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Tether


Tether (USDT) is a useful crypto whose value roughly mirrors the value of the U.S. dollar. The idea was to create a stable cryptocurrency that could be used like digital dollars. Coins that serve this purpose are called “stable coins” (coins that are meant to maintain a stable price).

Essentially, and according to their site, Tether converts cash into digital currency, to anchor or “tether” the value of the coin to the price of national currencies like the US dollar, the Euro, and the Yen. Like other cryptos it uses blockchain. Unlike other cryptos, it is [according to the official Tether site] “100% backed by USD” (USD is held in reserve).

ie., every Tether is supposed to be backed by dollars kept in reserve in a 1:1 ratio (this being a big selling point… and a potential problem in the otherwise rather untethered and decentralized crypto space).

This ideally means Tether trades at $1 on all exchanges and can be used in place of a dollar. However, in practice, the price tends to fluctuate a little. Problems with Tether aside, the main utility of Tether is that it offers some stability to the otherwise volatile crypto space and offers liquidity to exchanges who can’t deal in dollars and with banks (for example to the sometimes controversial but leading exchange Bitfinex).

With USDT you can, in theory, move into a coin that holds a stable value like USD… even when you are on an exchange that doesn’t deal in fiat! That is a big deal on its own, but it gets even better. Many exchanges also offer USDT as a trading pair, thus allowing you to buy coins with a coin that mirrors USD. That is very useful…

The reality is there are some real considerations and concerns with Tether that any user must keep in the back of their mind (partly based around the concern that getting fiat for USDT could not work as intended at some point, partly based on the fact that the crypto economy is now “tethered” to a somewhat centralized dollar substitute, and partly based around the fact that Bitfinex and Tether are essentially run by the same people; Bitfinex being a leading exchange that allows margin trading using USDT as collateral).

Some question exactly how all the above is working, questioning if they are creating coins in a way that mirrors fractional reserves, questioning if every Tether really can be redeemed for USD and other fiat currencies “no matter what,” and questioning if Tether isn’t just printing money and filtering it through exchanges (and if they are, “for what purpose?!”)

The problems and benefits here then all essentially revolve around the same concept. That is, Tethering of the crypto space to the dollar and setting expectations that a single entity is holding dollars in reserve.

That should sound ironic, because it was largely the exact problem crypto was trying to avoid in the first place!

The problem being that the company Tether, although they use blockchain technology, is not a decentralized distributed smart contract, they are a company run by potentially fallible humans (whom we have to trust; they are not inherently trustless). Same for Bitfinex. Bitfinex isn’t a peer-to-peer decentralized exchange, they are a company.

That doesn’t make them bad, but it does put them more in the category with Ripple and XRP then it does with Bitcoin (that is, they are companies who deal with crypto, not pure decentralized cryptos).

Still, at the end of the day, Tether is VERY useful in-practice due to its steady value, ability to be used in trade for many cryptos many of the world’s major exchanges, and its ability to offer liquidity to exchanges.

To the extent that everyone agrees a Tether is worth $1, and especially to the extent that it holds true across exchanges including Bitfinex, is to the extent that the utility of Tether outweighs its potential issues.

Concerns and considerations aside, the reality is: Tether has worked rather well so far and that has earned it a place as one of the top 20 coins by market cap as of early 2018.