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Tether: The Crypto-Dollar

November 12, 2020

8 min

Tether: The Crypto-Dollar
Intermediate

Answering the question of what Tether (USDT) is, at present, relatively simple: the most important stablecoin in the crypto world. In other words, it is a cryptocurrency whose price is pegged to that of the US dollar, issued by the Hong Kong-based company Tether Ltd. 

The peg of the token to the dollar is achieved through a dollar reserve equal to the number of USDT in circulation. In this article, find out what Tether (USDT) is and how it works!

tether (usdt)

How Tether was born

First, we must know Tether’s history. This innovative protocol has its roots in an earlier project: Mastercoin, which we already know from the history of ICOs

In January 2012, J. R. Willett published a White Paper online outlining the possibility of creating currencies on the Bitcoin protocol.

Based on this concept, Willet created the Mastercoin cryptocurrency in 2013 and established the Mastercoin Foundation, later renamed Omni Foundation, to promote its use.

In July 2014, Brock Pierce, Reeve Collins and Craig Sellars announced Realcoin, a project with the Mastercoin protocol as its technological foundation.

Two of the founders, Brock Pierce and Craig Sellars, are respectively one of the original members and the CTO of the Mastercoin Foundation. 

On 20 November 2014, the project changed its name to Tether. The eponymous Tether is a stablecoin linked to the project, pegged to the dollar. 

Tether Limited later developed other stablecoins similar to Tether USDT but linked to the euro, the Japanese yen. 

Tether will soon be successful and will be listed as one of the best exchanges over the next year. 

tether (usdt) roadmap

J. R. Willett

J. R. Willett is a software developer and blockchain enthusiast from the United States. He became interested in cryptocurrencies in 2010 when he paid several people to mine Bitcoin.

Later, in January 2012, he published a White Paper in the Bitcoin Talk forum called ‘Bitcoin’s Second White Paper‘ in which he proposed creating new cryptocurrencies based on the Bitcoin protocol.

Since 17 months after publication, no one had yet developed his idea, so he initiated the first ICO in history in 2013 to prove it would work. Mastercoin‘s ICO raises over half a million dollars in Bitcoin.

Brock Pierce

Brock Pierce is an American entrepreneur and actor born in 1980 in Minnesota. At 17, he left the film world and reinvented himself as a digital entrepreneur. From the entertainment sector with the Digital Entertainment Network, it moved into gaming with Internet Gaming Entertainment and finally, in 2013, into the world of cryptocurrencies.

Since then, Brock Pierce has founded and helped found several companies operating in the cryptocurrency sector, including Block.one and Blockchain Capital (BCC). In 2015, he even became chairman of the board of the Bitcoin Foundation.

What is Tether (USDT)?

Having addressed the history of some of the people who helped create this revolutionary project, it is time to answer the central question of this article: what is Tether (USDT)

Tether is a token available on all major blockchains pegged to the dollar’s value. It is also referred to as a first-generation (or collateralised) stablecoin backed by currency reserves on a 1-to-1 basis.

Knowing what Tether is means knowing the mechanism that allows this cryptocurrency to track the value of the US dollar. This is possible thanks to the organisation’s reserves, which are composed of extremely liquid and secure financial instruments, mainly treasury bonds issued by the US Treasury Department at short maturity. 

In any case, the following paragraphs will discuss how this stablecoin is issued in more detail.

What does it do?

Understanding Tether (USDT) means knowing its use cases. While these may be varied, the main one is clear and simple. Tether allows crypto world users to keep their value unchanged, especially on-chain, but also held on centralised exchanges.

If Tether and other dollar-anchored stablecoins did not exist, it would be impossible for users of decentralised exchanges to shield themselves entirely from market volatility. It is impossible to exchange crypto in fiat currency on these applications because they require representing the dollar’s value (or other classical currency) in the form of tokens or smart contracts.

However, centralised exchange platforms are slightly different. These make it possible to sell cryptocurrencies and thus instantly exchange them into fiat currency at the time of spot trading. However, this type of conversion is impossible when one decides to trade. Tether has also built its success around this innovative possibility.

Knowing what blockchain it can use may also help answer the question, ‘What is Tether?’. In recent years, Stablecoin has expanded the number of blockchains that support it. It is currently available on all popular networks, including Ethereum and all its Layer 2s, Solana, Avalanche, BNB Chain, and many others.

Tether: how does it work?

USDT: issue and reserves

As previously mentioned, USDT, Tether’s main product, is issued by the organisation on a 1:1 basis due to the monetary counter value held by the organisation. After years of various commentators in the crypto world questioning whether there is actually enough collateral to cover USDT’s issuance, Tether has published its Proof-of-Reserve. All of the reserves held by Tether that BDO, a Belgian auditing organisation, has verified are currently visible on the site.

Tether’s reserves are currently divided as follows:

But how does the issuance of new USDTs come about in practice? This process is straightforward and is triggered upon payment of the USD amount. The process of minting new Tether is usually handled by centralised exchanges, which in turn sell USDTs on their platforms.The reverse process, i.e. redeeming dollars (or any fiat currency) in exchange for stablecoins, can also be done through exchanges or, in the case of sums of money over $100,000, also by approaching Tether directly.

Tether is a centralised entity

Despite being very active in the DeFi sector, Tether is a centralised organisation and thus subject to the systemic risks of this characteristic. Although many consider centralisation a disadvantage, Tether exploits it to prevent certain malicious actors (e.g. fraudsters or terrorists) from processing exchanges. It is also able to block wallet addresses flagged by the authorities.

Tether is also one of the most hated Web3 companies, so much so that it has an ‘organised’ group of haters who are highly critical of every company activity. The truther is a group of people who have been challenging the company for years, raising doubts, currently completely unfounded, about the solidity of the reserves. 

Paolo Ardoino, Tether’s Chief Executive Officer (CEO) and Chief Technology Officer (CTO) of Bitfinex is a leading figure in the industry. He has turned a great yet simple idea into a successful business model.

Tether’s (USDT) market capitalisation recently surpassed USD 100 billion and dominated the reference market (more than 70% of shares). The company’s profits, mainly from interest on bonds held as collateral for issuing USDT, also continue to break records. In the last quarter of 2023, Tether recorded almost USD 3 billion in revenue.

Conclusions

What is Tether (USDT), and how does it work? It is a highly successful blockchain project that has managed to be the first to meet a widespread need and maintain its primacy over time. It is currently the world’s leading stablecoin issuer, owning more than 70% of the shares of this emerging market. It is also one of the companies that generate the most profits, $3 billion in the last quarter considered, concerning the number of employees, which according to recent estimates is less than sixty.

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