Unveiling the Controversial Stable Coin: Tether
Cryptocurrencies have been in the limelight for almost a decade now, but considering the price fluctuations of the crypto market, digital currencies are still struggling to be widely adopted.
This infamous volatility of the crypto space has brought forth a new class of cryptocurrencies – stable coins. Undoubtedly, the emergence of stable coins has been one of the most significant events to occur in the crypto sphere. They go hand in hand with the publication of Altcoins or the launch of Bitcoin futures.
If you've been interacting with cryptocurrencies for any length of time, you must have come across the word stable coins. Perhaps, you are well-acquainted with the concept of stable coins and how they work.
Stable coins mirror the value of fiat currency by holding enough reserves to back the supply. Simply put, the stable coin is a cryptocurrency that is pegged to an asset with a stable value such as the US dollar or gold.
Some of the stable coins are Tether, Dai, PAX, and USDC. However, in this article, we will be addressing the most popular stable coin – Tether. So, if you want to know more about this intriguing coin, continue reading for widely known yet inconspicuous facts.
What Is Tether?
Tether, commonly known as USDT, is the first and most popular stable coin. This unique cryptocurrency aims to represent a digital cryptographic value equivalent to the US dollar.
Each tether token is supposed to be “tethered” to one USD and therefore offer a stable spot for traders to store their money when exiting a trade in ETH, BTC or other paired cryptocurrencies.
With features such as a decentralized form of processing and data storage, Tether token is very much a cryptocurrency. What makes it different from cryptocurrencies like Bitcoin and Ethereum is its centralized emission and the rate that is always kept at an equivalent to one dollar.
Specifically, Tether belongs to the category of fiat collateralized stable coins, such as the USD, the yen, or the euro, which backs each cryptocoin in circulation.
It is specifically designed to build the necessary bridge between cryptocurrencies and fiat currencies to offer transparency, stability, and minimal transaction charges to users.
The tokens are backed 1:1 by the dollars that investors put up when buying them. But Tether Ltd. provides no guarantee for any right of redemption or exchange of Tethers for real-money. It doesn’t have its own blockchain but instead functions within Bitcoin’s script. This layer on top of Bitcoin is called the Omni Layer.
Tether is traded on multiple cryptocurrency exchanges including Binance, BitForex, FCoin, OKEx, Huobi, and OOOBTC. Trading pairs include BTC, ETH, BCH, LTC, and more cryptocurrencies.
Working of Tether
Tether works on the Omni protocol, which is a versatile platform used for several digital assets and currencies anchored to the bitcoin blockchain. Each Tether token is worth $1, and you can redeem at any time for $1 of fiat currency.
You can also exchange your cryptocurrencies for Tether on a trading platform.
Just like a central bank, USDT prints its coin, after which it sells the coins. Theoretically, if you own an amount of Tether, you can send it to Tether Limited to receive the equivalent in cash. This stable coin exists on blockchains using the Omni Protocol specifically developed for Tether Limited.
These protocols consist of open source software, which uses blockchain technology to issue and redeem Tether coins. However, even though you can redeem your USDT for cold hard USD, you cannot do so if you are a citizen of the US. Since January 2018, Tether LTD. has stopped serving the US individuals and corporate customers unless they are Eligible Contract Participants (ECP).
Don’t you think it’s somewhat concerning? A central bank, printing the equivalent to the world’s most stable currency, is only printing money for use by other companies – but doesn’t accept it at its own branch.
It’s like spending money on stuff, but if you want to deposit the funds at your bank, they won't let you. This makes Tether more of a totally centralized system which is in contradiction to what it claims.
There are various questions on Tether being described as a decentralized system and a secure network. If you look at its operation mechanism, it is obvious the system depends on Tether's ability and willingness to maintain the currency peg.
Who Is Behind Tether?
Tether Ltd. is based in Hong Kong and run by JL Van Der Velde, Giancarlo Devasini, and Stuart Hoegner.
Originally, Tether was conceived of and named Mastercoin and Realcoin. Although, it struggled to take off initially, starting from January and continuing for the next year and a half it grew from $10 million to almost $2.8 billion.
The research even revealed that in February 2018, Tether accounted for about 10% of bitcoin trading volume.
This is possible because the CEO of Tether is also the CEO of Bitfinex, one of the largest exchanges in the world. And, Bitfinex offers trading on hundreds of coins, out of which many coins are paired with USDT.
