What is Tether (USDT)?

In the crypto space, Tether is known as a stablecoin. This is a token whose price is usually stable — unlike many cryptocurrencies, which are considered volatile — and often pegged to that of a fiat currency like Chinese yuan. 

In Tether’s case, the price of the token is more or less the same as the U.S. dollar, so it goes by the ticker symbol USDT. However, the project also includes tokens pegged to offshore Chinese yuan, and euros.

Overview for Fast-Readers

  • Tether is the most popular stablecoin, with a market capitalization in the billions
  • Because the price of Tether isn’t volatile, the token is useful as a medium of exchange
  • Some have expressed concerns about the level of centralized control for Tether

What is Tether used for?

Tether is a relatively simple token to introduce cryptocurrency and blockchain concepts to those unfamiliar with the technology. Because the USDT price is around $1.00 at all times and the token available for purchase on many crypto exchanges, it can serve as a gateway between no-coiners and the crypto space.

People can use USDT for making simple peer-to-peer transactions and purchasing other cryptocurrencies for trading or HODLing (“hold on for dear life”), among other things.

How does the Tether coin work?

Many cryptocurrencies are supported on more than one blockchain — the underlying infrastructure through which transactions occur. In Tether’s case, the token exists on the Bitcoin, Ethereum, EOS, Algorant, SLP, OMG, and Tron blockchains. 

The stable price and availability of tokens — unlike Bitcoin, USDT is not limited to a 21-million token supply — allows businesses to use blockchain technology almost as though they’re using fiat currencies. Individuals can likewise use a number of different blockchains to handle the token. For example, users can send Tether to Ethereum addresses as an ERC-20 token. 

How does the price of Tether stay at $1?

In general, a stablecoin maintains its stable price (for one pegged to USD, rarely rising or falling more than $0.02), by being backed by reserves for every token in circulation. 

The price of Tether has followed this pattern with one notable exception. In 2018, when allegations arose that the project was not fully backed by U.S. dollars (see below for details), the price of the token dropped to a low of $0.88 as many crypto users sold their holdings.

Is USDT safe to use?

At the time of writing, Tether is the most popular stablecoin in the world and ranked in the top 10 cryptocurrencies by market capitalization. However, some crypto users have expressed concerns about the project.

For instance, the project has suffered a major hack. In November 2017, a hacker stole more than $30 million from the Tether Treasury account.

The project’s parent company is currently facing a class-action lawsuit alleging the firm manipulated the crypto market to spike prices for certain tokens. Tether has denied the allegations. 

Advantages of Tether

Tether is by and far the most popular stablecoin currently in existence, with a market capitalization of more than $19 billion at the time of writing, representing the total number of tokens in circulation. 

Because it is pegged to the U.S. dollar, the stablecoin is useful as a “stable” form of payment. While transactions made using Bitcoin, Ethereum or any number of altcoins are often just as secure as Tether, their prices are volatile, meaning users wishing to exchange them for fiat usually need to do so immediately to ensure they can sell them for the same price in fiat. The token also offers liquidity to crypto exchanges that don’t deal with traditional banks.

Disadvantages of Tether

Though Tether still claims to back up all USDT tokens in circulation with reserves, the project changed its website in 2019 to reflect that these reserves are comprised of cash as well as loans to affiliated companies. Therefore, the tokens are not 100% backed up with fiat currency.

There is also the question of centralized control. Unlike the Bitcoin network, which has no central authority — the network is peer-to-peer — Tether is anything but decentralized. In September 2020, Tether announced it had frozen millions in funds connected with the hack of crypto exchange KuCoin, something that would be impossible on the Bitcoin blockchain. 

Summary

Based in Hong Kong, Tether is under the leadership of Chief Technical Officer Paolo Ardoino, Chief Financial Officer Giancarlo Devasini, and Chief Executive Officer JL Van Der Velde. Van Der Velde and Ardoino have the same positions at Bitfinex, a crypto exchange that allows margin trading using USDT as collateral.

Many central banks across the globe are also in the process of exploring central bank digital currencies, or CBDCs. These tokens are similar to stablecoins in that they are also linked to the price of that country’s fiat currency, but are controlled by a governmental authority — usually the central bank itself.