Last Updated on May 26, 2020
One of the criteria that any given coin should fulfill in order to be considered a “currency” is to offer a stable store of value.
So far, fiat currencies have been able to provide a sufficient level of stability in spite of the occasional market crashes and inflations. But can we expect the same thing from cryptocurrencies?
Tether might be the answer to that!
Keep reading our guide to find out the most important details about this stablecoin and how to use it.
What is Tether: A Fiat-Pegged Cryptocurrency
The main incentive of the developer who gave us Bitcoin and blockchain technology was to prove to the world we could use currencies that are both digital and decentralized at the same time. Since these coins are built using cryptographic proof instead of trust in intermediaries, they’re called cryptocurrencies.
Cryptocurrencies allow us to make cheaper and faster transactions, sign them with a pseudonym (encrypted address known as a public key), make cross-border payments with a universal medium of value, and transfer money outside of the jurisdiction of centralized financial institutions.
Looking at this list of advantages, you’re probably wondering why there’s still no mainstream use of cryptocurrencies? The main reason is their low liquidity and high volatility, resulting in frequent price swings.
This is not necessarily a shortcoming as it makes cryptocurrencies an attractive long term investment for a lot of traders. However, if we want to popularize the use of these coins for everyday purchases, we need a coin that promises a degree of stability.
This is exactly what Tether is all about!
Tether is a digital stablecoin that can be pegged to various fiat currencies. USDT, for example, is pegged to the US dollar, i.e. one Tether USDT equals one US dollar. This way, USDT is exempt from the volatile nature characteristic of other cryptocurrencies but it’s exposed to inflation like its pegged fiat currency nevertheless.
This value for value conversion is explained in more detail in Tether’s official white paper:
Tethers may be redeemable/exchangeable for the underlying fiat currency pursuant to Tether Limited’s terms of service or, if the holder prefers, the equivalent spot value in Bitcoin. Once a tether has been issued, it can be transferred, stored, spent, etc just like bitcoins or any other cryptocurrency. The fiat currency on reserve has gained the properties of a cryptocurrency and its price is permanently tethered to the price of the fiat currency. (p.4)
How Does Tether Work?
Originally, Tether was built on Bitcoin’s blockchain using its transfer protocol, namely the Omni and Liquid Protocol.
It was only later that Tether was created on a new transport layer anchored to Ethereum’s blockchain, in accordance with the ERC20 standard. This made it not possible to use the tokenized US dollars for transactions on the Ethereum network but also to use them in smart contracts and decentralized applications (dApps).
Apart from Bitcoin and Ethereum, Tether has been built on the EOS and Tron blockchain as well. This also means that whenever you want to send tethers to a certain address, you have to check whether you’re using the right transport protocol for the right network.
Tether supports two other fiat currencies besides US Dollars (USD), i.e. Euros (EUR) and Chinese yuan (CNH). The Tether symbol is represented by ₮, so the tether tokens are denoted as USD₮, EUR₮, and CNH₮ respectively.
Tether currencies are 100% backed by Tether Limited’s reserves and can be exchanged for fiat currencies in compliance with the company’s terms of service.
Proof of Reserves
Insolvency is a common problem in the crypto industry experienced by crypto platforms, exchanges, and digital wallets around the world. Even though some past scenarios included hacking attacks and malware, most of the time it was just pure mismanagement and company fraud.
To avoid such scandals and enjoy the trust of its customers, Tether employs the Proof of Reserves method which gives the company a simple and transparent way of proving that the total number of USDT in circulation is indeed 100% backed by the same number of US dollars that the company holds in its reserves.
In our configuration, each USDT in circulation represents one US dollar held in our reserves (i.e. a onetoone ratio) which means the system is fully reserved when the sum of all tethers in existence (at any point in time) is exactly equal to the balance of USD held in our reserve [..] The corresponding total amount of USD held in our reserves is proved by publishing the bank balance and undergoing periodic audits by professionals. (p.9)
You can check Tether’s bank balance on their website.
In the white paper, Tether divides the beneficiaries of its services into three groups:
“Exchange operators understand that accepting fiat deposits and withdrawals using legacy financial systems can be complicated, risky, slow, and expensive.” (p.12)
With Tether, exchanges can allow crypto-fiats deposits and withdrawals. Their part of the job would be only to manage the cryptocurrency liquidity and let Tether deal with the fiat custodial risk.
Tether believes that “anything one can do with Bitcoin as an individual one can also do with Tether” (p.13). This includes crypto to fiat exchanges, anonymous transactions, secure your funds in cold storage with your private key, etc.
The same thing applies to merchants who continue to struggle with our outdated global financial system.
With Tether, they can price their goods in USD/fiat value and then allow customers to pay in USDT without having to worry about coin volatility. Plus, they can avoid unnecessary conversion fees.
Disclaimer: Digital currencies and cryptocurrencies are volatile and can involve a lot of risk. Their prices and performance is very unpredictable and past performance is no guarantee of future performance. Consult a financial advisor or obtain your own advice independent of this site before relying and acting on the information provided.