosystem, with a sizable lead in volume compared to USDC.
Tether’s Controversies
Tether has been subjected to additional controversy within, and outside, the crypto space, from allegations of price manipulation, to issues involving liquidity and security. Tether was also hacked in November 2017, that resulted in the theft of $31 million USDT, and then implemented a hard fork making the stolen funds untraceable.
Tether, and its sister company, Bitfinex, are the defendants in two class-action suits where the plaintiffs claim that they used their USDT reserves to manipulate the price of Bitcoin during the bull run of December 2017. Additionally, the New York Attorney General last year accused iFinex, the parent company of Tether and Bitfinex, that they used their USDT reserves to hide from their investors a loss of $850 million dollars that went missing from the popular exchange.
iFinex rejects both these claims as “insubstantial” and “in bad faith”. But what is perhaps the biggest controversy around Tether is whether their reserves are actually adequate to cover the circulating supply of USDT tokens. The fact that their reserves have never been officially audited, only adds fuel to the fire, and, in fact, in March 2019 the company changed their long-standing statement that all USDT is backed by the same amount of cash to say that all USDT are indeed 100% backed, but as we stated earlier “by cash and cash equivalents.”
Conclusion
So do you think Tether is a safe bet? This is a good question to ask and the answer is nuanced depending on what your needs are. The truth is that Tether probably won’t blow up and go out of business tomorrow. It’s been around for more than five years and will probably last well into the future.
