What is Tether (USDT)? | The Motley Fool

Attached (CRYPTO:USDT) is a stablecoin pegged to the US dollar. This means that 1 USDT is designed to have a value of $1, and this is normally the case, although there have been price fluctuations in the past.

Stablecoins are useful for people who want to hold a digital currency that will retain a constant value and is backed by an asset. Tether is hugely popular for this, but it’s also arguably the most controversial stablecoin. We’ll cover that and everything you need to know about Tether in this guide.

Image source: Getty Images.

What makes Tether unique?

There are many stablecoins out there, and many of them are pegged to the US dollar. Although it effectively offers the same as these competitors, the popularity of Tether (and one of its main competitors, USD coin (CRYPTO:USDC)) distinguishes it.

Tether has a larger market capitalization than any other stablecoin. More importantly, it has a much higher daily trading volume. In fact, Tether regularly has the highest 24-hour transaction volume of any cryptocurrency, so it plays a huge role in the digital token ecosystem.

The advantage of stablecoins over other types of cryptocurrency is that under normal circumstances they maintain a predictable price range. They are not volatile, so they are used differently from cryptocurrencies that people buy as an investment. Here are the most common ways to use stablecoins such as Tether:

  • Send money digitally to another party anywhere in the world.
  • Transfer your own funds between crypto exchanges.
  • Loan your stablecoins to earn high interest rates (some lending platforms pay more than 10%).
  • Storing funds on an exchange so you can quickly exchange them for other cryptocurrencies.

Tether’s popularity and high transaction volume make it easier to use than other stablecoins. For example, if you want to buy, sell or trade Tether, it is available on most top crypto apps. And the trading volume means you should have no trouble using your Tether.

Although USDT is the largest crypto token in Tether, it also has tokens pegged to Euro, Yuan, and Gold.

Where does Tether come from

Brock Pierce, Reeve Collins, and Craig Sellars founded Tether in 2014. The project was originally called Realcoin, but they changed the name to Tether shortly after launch. The company behind Tether, Tether Limited, is responsible for issuing it and managing the reserves.

Bitfinex was the first major crypto exchange to offer Tether trading, which began in January 2015. Although Bitfinex and Tether Limited are separate entities, leaks from the Paradise Papers in 2017 revealed that Bitfinex officials created Tether Limited . In 2018, a spokesperson for both companies said they shared the same CEO.

How Tether Works

Tether is a cryptographic token issued on several major blockchains. Tether’s goal is for 1 USDT to be interchangeable for $1. To do this, Tether Limited maintains reserves to back up the tokens it issues.

For Tether Limited to mint 1,000 USDT, it must have $1,000 in its reserves, ensuring that if buyers want their money back, they can get it back. While this is how Tether is supposed to work in theory, the reality is a bit more complicated; there have been issues with the reliability of Tether Limited regarding its reserves. The company initially claimed that each USDT was individually backed by $1. This turned out to be wrong.

A lawyer for Tether Limited said in 2019 that 74% of USDT tokens are backed by cash or cash equivalents. But when Tether Limited provided a breakdown of its reserves in 2021, only 2.9% of USDT tokens were backed by cash. The rest of its reserves consisted of secured loans, corporate bonds and commercial paper.

To sum up, Tether Limited claims that all USDT is 100% backed by the company’s reserves. These reserves are a mix of assets, so it’s not just cash. It should also be noted that there is no legal guarantee that a USDT token will be exchangeable for $1.

Connections

For years, Tether has established a variety of connections and partnerships.

Its most notable link is the Bitfinex cryptocurrency exchange. The same people control the exchange and Tether.

Tether has been integrated with several blockchains, which has helped it become widely available. Here are the blockchains that currently support Tether:

One of the most interesting recent partnerships for Tether is with the Swiss city of Lugano. In March 2022, Tether Limited signed a partnership agreement with Lugano to use blockchain technology in the local community. This will allow businesses and citizens of the city to pay taxes in Tether.

Can I earn passive income with Tether?

You can earn passive income with Tether through crypto lending programs. One option is to deposit your Tether with a decentralized lending protocol such as Aave (CRYPTO:AAVE) or Compound (CRYPTO:COMP). These decentralized finance (DeFi) platforms allow you to lend crypto without opening an account.

There are also crypto exchanges that have their own lending programs. Exchanges that allow you to earn interest by lending Tether include Celsius and KuCoin. Note that US residents are prohibited from using KuCoin.

Unique Risks

The biggest problem with Tether has been the questionable business practices behind it. As mentioned earlier, Tether Limited has misrepresented its reserves in the past. For several years, he was reluctant to share detailed information about these reserves.

Tether Limited has also encountered legal issues due to its relationship with Bitfinex. In 2019, the New York Attorney General sued both companies. He alleged that in 2018, when $850 million of Bitfinex funds disappeared, he used $700 million from Tether’s reserves to help cover the loss. Although the companies admitted no wrongdoing, the owner paid an $18.5 million fine in 2021.

To be fair, Tether has made an effort to be more transparent. It now publishes regular reports on its reserves and includes information about them on its website. However, there are still people who don’t trust him due to previous missteps.

Is Tether a good investment?

Tether is not exactly an investment as it is designed to maintain a price of $1. The value will not increase like other cryptocurrencies and cryptocurrency stocks.

As mentioned earlier, you can use Tether to generate passive income. There are many lending platforms available that will pay you competitive interest rates for your Tether. It’s a way to earn more interest than you would with a typical savings account.

Keep in mind that it’s far from risk-free. Your Tether is not insured or guaranteed like money in a bank account. Although Tether has generally maintained its value of $1, this may change in the future.

How to buy Tether

To buy Tether, create an account with a cryptocurrency exchange that offers it. As one of the biggest cryptocurrencies, there are several good places to buy Tether.

After signing up, deposit money into your account. On most exchanges, the cheapest way to deposit money and buy crypto is through a bank transfer. From there you can make your purchase.

When people think of stablecoins, Tether is one of the first names that comes to mind. Despite its issues, it is a very popular choice used for crypto lending and trading.

About Brandon A. Hood

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