Since the exchange does not offer its services to US citizens; Tether is the only stable coin traders can run to.
Why Do We Need Stable Coins?
Can Be Used As A Currency
Be it travelling, sending payments globally, or even waiting for transactions across blockchain to confirm – we need a measure of stability in a currency.
A stable coin makes sure that the value of money you send to someone will be the same when it arrives.
Can Be Used As A Payment Medium
As these coins have low volatility, they are not so good for trading. But, you can use these as a middle man.
These coins cannot be used as a replacement for dollar bills, but these sure can be used to send payment to another side of the world. You can easily send the money without bank transaction fees, times, or control check.
Mass Adoption Of Crypto
Mass adoption of cryptocurrencies has been a dream of anarchists and enthusiasts. And, once the public sees that cryptocurrencies can be stable, they will be more interested in them as currencies.
Stable coins could help us in the mass adoption of cryptos. Since a stable coin provides the same security as fiat and holds its value, it can usher mass adoption.
Pros and Cons of Tether
Tether is the longest established stable coin, and there is no denying that people security and comfort in companies with roots. Tether has been through a couple of boom and bust cycles. Being struggled past a few hacks, it has proven itself over and over again.
Many accused the company of its lack of transparency, bad customer service, and overall customer neglect. To rectify the problem, Tether has announced one of the newest features – the periodic release of its accounts. By this, the company aims to show that a real USD in their accounts backs each USDT.
USDT is available across medium and mega exchanges alike, even certain small ones. This gives the traders a secure platform to store their funds during the volatile boom and bust cycles of crypto.
The Tether can transfer money over the decentralized network at a faster and cheaper rate. Since it is created in such a way that it always holds an equivalent value of US $1, you can use it to transfer money to anyone across the network.
Another advantage of using USDT on the Tether network is the reselling option a user gets on the platform itself. You can withdraw your USDT in fiat currency as well. But withdrawal in fiat currency would incur charges over bank transfer.
Many exchanges have indeed been hacked millions of dollars. However, the problem with Tether being hacked is that, once again, its value proposition is compromised. When a business sells itself as providing security, stability, and accountability, the last thing its customers want to hear is that their accounts have been hacked and their hard earned money has been stolen. Unfortunately, USDT has been hacked a few times.
Tether has various allegation of manipulating the Bitcoin’s price. Since the CEO of Tether is the same man as Bitfinex, it has led many people to wonder if there could be collusion. A particularly zealous investigative journalist seems to have discovered evidence "showing a single entity negotiating 24,000 BTC, or more than 20% of all bitcoin held on Bitfinex." Nor is it the job of a single bored shopkeeper. Such a configuration requires capital and incredible connections. The roots of this problem also affect many people. When the volume and the price are manipulated artificially in this way, the whole market suffers.
In October 2018, there were concerning accusations like USDTs were not backed up by USDs, no bank likes to partner with Tether and many more. Long term HODLers and traders began to sell off their USDT’s for bitcoin.
There is no provision for the public mining of Tether. Tether Limited has the sole right to do the same. The reason behind this is not yet fully apparent, but it is quite understandable because it is not easy to maintain the fixed value against USD unless it is controlled solely by the company.
To buy USDT, you need to provide various documents to confirm your identity before opening an account. With its complicated history, many still doubt it truly has the USD capital to back the USDT supply. Since the value of US dollars is not fixed, the whole aura of 1 USD does not remain true in all senses.
Things to Consider Before Buying USDT
The number of Tether token can increase or decrease as long as the company has enough funds to back them up.
Tether token is not available on several crypto exchanges and can be bought with a credit card or fiat currencies directly.
Tether is mostly used on exchanges to buy and trade other cryptocurrencies. However, the company behind Tether hopes to make USDT the virtual equivalent of USD.
Each stable coin has various risks associated with it. In fact, in the white paper, the Tether company claims there are several risks involved in the use of USDT. For instance, the company or its bank could go bankrupt, or its funds could be frozen.
If this will be the case, USDT could become useless, as there might be no fiat currency backing their value.
You need to look into the market competition as well since there are many other cryptocurrencies secured to the US dollar in one way or another. Some of them are NuBits, BitUSD, and Steem Dollar.
