Tether (USDT) is one of the most popular and largest stablecoins by market capitalization available today. It is a financial tool that operates on blockchain networks, with its key feature being that its value is backed by and maintains a 1:1 parity with a fiat currency.
These tokens function as a digital representation of fiat money on a blockchain. Tether USDT specifically embodies the US dollar. This is precisely why it is denominated as USDT—a combination of the official abbreviation for the US dollar (USD) and the initial of the project (T).
The Origin and History of Tether
Tether's history traces back to one of the earliest stablecoin initiatives developed on the Bitcoin blockchain, originally known as Mastercoin. Around mid-2013, investor Brock Pierce and software developer Craig Sellars worked on creating a protocol that would interact with Bitcoin. The idea was to expand its financial opportunities by integrating a sidechain. This would allow the generation of new products and assets without diluting the adoption of the main cryptocurrency.
In 2014, Mastercoin rebranded to Tether when entrepreneur Reeve Collins also joined as a founding member. This move laid the foundation for Tether's future. It was confirmed that its offering would be based on three types of tokens: one pegged to the US dollar, another to the euro, and a final one to the yen.
Tether Limited, the company formed to handle the issuance and management of the tokens, promised in its technical documentation that every Tether issued would be 100% backed by its original currency. This formally established the supposed basic operation of the cryptocurrency.
Tether's founding goal was to address two major problems in the cryptocurrency market at the time: the high volatility in the price of major crypto assets and the low convertibility of fiat currencies. The idea was to create a token with a stable price and easy access. These characteristics helped popularize USDT above other market proposals.
Controversies and Legal Challenges
Despite its popularity, both Tether the cryptocurrency and the company issuing it have been embroiled in controversies and harsh criticism since their inception. The lack of public audits for the reserves backing the tokens in circulation, coupled with little transparency about the commercial relationships between Bitfinex and Tether Limited, has generated a wave of controversies and lawsuits that still affect the project today.
Since 2014, Tether Limited faced criticism for not providing audited financial statements to prove they held adequate reserves to back USDT. As stated in the project's original document, the issued tokens are supposedly backed by deposits of the original currency. However, the company has not publicly revealed its banking relationships. It only discloses the total supply of tokens in circulation and provides internal documents to US authorities.
In an investigation initiated in 2019, after New York Attorney General Letitia James filed a lawsuit against the project for trading securities without the relevant permits, Tether Limited confessed that its reserves were not solely composed of dollar deposits. They also included equivalent assets.
In this context, they claimed that their circulating coins were backed by cash, various crypto assets, and receivables from loans. However, it was never clarified in detail why they decided to change the backing methodology, nor what the current composition of Tether's reserves is.
Due to the same lawsuit filed by the New York Attorney General, the state's Office of the Attorney General began a process against Bitfinex and Tether Limited that lasted two years. The authority accused both companies of bank fraud, sale of unregistered securities, money laundering, and even violating antitrust laws. The investigation started after the entity accused Bitfinex (one of the largest and most recognized exchanges in the Bitcoin and cryptocurrency environment) of using Tether's reserves to cover an $850 million loss that was never reported to its clients.
The legal dispute was settled in February 2021. Both companies agreed to pay a multi-million dollar fine "to put the matter behind them" and committed to ceasing operations in New York.
Who Develops and Maintains Tether?
Undoubtedly, the key figures behind Tether are its founders:
Brock Pierce is an American entrepreneur, philanthropist, and Bitcoin investor. He is one of the most prominent figures as a co-creator.
Reeve Collins is another creator of the firm and was the CEO of Tether for a time. Today, he is dedicated to his project BLOCKv, a platform specializing in digital finance.
Craig Sellars is the third name involved in Tether's foundation. A software developer, he is still a member of the Omni Foundation and describes himself as an innovator in blockchain technologies. He has also been involved in developments with companies like Bitfinex, Polymath, and even Tether Limited itself.
Currently, Tether Limited is chaired by several of the most important executives from the Bitfinex exchange. For example, Jean-Louis Van der Velde, an entrepreneur, technologist, and CEO of Bitfinex, is the current chairman of the company.
However, as mentioned earlier, the main entity responsible for managing and issuing USDT is Tether Limited. It is a company originally from Hong Kong that also has offices in Switzerland, according to its official website. This entity is solely responsible for administering the bank accounts where fiat currency funds are deposited to issue Tether tokens. Furthermore, it is known to have commercial relationships with Bitfinex.
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Popularization, Growth, and Importance for DeFi
Since its launch, Tether has been one of the fastest-growing cryptocurrencies by market capitalization. For instance, in 2020 alone, its market value grew by 300%, reaching $34 billion. Furthermore, by 2021, it held the fourth position as the largest cryptocurrency in the ecosystem, only surpassed by Bitcoin, Ether, and Binance's token (BNB).
