How was Tether born?
You see in the beginning and from the darkness of nothing the Mastercoin protocol became the technological foundation of the Tether cryptocurrency. One of the original members of Mastercoin Foundation- Brock Pierce, became a co-founder of Tether. and Tether founder, Craig Sellars, became the CTO of the Mastercoin Foundation. So where’s the light?
Well, Tether has one of the most popular and widely used cryptocurrencies in this beautifully creative market, a stablecoin called tether (USDT).
If we travel a little farther back to before the big bang (let’s appease the atheist readers here) the protocol Tether is closely connected to the crypto exchange Bitfinex as it shares the same parent company, iFinex Inc. iFinex was founded in 2012 in Hong Kong although it’s registered in the British Virgin Islands.
Tether’s history goes back to 2014, when it first issued a dollar-backed digital currency called Realcoin on the Bitcoin network to help transfer fiat currencies on the blockchain. Later that year, Realcoin was rebranded to what? You guessed it…Tether. And so it was born. Tether refers to the issuer company, while Tether USDT is the token.
Since then, like daisies in the summer, Tether has expanded to numerous blockchains, launched various tokens and skyrocketed in popularity. As of the end of August 2022, the USDT circulating supply is 68 billion. Yes that’s a ‘b’ and it is the largest Stablecoin by marketcap at a current 1:1 ration ($68 billion). Impressive stuff.
How does Tether’s USDT work?
Tether’s cryptocurrencies belong to a special subset of digital assets called stablecoins, which means their prices are anchored, or pegged, to a less-volatile asset.
Stablecoins serve as an important link between the real world and cryptocurrencies. With their prices tied to a stable asset such as a central bank-issued (fiat) currency like the U.S. dollar. Stablecoins aim to shield crypto holders from volatility and are well-suited for transactions and trades on and even between blockchains.
Tether is a fiat-collateralized stablecoin that offers individuals the advantages of transacting with blockchain-based assets while attempting to mitigate price risk. Tether is primarily issued on the Ethereum and Bitcoin blockchains and corresponds on a 1:1 basis with US Dollars sitting in bank accounts.
As mentioned it was founded in July 2014 by Brock Pierce, Craig Sellars, and another chap Reeve Collins. Tether (USDT), originally known as “Realcoin”, is a cryptocurrency commonly known as a stablecoin that aims to keep a fixed 1:1 exchange ratio with the U.S. dollar. Tether was one of the earliest stablecoins created, built upon Mastercoin (Omni), which was a protocol layer for Bitcoin that introduced the stablecoin concept to the world back in 2012. So Tether pioneered what is now known as a fiat-collateralized stablecoin model, and is now the most widely used stablecoin today.
What problems does Tether solve?
Tether was created as an attempt to solve two major issues with existing cryptocurrencies: high volatility and convertibility between fiat currencies and cryptocurrencies. To address these perceived issues Tether created a cryptocurrency that is fully backed 1:1 by deposits of U.S. dollars held at banks.
On Ethereum, USDT tokens are represented as ERC-20 tokens, while on Bitcoin, Tether utilizes the Omni layer, to represent USDT tokens. While the tokens themselves operate in a decentralized network, Hong Kong based Tether Ltd is solely responsible for creating and redeeming tokens as well as maintaining the 1:1 deposit backing.
Exchanges have been the primary users of USDT as an alternative to fiat currencies, reducing or eliminating the need to maintain outside banking relationships. Amongst a few recognizable names amongst these exchanges utilizing the token are: Bitfinex, Bittrex, Binance, OKEx, Coinbase, Kraken, Huobi, Poloniex, liquid.io and Gate.io. Tether Ltd shares many executives as it has strong ties with Hong Kong based Bitfinex as we see both sharing the same parent organization (iFinex Inc. if you’ve been listening and if you did get that correct…full marks!)
Since its founding in 2014, Tether has been the subject of past controversy due to the failure of Tether to provided audited financial statements proving it has adequate reserves backing USDT. Naughty naughty. Historically Tether failed to disclose its banking relationships, only announcing its banking partners in November 2018 to quell rumors about its solvency raised by associated crypto exchange, Bitfinex.
In March 2019, Tether did the right thing and updated its disclosure statement claiming that its tokens are no longer backed 100% by U.S. dollar deposits. Tether is instead now backed 100% backed by reserves, which include traditional currency and cash equivalents and from time to time, other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.
With all this talk of a Stablecoin – what is it?
What Is a Stablecoin?
Tether issues several fiat stablecoins and one that is pegged to gold. The most widespread among them is the U.S. dollar-pegged stablecoin USDT, with that circulating supply we talked about of circa 73 billion tokens.
Other Tether-issued stablecoins are:
Tether gold (AUXT): pegged to gold’s price
Tether euro (EURT): pegged to the common currency of the European Union
Tether peso (MXNT) : pegged to the Mexican peso
Tether yuan (CNHT): pegged to the offshore Chinese yuan
But Tether doesn’t have its own blockchain. Instead, users can transact with USDT on and across some of the bigger blockchain platforms including:
USDT is not mined and it is not decentralized. It has a central entity, the company Tether, that issues (mints) and destroys (burns) USDT tokens to adjust the supply of coins to user demand.
What backs USDT’s value?
Tether claims its Stablecoins’ value is always 100% backed by assets in its reserve to ensure the one-to-one exchange ratio to the currency (or asset) to which their prices are anchored.
Now when you enter a casino one late, possibly drunken Saturday evening they will always have enough cash in its vault to cover every chip you and everyone else has in play. The reserve serves as a guarantee that if everyone wanted to convert USDT into fiat, they could.
