What is Tether? Introduction to USDT

Tether is hybrid cryptocurrency whose value is tethered to that of the US dollar and other fiat currencies. A number of cryptocurrency exchanges, such as Binance, Coinbase and ANX do not accept dollars as payments, but have various markets that are still denominated in USD. Such cryptocurrencies are known as stable cryptocurrencies, and the value of each unit is pegged on to the value of a underlying stable asset, USD. Interestingly the value of USD itself fluctuates around the world. The idea behind tether currency is to control the volatility of cryptocurrencies, and allow users to use cryptocurrencies as fiat money. Each USDT unit is guaranteed by 1 US dollars and users can choose to exchange on the digital platform anytime they may wish to.

We will analyze the functioning and the concept behind Tether .

Tether is a cryptocurrency asset issued by Tether Limited. Most of the exchanges denote Tether as USDT. Tether is actually a token issued on blockchain through the Omni protocol, which is an open source platform. Omni trasactions are recorded over bitcoin blockchain sharing same transaction hash.

At the time of writing this article, total supply of tether stood around 2.2 billion as seen below.

Functions

Tether is aimed to solve the problem of currency exchange across the world. Currently, in order to convert cryptocurrency assets into Fiat currency, users have to first convert it into dollars, and then get it converted to the currency of their choice. The process involves a lot of time and fees in the exchange of currencies. The transactions on tether will allow consumers to save time and money without affecting the value of the cryptocurrency. The company is led by Jean-Louis van der Velde, who is also the CEO of Bitfinex, which is the largest cryptocurrency exchange in the world, with a total market share of ten percent since 2014. The two companies are closely affiliated with a number of common stakeholders. Due to its high liquidity, Tether can be used to buy other cryptocurrencies, which makes it complementary to the entire market. Currently, most bitcoin exchanges have strained relationships with banks across the globe. Moreover, the entire process of converting assets into fiat currencies involves the levying of costs of the bank on the transactions. Tether works to solve that problem and provide users with a fast, easy method to convert cryptocurrencies into Fiat assets.

How does it work?

Currently, tether supports the US dollar and Euros, with plans to expand to the Japanese Yen in the near future. Only banks that are backed by governments have the authority to declare assets as holding value. This means that Tether has to make sure that its value is always redeemable at one dollar, and keep reserves of each of its cryptocurrency unit in circulation.  Tether publishes its bank account balance on its website’s transparency page every month, in order to prove that it has exactly the amount in its bank account it uses to redeem the users as the value of the number of coins in circulation. Therefore, the only reason why one unit of USDT is worth one dollar is because the company has the amount as reserves at all times.

Relationship with Bitcoin

As Tether is closely related to Bitfinex, which is the largest cryptocurrency exchange in the world, and shares the CEO and a number of stakeholders with the exchange, the relationship between the two is interesting to say the least. In November 2017, 50 million tethers were printed, which is considerably higher than what one would expect, considering that the company needs to put 50 million US dollars in reserves to compensate for the same. Tether sends these tokens directly to Bitfinex, and it is unclear as to what happens from there. At the same time, it has been observed that the price of bitcoin jumps unexpectedly, a phenomenon that has been identified multiple times. While it is unclear as to what transactions take place once the tether coins enter the Bitfinex, it has been speculated that is gets used to buy bitcoins, which creates an increased demand for them. This gets noticed by investors across the globe who then take part in transactions to make profits. While there is nothing illegal about this, questions have been asked about what the actual worth of each tether coin is. Therefore, it cannot be said that tether coins are as well backed as the company claims they are.

The risk

In 2014, Mt. Gox, one of the biggest currency exchanges of the time underwent a disastrous crash that was worth 460 million US dollars. Investors were told that the crash took place because the currency invested a lot in the cryptocurrencies in question, and even though cryptocurrencies underwent a huge surge in value since then, a phenomenon led by bitcoin, a similar situation has been predicted in the case of Tether and Bitfinex. Investors have a tendency to take notice more of the increase in value of the cryptocurrencies, not giving enough attention to the quality of backing that it possesses. In the case of Bitfinex and bitcoin, the impact of such a collapse could be disastrous for the entire cryptocurrency markets, including the exchanges and the value of cryptocurrencies as a whole.

Controversy

In February 2018, news broke out that the U.S. Commodity Futures Trading Commission (CFTC) had subpoenaed Tether as well as Bitfinex. This led to people believing in the rumours that were flying around for months, that Tether might not have the cash reserves that the company claims. While a company representatives said that the entire process was a routine legal matter, the news has gained widespread following across the world. It has been argued by experts around the world that Bitfinex has been guilty of creating Tether coins without the company having enough reserves to do so, and then use them to buy bitcoins in order to push the price up. While the company does from time to time post details of the bank account, various critics have pointed out that the company hasn’t given details about where the money was held, or with which banks accounts. This fact, along with the fact that tether has been recently increasing the number of tokens in circulation, putting up around 850 millions tethers in January alone, and that these releases have had a history of coinciding with price variations in bitcoin have made the controversy a well followed one. In order to put away these doubts about its future, Tether needs to take various steps in order to be more transparent.

What do you think? Will Tether come clean, or its relationship with Bitfinex is one that is unethical and also, illegal? Let us know in the comments below.