Stablecoins are a type of cryptocurrency that is designed to maintain a stable value. One of the most popular stablecoins on the market is Tether (USDT), which is pegged 1:1 to the US dollar. USDT cryptocurrency was created by Tether Limited to function as an online digital dollar. Millions of users use USDT every day for trading, hedging, and transactions on various blockchain networks.
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Detailed functioning of the stablecoin
The aim of Tether is for 1 USDT to be equivalent to 1 USD. The coins are destroyed and removed from circulation when users redeem Tether for fiat money. Tether Limited must have an equivalent amount in reserves to mint USDT, guaranteeing that customers can get their money back if they want it.
USDT is built on multiple blockchains, which offers easy integration and adoption. Supported blockchains are Bitcoin (Omni & Liquid protocol), Ethereum, TRON, EOS, Algorand, Solana, and Bitcoin Cash (SLP).
All USDT are pegged at 1:1 with a matching fiat currency and are backed 100 % by Tether’s reserves. The reserves match or exceed the amount required to redeem all Tether tokens in circulation. Tether uses proof of reserve, meaning their reserve will always be equal to or greater than the number of Tether tokens in circulation. The record of Tether tokens issued and reserve assets are publicly available and updated on their official website in the ‘Transparency’ section.
Pros and Cons
- Stable value
- Highly liquid
- Widely accepted by many exchanges
- Multiple blockchain support
- Transparency reports
- Active customer support 24/7
- Issues in the past
Company: Tether Limited LLC, Hong Kong
Reserves and Security
Tether Limited maintains world-class standardized compliance measures for Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), sanctions, and Know-Your-Customer (KYC) laws and regulations.
On-chain security: USDT can currently be issued on various blockchains. By hosting smart contracts and tokens on these blockchain networks, basic protection is also provided by nodes or miners, who protect the network through Proof of Work (PoW) or Proof of Stake (PoS). These platforms regularly audit their code to ensure that it is current, secure, and compliant with the relevant framework. Tether also ensures USDT compliance by each of these networks.
History of Stablecoin
Tether (USDT) was first issued in 2014 by Tether Limited, a company that was founded to create a stablecoin that could be used for trading, and for other transactions in the cryptocurrency market. Since its launch, USDT has become one of the most popular stablecoin on the market and is widely accepted by many exchanges and multiple blockchains.
USDT was originally launched on 6 October 2014 as Realcoin, and was issued by Brock Pierce, Reeve Collins, and Craig Sellars (members of the Omni Foundation). They built Tether on the Omni protocol. On November 20, 2014, Tether's CEO, Reeve Collins, announced the name change of their token from Realcoin to Tether (USDT).
Tether's controversial history began with its launch. In January 2015, Bitfinex allowed USDT to be traded on their exchange for the first time. Tether's volume began to increase rapidly on the blockchain network as USD transactions passed through Taiwanese banks, which in turn transferred them to Wells Fargo. This continued until 2017.
In April 2017, US banks blocked international Tether transfers. The lack of transparency, before and during these events, followed by leaks such as the Paradise Papers and accusations of market manipulation, led many users to speculate whether Tether's currency reserves actually existed, or whether the entire stablecoin was about to collapse. The situation worsened in 2017 when withdrawals were temporarily suspended. These news events caused volatility for USDT holders - USDT depegged to 0.92 USD and took a month to return to 1 USD.
Starting in January 2017, the amount of USDT rose from 10 million USD to nearly 2.8 billion USD in September 2018. This was then followed, in April 2019, by a lawsuit from New York Attorney General Letitia James, who accused Bitfinex and Tether of misappropriating 850 million USD in deficit reserve funds. In 2021, Bitfinex and Tether agreed to pay an 18.5 million USD fine.
Importance and Uniqueness
Since its beginnings, USDT has been the most popular stablecoin across the cryptocurrency world. It has gone through various problems, but has always stood its ground and, ultimately, has not caused any financial losses to users. It is accepted on almost all centralized exchanges (CEXs) and many blockchains in decenralized finance (DeFi). As a company, Tether has faced various problems of its own making and has responded by rapidly increasing transparency and regularly reporting publicly on the platform about the reserves used to back USDT. The USDT is also used on CEXs for perpetual trading, where it is paired with other cryptocurrencies that can be traded on the exchange's perpetual interface.
Despite its many advantages, USDT does come with some risks. One of the main risks is that, as a centralized company, Tether has the power to issue or destroy USDT. This could lead to potential issues with trust and security. Additionally, any mishandling of the reserves by Tether could lead to a loss of value for USDT holders.
There have been various issues with Tether in the past, such as hiding losses, insufficient reserves to back USDT, and issuing USDT without dollar backing for Bitfinex. Tether continues to be the center of speculation in crypto markets and blockchain networks, with many users questioning its liquidity and stability.
Tether (USDT) has long been one of the most popular stablecoins used for trading across the entire cryptocurrency environment. However, the main problem is that it is backed by a centralized company in which we have no choice but to put our trust. It has faced various issues in the past, but today, it seems to have learned from them and chosen the path of being as transparent as possible. Regardless of this, we cannot rely on Tether alone, so we should always diversify our cryptocurrencies wisely, rather than trusting only one asset. To learn more about stablecoins, read our other articles such as: Stablecoins or Fiat-Backed stablecoins.