Tether is a cryptocurrency linked to fiat currencies. The US dollar-backed Tether (USD) is represented by USDT, a stablecoin that maintains a 1:1 equivalence with the US dollar. USDT is the most well-known and largest stablecoin by market capitalization, created by Tether Limited with the goal of becoming the digital dollar of the internet.
History of Tether
To understand the creation of Tether and stablecoins in general, it’s essential to remember that cryptocurrencies are characterized by high volatility, making them unstable in terms of value. This volatility led to the development of cryptocurrencies linked to traditional assets, such as fiat currencies, which became known as stablecoins.
In 2014, J.R. Willet, known for creating Initial Coin Offerings (ICOs), laid the groundwork for Tether while working on the Mastercoin project—a cryptocurrency and communication protocol built on Bitcoin, enabling the execution of other cryptocurrencies and tokens. In the same year, Brock Pierce and Craig Sellars, who were also involved in Mastercoin, introduced another project called Realcoin, utilizing the Omni Layer protocol. In November 2014, Tether’s CEO at the time, Reeve Collins, announced that Realcoin would be renamed Tether, associated with the US dollar. The company also launched «sister» currencies, EuroTether (EURT) and YenTether (YENT).
In August 2021, Bit2Me, one of Spain’s leading cryptocurrency exchanges, integrated Tether (USDT) into its platform, allowing users to deposit, withdraw, and trade this stablecoin directly from their wallet. Additionally, trading pairs such as USDT/EUR were introduced, providing more flexibility for users in the Bit2Me ecosystem.
Technical Features of USDT
Unlike other cryptocurrencies, USDT does not have its own blockchain. Instead, it operates on multiple blockchains, including Algorand, Avalanche, Celo, Cosmos, Ethereum, EOS, Liquid Network, Near, Polkadot, Solana, Tezos, Ton, and Tron, according to its official website.
One of the distinguishing features of USDT is its centralization. While cryptocurrencies like Bitcoin are mined and distributed by users, Tether’s issuance is managed by Tether Limited, making the company responsible for the «mining» and decision-making processes related to its supply.
How USDT Works
As a stablecoin, USDT is backed by a fiat currency, the US dollar in this case. The process for issuing and “burning” the cryptocurrency is as follows:
- Issuance:
- A user deposits USD into Tether Limited’s bank account (either directly on Tether’s platform or through a trusted exchange).
- Tether Limited issues USDT tokens equivalent to the deposited amount in a 1:1 ratio and deposits them into the user’s virtual wallet.
- Burning:
- When a user wishes to exchange USDT for USD, they deposit the cryptocurrency into the wallet managed by Tether Limited.
- Tether Limited «burns» the tokens and then delivers the corresponding USD to the user.
Advantages and Disadvantages of USDT
Advantages:
- Stable Price: USDT maintains a 1:1 peg with the US dollar (although there have been rare occasions when this parity temporarily faltered).
- Low Fees: Transactions between two USDT wallets are typically free, and fees are generally low for other types of transactions.
- Availability on Exchanges: USDT is available on most cryptocurrency trading platforms.
- Fiat-backed: USDT is backed by a fiat currency (the US dollar).
Disadvantages:
- Centralization: USDT is controlled entirely by Tether Limited, unlike decentralized cryptocurrencies.
- Transparency Issues: The transparency of USDT has been questioned in recent years. Tether Limited has claimed to hold reserves for every USDT issued, but investigations revealed that this wasn’t always the case. In February 2021, the New York Attorney General’s office found that Tether hadn’t always maintained sufficient reserves, resulting in a $18.5 million USD fine for Tether and the Bitfinex exchange. Tether committed to improving its transparency but was later fined an additional $41.5 million USD by the U.S. Commodity Futures Trading Commission (CFTC) for further misstatements regarding its reserves.
- Lack of Open Source: USDT does not have a public project on GitHub (a platform where developers share their work), so its development, particularly on the Omni protocol, cannot be tracked.
- No Mining: USDT cannot be mined, and it does not offer any rewards for participation.
Conclusion
USDT has become one of the most widely used stablecoins, offering a stable value tied to the US dollar. Its ease of use, low fees, and broad availability on exchanges make it an attractive option for those seeking stability in the volatile world of cryptocurrencies. However, its centralization and the transparency concerns surrounding Tether Limited remain significant issues that users should consider when interacting with this stablecoin.