Tether's success stems from its widespread use in the daily operations of traders. Due to its price stability, some users utilize it to safeguard profits from their crypto investments when the market is highly volatile. Additionally, because of its high convertibility, it is a commonly used token on decentralized exchanges and DeFi platforms.
Over the years, the demand for Tether in derivative trading and emerging markets has also grown. According to researchers at Long Hash, 97% of the USDT issued by Tether Limited today is transferred directly to exchanges. These platforms, in turn, use these Tethers to issue digital financial products in dollars.
Its usage has also surged with Tether's expansion to other blockchains. As mentioned before, USDT is integrated into various networks, with Bitcoin being the first it circulated on. However, in 2017, it was also incorporated into the Litecoin and Ethereum blockchains. On Ethereum, it functions as an ERC-20 token. More recently, it has increased its market presence on networks like Tron, EOS, Algorand, and Solana.
How is USDT Issued? Why is Tether Stable?
Tether is a cryptocurrency whose issuance model is based on physical backing and token burning. The only entity responsible for both generating new tokens and taking them out of circulation is Tether Limited. This company has control over the reserves of fiat currencies that validate the existence of a certain number of USDT.
New USDT tokens are issued when users deposit US dollars into the company's bank accounts. In this way, Tether Limited creates tokens representing those deposits, maintaining a 1:1 parity. This means for every dollar deposited, there is one USDT token in circulation.
Conversely, if a customer wants to redeem their physical US dollars, all they need to do is deposit the USDT they hold into a wallet managed by Tether. The company then destroys, or "burns," these tokens—a common term in the ecosystem—and transfers the dollars to the user's bank account.
Due to these mechanisms, Tether is a cryptocurrency with no supply limit that simultaneously maintains a stable price. Its goal is not to become a vehicle for speculation but rather to be a digital representation of the dollar.
However, alterations in the price of USDT can occur due to excess demand or supply. For example, in 2017, the price of Tether exceeded the dollar on several occasions. In such cases, when a stablecoin loses its parity with the currency it's pegged to, intrinsic mechanisms within the token's supply and demand help maintain a relatively stable price.
For instance, stablecoins like Tether USDT depend on arbitrage. If the token's price falls compared to the dollar, investors can buy USDT at that lower price and sell it back to the company at a 1:1 rate. This way, they generate profits from the price difference. Over hours or days, the price will tend to rise and recover its parity with the dollar.
Conversely, if the token's price rises above the dollar, these same traders can buy USDT from the entity and sell it to other investors to make a profit. In the long run, the increased supply of Tether in the market will influence a decrease in its price, stabilizing it again with the dollar. These are the natural market movements that maintain the stability of cryptocurrencies like USDT, whose utility is largely focused on being a means of safeguarding value.
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Frequently Asked Questions
How does Tether maintain its 1:1 peg with the US dollar?
Tether Limited claims to hold reserves equivalent to the number of USDT tokens in circulation. These reserves are supposed to include traditional currency, cash equivalents, and other assets. The company uses issuance and redemption mechanisms, creating new tokens when dollars are deposited and burning them when dollars are withdrawn, to help maintain the peg through market arbitrage.
Is Tether a safe asset to hold?
Tether offers price stability compared to volatile cryptocurrencies, making it popular for trading and storing value short-term. However, its safety depends on the actual backing of its reserves. Past controversies regarding transparency and legal issues mean users should be aware of the associated risks and conduct their own research before holding significant amounts.
On which blockchains can I use USDT?
Initially launched on Bitcoin via the Omni Layer, USDT is now available on multiple blockchains. These include Ethereum (as an ERC-20 token), Tron, EOS, Litecoin, Algorand, and Solana. This multi-chain presence enhances its accessibility and utility across different decentralized applications and exchanges.
What is the main use case for Tether (USDT)?
The primary use case is as a stable medium of exchange and store of value within the crypto ecosystem. Traders use it to hedge against volatility, move funds between exchanges quickly, and provide liquidity. It is also widely used in decentralized finance (DeFi) for lending, borrowing, and as a trading pair.
Can Tether be used for international transfers?
Yes, one of the advantages of USDT is its ability to facilitate fast and relatively low-cost international transfers compared to traditional banking systems. Its value is stable against the US dollar, making it a practical tool for cross-border payments and remittances without the typical volatility of other cryptocurrencies.
How does Tether differ from other stablecoins?
Tether was the first major stablecoin and remains the most liquid and widely adopted. Unlike some algorithmic stablecoins that use code to maintain stability, Tether relies on a centralized model of claimed fiat collateral. Other competitors, like USDC, often emphasize more regular audits and transparency in their reserve holdings.
Closing Thoughts
The core idea behind tools like Tether is to allow users in the ecosystem to avoid the price volatility of other cryptocurrencies, such as Bitcoin or Ether, whose value can fluctuate dramatically within minutes. Tether provides its users with stability equivalent to the US dollar market, acting as a digital dollar for the crypto world. Its role as a bridge between traditional finance and digital assets continues to be fundamental, despite the debates surrounding its operations and reserves.