Tether is a cryptocurrency that has combined the traditional monetary currency with blockchain architecture. It is pegged to the US dollar and used as a medium of exchange or store of value.
Tether (USDT) is the first stablecoin from Tether Limited. It was developed in July 2014 with the launch name Realcoin. The company today shares most of its management team with the cryptocurrency exchange Bitfinex.
Tether trades under the ticker symbol USDT and uses the symbol ₮. Trading started in February 2015. USDT is ranked third by market capitalization with a circulating supply of roughly nine billion coins. USDT has no maximum supply and is not mined. Rather, it is generated by Tether Limited and issued through Bitfinex.
Tether is designed to turn money into digital currency. Therefore, the monetary value of one coin can be pegged to the price of the US dollar, European euro, or Japanese yen. The Tethers pegged to the three large fiat currencies have the ticker symbol USDT, EURT, and JPYT, respectively.
To maintain a stable value of the digital asset, every USDT is always 100% backed by Tether Limited company reserves. The underlying mechanism that keeps the balance is bots buying and selling whenever USDT’s value fluctuates from the dollar.
Tether is popular and widely accepted as an alternative to Bitcoin because of its unique design as a stablecoin—the cryptocurrency’s value is backed by fiat currency. USDT users are less exposed to the volatility of digital assets, and USDT derives its value from the US dollar, which is easier to read when purchasing other cryptocurrencies. The first stablecoin is popular on exchanges as a trading pair to denominate prices in fiat currency, which most cryptocurrency traders can easily understand and calculate when buying or selling.
To maintain stability, Tether is pegged to the US dollar in terms of value. To keep the ratio at 1:1, the company issuing the stablecoin holds dollar reserves. They describe this principle as Proof-of-Reserves. Proof-of-Reserves is a system that verifies that the amount of USDT in circulation is equal to the US dollars in Tether Limited’s bank accounts. To establish liability, the company’s bank accounts were audited in 2018 but have not been verified since. The report stated the total amount of $2,545,067,236.82 in two bank accounts in the name of Tether was equal to the 2,538,090,823.52 USDT in circulation as of June 1, 2018. The issuer of the stablecoin dismissed the independent US-based accountancy firm and continues to report proof-of-reserves on a Tether transparency website without an actual audit report.
How USDT Works: Protocols and Architecture
Tether was first built on a meta-protocol on top of the Bitcoin blockchain. The Omni Layer protocol used for Tether is open-source software that interacts with the blockchain to ensure distribution and redemption of the Bitcoin-based cryptocurrency token. In 2017, Tether tokens were also issued on the Omni layer for Litecoin. Later in 2017, Tether was launched as ERC-20 token for US dollars and European euros on Ethereum blockchain.
At the time of this writing, Tether is available on the Bitcoin (Omni and Liquid Protocol), Ethereum, Eos, and Tron blockchains.
USDT can be stored in any crypto wallet that supports Omni Layer technology for Bitcoin blockchain-based stablecoins and wallets that support tokens on the Ethereum, Tron, and Eos blockchains. However, USDT is mostly stored on cryptocurrency exchanges and used for trading as a fiat on- and off-ramp.
Stablecoins have strengthened their position in the crypto community as a useful tool for liquidity and a denomination for other cryptocurrencies. Most of the criticism is based on a lack of auditing, and some influences on the purpose of stablecoins can be noticed. The future of Tether will depend on the confidence of the market that it really is tethered to the stated fiat currency.