December 29, 2021 -

A Guide to Tether

A Guide to Tether

Cryptocurrencies keep getting featured in news, and not just in the financial section. Crypto has become mainstream even though just a few years ago people were hesitant when investing in digital tokens. Today, it is common to invest in crypto thanks to quite a few successful examples like Bitcoin, Ether, Solana, etc.

But there another type of cryptocurrency is trying to escape the shadow of the bigger brother — stablecoin. It’s a type of cryptocurrency that is bankrolled by a store of value, usually, by a fiat currency. In some cases, stablecoins are backed by gold or even silver, but the most popular options are the dollar, euro, and other stable fiat currencies.

Tether or USDT is one such cryptocurrency. It is bankrolled by the dollar, and the price of 1 USDT is always $1. The Tether platform was created, and launched by BitFinex.

The coin is called Tether, but the trading symbol is USDT. It’s like Bitcoin’s BTC. Currently, Tether is considered the third biggest cryptocurrency with a market capitalization of $73 billion.

Even though it seems like a good idea to invest in Tether since it’s less volatile thanks to the support of the dollar, the coin is rather controversial. Study the article to learn more about Tether, how it works, and other interesting details.

The Idea of Stablecoins

Standard cryptocurrency is volatile. For example, throughout its history, Bitcoin has been significantly increasing and decreasing in price because of its volatility. Stablecoins were created to make crypto less volatile and more stable depending on the fiat currency they are bankrolled by.

Thanks to stablecoins, the cryptocurrency market has more liquidity. As a result, it’s easier to convert cryptocurrency to fiat currency thanks to stablecoins that play the role of fiat money in the crypto world.

The most popular stablecoins like Tether, USD coin, Gemini Dollar, etc., use dollars to stabilize the digital currency. But it’s possible to use other fiat currency and even a different type of collateral. For example, some stablecoins are backed by the euro, yen, but some coins use gold and silver.

The theoretical idea is that companies responsible for creating stablecoins have to be transparent about the amount of currency backing stablecoins. But not all companies reveal this information. That’s why Tether got under the fire of controversy, it seems that the company hid important facts about their losses.

How does Tether (USDT) Work?

The Tether Limited company is holding Tether reserves so it’s easier to deposit in fiat currency and then withdraw cryptocurrency to exchange for fiat money.

To stabilize the price of USDT, the company adds and destroys coins if the number of tokens in circulation increases or decreases compared to the overall Tether reserves.

Tether Limited keeps the reserves of Tether tokens and facilitates fiat deposits and withdrawals. Additionally, it mints and destroys the tokens to stabilize the coin’s value.

Tether and Bitcoin Blockchain

Tether Limited preferred Bitcoin blockchain to launch the platform, specifically, the Omni Layer. The distributed ledger is using the Bitcoin blockchain as the main system, and Bitcoin’s second blockchain is called Liquid as a side system. Looking for transactions is possible thanks to Omni Explorer.

Tether and Other Blockchains

Bitcoin is not the only system where Tether is available. Tether is reachable on such blockchains as:

  • Ethereum
  • EOS
  • OMG
  • Tron
  • SLP
  • Algorand

Even though Bitcoin blockchain was used as a primary system, Ethereum seems to be the main system since it is holding the biggest Tether market.

Considering this info, it means that Tether coins are available to be used on different protocols. Note, when sending tokens from one address to the other, this information should be considered since the correct address needs to be chosen. There are different transport protocols used by Tether, so it’s essential to choose the right one.

Tether and Volatility Protection

A Guide to Tether

The company responsible for Tether creation, claims that USDT digital tokens are “tethered” to dollars in 1 to 1 proportion. Meaning, 1 USDT is connected to 1 dollar. The company also claims that to fix the volatility issues, Tether is also bankrolled by the company’s reserves.

USDT coins can move on blockchains as easily as traditional cryptocurrencies. Tether is not money in its traditional meaning, these coins are designed to perform just like all other cryptocurrencies. But the difference is that each Tether is equal to 1 dollar. Thanks to this connection, stablecoin Tether is less volatile as long as the dollar isn’t suffering from inflation (which is highly unlikely to happen).

Use Cases of Tether

One of the reasons why stablecoins were introduced is to fix the issue of volatility. They also facilitate the exchange process, but still, the decreased volatility is one of the primary reasons why people invest in stablecoins.

If an investor wants to have crypto assets in their portfolio but is cautious about investing in volatile cryptocurrencies, stablecoins is the go-to option. Another use case of Tether lies in the business sector. USDT enables businesses to utilize blockchains.

Exchanges, financial platforms, and services, payment platforms, wallets all can benefit from using Tether since it’s almost like using fiat currency. Several huge crypto enterprises have already implemented Tether in their ecosystems.

Why is Tether (USDT) Controversial?

The main issue with Tether is that it doesn’t seem to have enough dollar reserves to claim that it can hold the 1 to 1 proportion. Meaning, if there are not enough dollars in their reserves, the price of USDT should be lower. Not long ago, the company has finally revealed that they have only 2.9% of their reserves in actual cash.

Other reserves are stored as commercial paper, which isn’t a good sign since it’s not a secure reserve type. It seems that Tether is one of the top biggest holders of commercial paper. This peculiarity makes Tether resemble traditional market funds, but without traditional regulations since it’s cryptocurrency.

Another controversy is that some experts believe that Tether is used to help Bitcoin increase in price. There is no proof of that, but some have assumed that it’s been used in 2017 when Bitcoin has reached an all-time high during that period.

Is it a Good Idea to Invest in Tether?

Even considering the controversy, Tether is still considered to be one of the most important coins in the crypto world. It keeps growing and even despite some major scandals, it managed to reach the third biggest cryptocurrency after being the fifth biggest coin.

The main issue with Tether is its lack of transparency. Even though the company has finally released some important data about its reserves, it makes investors hesitant to invest in USDT.

Nevertheless, Tether is one of the most stable cryptocurrencies out there. It might be a good idea to invest in Tether when someone wants to add crypto to their portfolio.

Unlike other volatile currencies, holding Tether is like having dollar reserves in crypto. Naturally, without the risks of other traditional cryptocurrencies.