What Is Tether?
Tether is the first and most popular cryptocurrency stablecoin. Stablecoins mirror the value of a fiat currency by holding enough reserves to back the supply. In the volatile crypto markets, this helps investors to trade in and out of currencies with more control of their money.
USDT is tethered to the US dollar, with plans to anchor to other fiat currencies too. Of course all the heat it received about reserves made it clarify the “cash” could also be replaced with “cash equivalents.”
All currencies have variable values, but cryptocurrency is especially notorious for unstable pricing. Tether Limited’s aim is to create a stable coin (Tether) that’s tied (or tethered) to the value of the U.S. dollar. By linking to a fiat currency, USDT becomes a port in the storm of constantly fluctuating cryptocurrency values…
…or does it?
Like everything to do with money, Tether’s story isn’t so cut and dry. It has a complicated history, and many still doubt it truly has the USD capital to back the USDT supply. The project also has ties to Bitfinex through mutual parent company iFinex Inch. It’s widely believed to have been used to illegally manipulate the Bitcoin market in late 2017. This boom took the entire cryptocurrency market into 10x multipliers or more.
And in early 2019, the New York Attorney General alleged Tether covered up $850 million in losses caused by an October 2018 Bitfinex withdrawal issue.
People on both sides have strong opinions on whether Tether is the savior or destroyer of the crypto market. We’re happy to investigate the matter, and to do this, we’ll first examine how USDT has performed on the crypto market since its inception.
Crypto Market Performance of Tether USDT
Tether is rarely traded at exactly $1 to 1 USDT.
What’s that, you say – why is the exchange rate not exactly $1 for a stablecoin?
Anchoring to a variable value (which all fiat currencies are) is more difficult in practice than on paper. Tether’s value regularly fluctuates around $1, rather than always being worth exactly $1.
We’ll discuss how it works in more detail in the next section, but understand the crypto market value of USDT is rarely exactly $1. The lowest value it hit so far was $0.88 on October 15, 2018, and the highest value was $1.06 on December 12, 2017.
Tether isn’t mined. Instead, it’s issued in response to how many dollars Tether Limited allegedly holds. It uses a Proof of Reserves protocol, where fiat reserves back the cryptocurrency.
USDT is traded on a variety of cryptocurrency exchanges, including BitForex, OKEx, FCoin, Binance, Huobi, and OOOBTC. Trading pairs include BTC, BCH, ETH, LTC, and more cryptocurrencies. It’s also regularly traded for fiat currencies.
This is because USDT gives exchanges a USD substitute to allow cryptocurrency exchanges. Instead of anchoring values to fiat currency, it can be anchored to a Tether currency.
USDT is the only Tether currency currently trading, but other Tether currencies anchored to Euros, Yen, and other currencies are planned.
Several cryptocurrency wallets support USDT, including MyEtherWallet, OmniWallet, and the official Tether Wallet, which was taken offline after a late 2017 hack.
Tether’s Attempts at Stability Are Dangerous
USDT isn’t issued on a new blockchain. Instead, there are multiple different versions of the Tether token on the market.
Tether uses the Omni Layer Protocol to issue assets on the Bitcoin blockchain. The same Omni layer is used to mint Euro Tether tokens. There are also Euro Tether and Dollar Tether ERC-20 tokens on the Ethereum blockchain and Tether TRC-20 tokens on Tron.
While it sounds great on the surface, the real market has different reactions to the Tether project.
As stated above, hackers attacked Tether, stealing approximately $31 million in USDT tokens.
And Tether’s ties to Bitfinex has been cited in a 2018 report by John M. Griffin and Amin Shams in regards to Bitcoin’s price manipulation in late 2017.
According to the report, tether was created and used to purchase BTC on the Kraken exchange to drive Bitcoin’s price higher. JL van der Velde, CEO of both Bitfinex and Tether Limited denies any wrongdoing.
Several independent audits have allegedly been performed, but there’s a lot of gray areas, and nobody has fully verified the existence of reserves to back the tether supply. In fact, Bitfinex Chief Strategy Officer Phil Potter departed Bitfinex in the midst of investigations by the U.S. Commodity Futures Trading Commission and U.S. Department of Justice.
It has what sounds like an altruistic vision of cryptocurrency, acting somewhat as a central reserve bank for crypto. However, Tether gained a lot of criticism from experts, analysts, regulators, and consumers throughout its release. Market confidence in the project isn’t high, and there are other stablecoins competing on the market.
Asset-backed cryptos like Digix Gold (DGX) and Propy (PRO) are gaining momentum. These projects are backed by gold and real estate, respectively. There are also fiat-currency-backed stablecoins like the Winklevoss-backed Gemini Dollar (GUSD) and Paco Standard (PAX). Unlike Tether, these projects actually have regulator approval in the form of the NY Department of Financial Services, one of the toughest watchdogs on Wall Street.
Meanwhile, the Neutral Dollar Project aims to stabilize stablecoins, but it omits both USDT and GUSD from its data.
Tether USDT Summary
Tether aims to be a stablecoin pegged to the value of fiat currencies like US dollars and euros. In order to do this, however, it needs asset reserves to back its supply at a one-to-one ratio. In the event of a run on the bank, it needs to be able to provide full liquidity, something even banks like Bank of America and JPMorgan Chase can’t do. Tether is embroiled in controversy, and there are four key factors to its survival.
- Tether Limited and Bitfinex need to submit themselves for full regulatory approval in major crypto markets like the U.S. and E.U.
- Although regulatory heat is always focused on Tether, it is still surviving.
- Tether has planned tokens for other blockchains and fiat currencies.
- Tether has stablecoin competitors back with other currencies and assets.
With these pieces in place, Tether is a constant lightning rod for media and regulators. If it can survive the storm it’s weathering, Tether will remain a dominant force in crypto. Otherwise, it at least proved the power of stablecoins for someone else to succeed.
And there are a lot of other contenders…