Hey Crypto Fam!
We’re going to dig into a popular cryptocurrency that traders have been using for years to
leverage their trades without going back to fiat. It's the first popular stablecoin project,
Tether, known by its ticker symbol USDT.
A stablecoin is pegged to a fiat Dollar, meaning it’s unaffected by the price of Bitcoin
and the wild swings of the crypto markets.
The reason investors and traders use Tether is liquidity, or the ability to get in and
out of cryptocurrency positions without huge changes in price.
In the last 24 hours Tether has reported 38 billion in trading volume, making it the most
liquid cryptocurrency, even more liquid than Bitcoin.
Not only is it the largest stablecoin, but it’s also one of the largest cryptocurrencies
by market cap.
Stick around as we tear into the nuts and bolts of USDT and find out what makes it tick.
We’re going to jump in the way back machine and dial in January of 2012, when a fellow
by the name of J.R. Willett proposed the idea of building new currencies on the Bitcoin
protocol.
This idea materialized into Mastercoin, which aimed to utilize a new “second layer”
on the bitcoin blockchain.
Mastercoin would eventually become the technological foundation of the Tether cryptocurrency.
In July of 2014, a few team members from the Mastercoin project established their own startup
called Realcoin, using the same second layer technology renamed as the “Omni Layer Protocol”.
Later that year, Realcoin was renamed to Tether, referencing its ties to fiat currency.
By definition, a tether is a line tied to an object to restrict its range of movement.
This connection is represented digitally, meaning each Tether coin is equivalent to
one US dollar or alternant reserve currency essentially.
Making it a “digital dollar.”
Bitfinex, which is a sister company of Tether,
claims: “Every tether is always 100% backed by our reserves,
which include traditional currency and cash equivalents and, from time to time, may include
other assets and receivables from loans made by Tether to third parties, which may include
affiliated entities.
Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether
at 1 USD.”
So… How does Tether work?
First off we need to point out that Tether, besides being a stablecoin is a unique
cryptocurrency in that it “exists” on several different blockchains.
Currently there is a Tether token on the Omni Bitcoin platform, Ethereum, EOS and on Tron.
The difference between the four coins has to do with the properties inherent to the
blockchain hosting Tether.
For instance, for maximum safety and immutability some investors may prefer the Bitcoin Omni
version of Tether.
Other investors might prefer the ERC20 Tether token as it can be used in DeFi to earn a
passive income.
Apparently very few investors want to hold their Tether on the Tron network
We’ll go over both the ERC20 flavor which is the most popular, but first, let’s begin
with the OMNI layer OG version which is based on Bitcoin.
Tether’s technology consists of a 3-layer stack: the Bitcoin blockchain, the Omni layer
protocol, and Tether Limited.
The Bitcoin blockchain is the bottom layer that serves as a transactional ledger and
runs the consensus algorithm.
The second layer, Omni, is used to create and destroy digital Tether coins, as well
as track and report the tokens in circulation.
This layer also enables users to send and store these tokens securely and anonymously.
The third layer, Tether Limited, is the business entity that manages fiat deposits and withdrawals
from the Tether reserve, along with management of Tether’s web wallet and compliance logistics.
When a user deposits fiat currency into Tether Limited’s reserve, by selling fiat to buy
USDT, the business generates and issues the corresponding amount of digital dollar
tokens to the user that can then be sent, stored or exchanged.
If a user deposits $100 USD, they will receive 100 tether tokens.
These Tether coins are destroyed and removed from circulation when the user redeems the
tokens for fiat currency.
Bitcoin’s secure blockchain and it’s network effect helped Tether gain popularity over
other stablecoins operating on different blockchains.
In August 2019, the ERC20 version surpassed the Omni version in number of transactions
and in October of the same year it surpassed it in market capitalization too and never
looked back.
Today, the ERC20 version is the indisputable leader in market cap between the two, with
a little over $10 billion dollars, compared to $1.33 billions in the Omni version.
That move wasn’t without criticism, however, and critics claim the high volume of USDT
transactions saturates the Ethereum network and increases the transaction fees.
In fact, in July and August last year, when most exchanges made the switch from Omni to
ERC20, the over-saturation of the trades was 17 times higher than it was during the Ethereum
gridlock of Nov 2017.
USDT has two more versions, built on top of two more blockchains that are smart-contract
oriented, Tron and EOS as well as a future USDT token on the Algorand network.
Exodus supports the ERC20 version of the USDT token, providing our users with the faster,
most popular and most convenient form of the coin.
Other stablecoins available in the Exodus wallet include TrueUSD, USDC, DAI, PAX and
GUSD as well as a home to additional 100 cryptocurrencies and crypto apps.
If you would like to store any of them on your mobile device or your desktop, click
the link above to learn more and download Exodus today.
USDT has proven to be the most used stablecoin in the ecosystem, with a sizable lead in volume
compared to USDC.
Tether has been subjected to additional controversy within, and outside, the crypto space, from
allegations of price manipulation, to issues involving liquidity and security.
Tether was also hacked in November 2017, that resulted in the theft of $31 million USDT,
and then implemented a hard fork making the stolen funds untraceable.
Tether, and its sister company, Bitfinex, are the defendants in two class-action suits
where the plaintiffs claim that they used their USDT reserves to manipulate the price
of Bitcoin during the bull run of December 2017.
Additionally, the New York Attorney General last year accused iFinex, the parent company
of Tether and Bitfinex, that they used their USDT reserves to hide from their investors
a loss of $850 million dollars that went missing from the popular exchange.
iFinex rejects both these claims as “insubstantial” and “in bad faith”.
But what is perhaps the biggest controversy around Tether is whether their reserves are
actually adequate to cover the circulating supply of USDT tokens.
The fact that their reserves have never been officially audited, only adds fuel to the
fire, and, in fact, in March 2019 the company changed their long-standing statement that
all USDT is backed by the same amount of cash to say that all USDT are indeed 100% backed,
but as we stated earlier “by cash and cash equivalents.
So do you think Tether is a safe bet? This is a good question to ask and the answer is
nuanced depending on what your needs are.
The truth is that Tether probably won’t blow up and go out of business tomorrow.
It’s been around for more than five years and will probably last well into the future.
What do you think about USDT and other stablecoins?
Are there stablecoins you prefer or are they all the same? The world of DeFi gives us an
entirely different perspective but that’s for another video. Let us know in the comments
below what you think.
Thanks for watching, and until then…
Hodl on!