Tether publishes a quarterly attestation (not to be confused with an audit) breaking down its reserves by asset classes right there on its website and updates total value of the assets every single day. Well done chaps, jolly good show.
According to its latest report, Tether’s reserve contains a diverse mix of:
- Cash equivalents (money market funds, U.S. Treasuring Bills)
- Commercial Paper
- Corporate Bonds
- Investment including digital currencies
Now you may heard whispers that some backing is slightly questionable. How so?
Why USDT’s backing is controversial
The transparency and authenticity of the reserve has been called into question from time to time by those playing, frolicking and trading in the crypto world.
Tether only started to publish reports on their assets in early 2021 but still does not specify exactly what assets it holds. This has been the cause of a fair share of frustration and the attestation itself is not verified by an independent auditor.
What’s causing the most concern here? The most scrutiny has been on the non-cash holdings including what they are, how they are valued and how easily Tether can convert them into cash if, indeed, Stablecoin holders want to redeem their initial investment at once.
In 2019, New York Attorney General’s office (NYAG) launched a probe into whether the cryptocurrency exchange Bitfinex sought to cover up the loss of $850 million in customer and corporate funds held by Tether, the payment processor.
After almost two years, Tether and Bitfinex reached a settlement with NYAG in February 2021 to pay $18.5 million in fines (ouch) and to release a quarterly report describing the reserve’s composition for the next two years.
How USDT is different from other stablecoins
Once Tether’s USDT dominated the Stablecoin market, but now there is a wide selection of Stablecoins available. Some of the ways they differ depends on the issuer entity, the collateral that backs the value and how they keep their prices pegged to the fiat currency or other asset. Tether follows the IOU (I owe you) model. This means that a central entity backs the value of stablecoin with assets, and the issuer promises that you can redeem your investment anytime at a one-to-one exchange rate.
But you may have heard of algorithmic Stablecoins. What are they?
USDT vs. Algorithmic Stablecoins
Algorithmic Stablecoins such as Tron’s USDD or Waves’s USDN keep the exchange rate with trading incentives and the automatic minting and burning of tokens with the help of a twin token to absorb volatility without an outside reserve asset. I’ve run out of breath but I’ll draw another and continue…USDT does not operate that way because Tether, not an algorithm, decides when to burn or mint tokens according to demand. Hope that clears that one up.
USDT vs. DAI
DAI, the Stablecoin of MakerDAO, is also backed by assets in a reserve but it is overcollateralized. This simply means that the reserve holds more assets in the reserve than DAI’s total value and only holds cryptocurrencies such as Ether and USDC. Additionally, MakerDAO does not have a central governing body. Instead, leadership is spread out among holders of the MakerDAO governance token and some find it preferable that it is contrary to Tether’s centralized entity.
USDT vs. USDC
Both Tether’s USDT and Circle’s USDC are backed by real assets and issued by a centralized entity but there’s a key difference between them. That’s in the composition of reserves. USDC only holds cash and short-term U.S. government bonds. To some then USDC is perceived as a safer and more transparent asset.
To remain impartial we’ll need to take a brief look at both the advantages and disadvantages of USDT. Here we go:
Advantages of USDT
- Its price is stable. In the case of USDT, its value is 1 USDT equal to 1 $ USD
- Your transactions are very cheap. So for example, if you send money from one USDT account to another, no fees are charged for that transaction. But if you want to transform USDT for other cryptocurrencies or fiat currencies, you incur a small commission
- It is a highly integrable currency. USDT is especially easy to integrate into exchange platforms. As a result, virtually all exchange platforms offer pairs to trade
- It greatly facilitates the task of protecting the funds of traders and traders interested in working with cryptocurrencies. This since it allows to quickly exchange more volatile cryptocurrencies like Bitcoin in a stable cryptocurrency.
Disadvantages of USDT
- There are doubts about whether the Tether company actually maintains a 1: 1 collateralization between the USDT tokens and their bank reserves. This is because it has never been possible to carry out a complete and public audit of this system. Due to this, back in 2017, USDT faced a difficult situation in which its value had well below the 1: 1 ratio with the dollar, falling to 0.9: 1. Likewise, the Tether company has been involved in several scandals such as the Bitfinex hacking scandal and even the one suffered by Tether itself, both suffering millions in losses
- Tether is a company with many contradictions. First of all, it offers USDT as a 1: 1 backed cryptocurrency with the dollar, that appears on the main page of its website. However, in the legal and risk terms, it shows that they do not guarantee this claim 100%
- It is not an anonymous currency. The fact that you have to have to make a bank deposit to create the tokens removes privacy and puts your data in the hands of a company
- It is a cryptocurrency controlled by Tether, therefore it is not decentralized and its functions depend on this company
- There is no clarity on its implementation. There is no Github repository on its implementation on the Omni protocol. The only thing known is its smartcontracts on Ethereum and EOS, the rest is not clear
It’s fair to say that Tether has seen more than its fair share of controversy. It may therefore be welcomed news that as of August 2022 they have partnered with BDO Italia to conduct regular reviews and attestations of its dollar reserves. This time the reserve attestations will be an official verification by a reputable auditing and accounting firm that the reserves claimed to be held in a company’s treasury do, in fact, exist.
As part of its attempt to regain public confidence surrounding its treasury, Tether is looking to now release these public attestation reports on a monthly basis. These updates will include the latest figures on the number of USDT tokens issued along with the company’s reserves.
Now these reports may not have started at this point but in the interests of fairness at least some time has to be afforded to Tether to organise this initiative so I guess a tad of patience may be a prerequisite.