What is Tether?
Tether is a cryptocurrency that is pegged to the US dollar, making its price stable. So far, Tether supports US dollars (token denoted as USD₮), euros (token denoted as (EUR₮) and Japanese yen (token denoted as JPY₮).
In their whitepaper, the controlling body of Tether, called the Tether Limited, explain the purpose of Tether as ”a digital token backed by fiat currency provides individuals and organizations with a robust and decentralized method of exchanging value while using a familiar accounting unit.”
By leveraging blockchain technology, Tether allows users to “store, send and receive 1-to-1 backed digital currency across tether-integrated exchanges, platforms, and wallets.” The goal is to provide users with the joint benefits of blockchain technology and traditional currency, enabling global, instant and secure money transfers at a fraction of the cost of any other alternative.
How does Tether work?
When it launched in November 2015, Tether was built on the Bitcoin blockchain system but transferred to Litecoin’s Omni Protocol in June 2017. An open source software, the Omni Protocol interfaces with blockchains to allow for the issuance and redemption of cryptocurrency tokens, in this case, “tethers.”
Tether converts cash into its own cryptocurrency to ‘tether’ or anchors the value of a coin to the price of fiat currencies – the US dollar, the Euro and the Yen. In the ideal scenario, this would mean that the conversion rate is always 1 tether USD₮ equals 1 USD (meaning that tether trades at $1 on all exchanges) and that it can be used in place of a dollar.
Unlike any other cryptocurrency on the market, tether claims to be 100% backed by USD held in the reserve. This can be examined in more detail on Tether’s transparency page. The Tether Limited clarify that tether is “fully reserved when the sum of all tethers in circulation is less than or equal to the balance of fiat currency held in our reserve.”
Why do people use Tether?
Tether is valued for its stability over other crypto coins that are much more volatile and prone to unpredictable price movements. Additionally, some users like the fact that tethers don’t travel through the banking system and can instead be transferred between cryptocurrency exchanges or other platforms.
Some exchanges also offer Tether’s USDT as a trading pair, allowing users to buy cryptocurrencies with a coin that is pegged to the US dollar (i.e., mirrors its value). Given bitcoin’s volatile price, this can come in very handy.
Businesses such as exchanges, wallets, payment processors, financial services, and ATMs value Tether for enabling them to easily use traditional currencies on blockchains. The digital coin also offers liquidity to exchanges that can’t deal in dollars (e.g. Bitfinex). What many exchanges do is, rather than holding traders’ balance in dollars, they hold it in UTSD. Maintaining banking relationships in the crypto space is particularly tricky, so exchanges use Tether to price crypto assets in USD without having to own USD-denominated bank accounts.
What’s next for Tether?
Tether Limited is strongly denying all price manipulation accusations against it, pointing people to the transparency statement on their website. The underlying problem here is that Tether Limited is not a decentralized network, but rather a company that deals with crypto, run by fallible humans who are asking users to trust them. This doesn’t make them inherently bad, just raises different kinds of questions.
However, putting all the concerns to one side, Tether is a highly valued and used crypto in the ecosystem due to its stable value and liquidity. As of November 2018, it holds a spot amongst the top ten coins by market cap, affirming its appeal to crypto investors and users.