Tether has consistently been the third-most traded cryptocurrency in recent memory, but what is it? This coin is a unique and pioneering kind known as a stablecoin that derives its value against other assets such as the US dollar to maintain stability against volatile cryptocurrencies.
Cryptocurrencies come in many various forms and perform a plethora of unique functions. One compelling type in this market is stablecoins, to which Tether is a leader. Tether has consistently ranked as the largest-capped stablecoin globally, and the third-most traded cryptocurrency overall.
It boasts an incredible market cap of $29.7 billion according to CoinMarketCap (all data correct as of 10 February 2020), which is impressive considering that Tether is not a speculative coin like those above and below it.
As a stablecoin, Tether has maintained a value of around a dollar since its inception. Despite being a coin of this nature meant to keep a stable price and being the subject of much controversy, Tether deserves a case study.
What is the Tether stablecoin?
Before we understand Tether, it’s beneficial to grasp the concept of what stablecoins are. Tether is the first official project in this breed. As the word suggests, stablecoins are a unique type of digital currency whose value is pegged against a ‘stable’ asset in collateral reserve, most commonly a fiat currency such as the US dollar or euro.
However, other stablecoins peg themselves against other cryptocurrencies and commodities. In Tether’s case, for each issuance of its token, the founding company claims to hold a $1 or €1 or ¥1 in reserve (known as a fiat-collateralized stablecoin).
Thus, Tether is backed on a 1:1 ratio to the US dollar, euro, or Chinese yuan. The purpose of any stablecoin is to shield holders from the volatility of more speculative digital currencies, whose values are infamous for sometimes experiencing dramatic shifts, making them impractical as mediums of exchange.
It is also essential to understand specifically what a person would consider using Tether for because the functions are multi-faceted.
One of the benefits of a stablecoin like Tether is allowing investors to escape bearish markets without converting those funds back into fiat or crypto money.
For example, if someone believed the price of Ethereum was going down, they could sell ETH (Ether) into USDT to maintain the value of their holdings rather than selling to another fiat or cryptocurrency.
Another applicable advantage of Tether is its utility as a traditional cryptocurrency, which actually provides better value preservation. Tether is transactable peer-to-peer digitally, providing the benefits of blockchain technology, which are speed, transparency, and low cost.
Cryptocurrencies such as Bitcoin and Ethereum can fluctuate in value at the drop of a hat sometimes. For example, if someone sent 0.01 BTC to a friend at the current rounded-off price of $46,000, converted to US dollars, this equates to $460.
The minimum waiting time for Bitcoin transactions is 10 minutes, but it can typically take much longer (a few hours or more). During this period, the value of BTC may drop to $42,000, meaning the same 0.01 would now become $420 (almost 10% less).
Although this drop might seem drastic, it wouldn’t be a surprise. However, transacting with a coin like Tether ensures the $460 remains the same (excluding any fees) while taking advantage of transacting with a cryptocurrency.
The two use cases above only scratch the surface of what Tether can do.
As with most projects in this space, the idea of Tether was outlined in a 20-page whitepaper in January 2012 by American software developer J.R. Willett, ‘A fiat-backed digital token providing users with a secure and decentralized means of exchanging value while utilizing a familiar accounting unit.’
This concept led to the creation of a cryptocurrency known as Mastercoin. As with most cryptocurrencies, a foundation, the Mastercoin Foundation, was created to aid in the development.
Willett’s idea at the time was not of a pure stablecoin like Tether, but rather something with those elements and that also allowed for the creation of new coins, a ‘protocol layer top of Bitcoin’s.’ The technology fuelling this creation came to be known as Omni, spawning a change in the coin’s name to Omni in 2013 (and also a shift to the Omni Foundation).
Further name change before Tether
Many of those who were at the helm of the Omni Foundation, Brock Pierce, Craig Sellars (and later Reeve Collins) branched out on their own to create a stablecoin called Realcoin in July 2014.
Using the Omni Layer Protocol on the Bitcoin blockchain, the Realcoin tokens came onto the market in October 2014. Only about a month later (06 November 2014), the project was renamed one last time to the current name, Tether.
As time went on, Tether migrated from Bitcoin and began piggybacking off other blockchains for its creation, namely Ethereum, EOS, Algorand, SLP, TRON, and OMG.
How does Tether work?
Tether is available as a transactable stablecoin at tens of exchanges where users trade countless fiat and cryptocurrencies against this token. The company supports three fiat currencies currently, the US dollar (USD), euros (EUR), and the Chinese yuan (CNH), which are all denoted as USD₮, EUR₮, and CNH₮, respectively.
While there have been numerous controversies over the years about the actual existence of the collateral reserves, the company affirms transparency by providing daily records of their bank and reserve balances for the currencies they hold. However, it seems there hasn’t been any third-party agency to verify this data.
As previously stated, Tether relies on the consensus mechanisms of other blockchains. Therefore, the stablecoin gains security from the hashing algorithms of Ethereum, EOS, Algorand, SLP, TRON, and OMG.
There is no capped supply on Tether tokens, and there is no issuance schedule set in stone as this is at the discretion of the company. However, at the time of writing, 29.7 billion tokens are in circulation.
Why is Tether important?
The need for a coin like a stablecoin came about for a few reasons. One is the rough relationship exchanges have with banks regarding regulatory policies around accepting fiat or sovereign currencies from users.
With the growth of the cryptocurrency market, the ‘swapping’ between the ‘old and new’ posed some challenges. Tether aims to strike the ‘perfect middle ground,’ bridging the gap between fiat and cryptocurrencies by offering the perks of blockchain technology without the risk of volatility.
As already stated, one of the main uses for Tether is an exit strategy in bearish markets. Other benefits include (but are not limited to):
- Tether allows for more stable remittance digitally without fearing wild price swings as its value stays constant.
- Because of the 1:1 ratio, Tether works well from an accounting perspective because one does not need to calculate the value of their cryptocurrencies in US dollars or euros.
As with most cryptocurrencies, Tether is not without its fair share of critics and detractors. For one, a private company effectively controls the token issuance, which goes against the ethics of cryptocurrencies being decentralized entities.
However, there still seems to be an overwhelming and growing number of cryptocurrency investors taking advantage of the benefits of a stablecoin, as evidenced by its enormous daily trading volume.