Tether is an Ethereum-based token. It means it is compatible with the ERC20 standard and can be stored only in wallets that store ERC20 compatible coins.
Bitfinex and Tether Controversy
The company that created Tether is closely affiliated with Bitfinex exchange. While the company claims that Tethers in circulation are backed up by fiat currency reserves, it discontinued the relationship with auditors who were supposed to verify this claim.
This incident has led to uncertainty and speculation about whether Tether is securely backed up US dollar reserves.
Wallets to Hold USDT
Mobile wallet: You can use the Freewallet app for Android.
Web-based wallet: Tether has its own web-based wallet.
Desktop wallet: The OmniCore wallet is available for Linux and Windows.
Hardware wallet: ERC20-compatible Tethers can be held in a hardware wallet via MyEtherWallet.
According to the coindesk report, Tether has modified the terms on its site regarding how it is backed, saying that the USDT stable coin may not be backed 100% by fiat reserves.
In short, USDT is not claimed to be backed 1 to 1 by USD in a bank account anymore.
The new wording on the site is “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 (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”
The Centre Consortium developed the USD Coin (USDC).
Like Tether supposedly is, USDC is backed by actual US dollars kept in a bank account. Each USDC issued is backed 1:1 with a US dollar and these dollars are held in reserve accounts are regularly audited to make sure the reserve match the issuance of USDC.
Further, the USDC is an ERC20 token has been developed on the Ethereum blockchain to support the fast transactions of the coins on the network. In addition, there is added security provided by a powerful established network.
PAXOS Standard (PAX):
PAX is an ERC20 token built on the Ethereum blockchain. Like most stable coins, Paxos Standard uses US dollars to boost the circulation of its PAX tokens. To redeem the PAX, the corresponding coin is burned.
Paxos also has an exchange, itbit.com. The added benefit of this is that when you trade on this exchange, you will be able to withdraw other cryptographic currencies to PAX at no cost immediately. PAX has also been listed on many different stock exchanges. Plus, as with USDC, you can create an account at Paxos Standard and receive instant conversion to fiat.
Tied is a price stable cryptocurrency that offers a 1:1 relationship with the Japanese Yen and Euro. Every tied coin is entirely backed by one Japanese Yen or one Euro.
This digital currency is based on Stellar, which is proven blockchain technology.
The coin is built on a distributed, robust, fault-tolerant peer-to-peer network, which continually checks and verifies all the financial transactions before committing them to an irreversible open ledger.
The MakerDAO Stablecoin is an interesting alternative because it is one of the few pieces that does not have a centralized structure with a fiat supporting the coins in a bank account. DAI is backed by a guaranteed cryptocurrency debt. More specifically, DAI is created when you block a certain amount of Ethereum in a secured debt position (CDP). This is the guarantee that you bet for the DAI and that you can unlock again with DAI.
The method to maintain its peg is quite ingenious. It uses economic incentives that encourage users in the ecosystem to stabilize the price through their actions.
GUSD, a token based on ERC20, will be supported by a fiat statement held by State Street Bank. They also retained a pass-through insurance product to provide FDIC insurance within certain limits. BPM Accounting and Consulting regularly audits the Gemini Stablecoin.
GUSD is also listed on several exchanges, which facilitates trading. This coin has a much lower capitalization than the other centralized funds mentioned above. If you're looking for an easy off-road mode in fiat, you can still use the Gemini exchange. However, just like in the case of PAX, your buyout is entirely in the hands of Gemini.
Restricted Areas and Countries
Tether is not available in areas including New York State, Washington State, Iran, Yemen and Bosnia, and Herzegovina.
The main idea of a stable coin is a huge step towards a safe blockchain ecosystem. Given the capital value and volatility of the crypto market, many new entrants cannot afford the cryptocurrencies. They can buy stable coins as a reserve and then use it afterwards as the price is stable to the dollar.
Tether, both loved and dreaded, aims to be a stable coin pegged to the value of fiat currencies. For this, it, however, needs asset reserves to back its supply at a one-to-one ratio. It should be able to provide full liquidity, something that even banks cannot do.
Also, as there is no provision to mine Tether, it is not a very good idea to buy the token. It is a significant step to keep the value of USDT at $1.
For cryptocurrencies to be a mainstream currency, we need price stability. This will give the users confidence in making daily transactions. The full adoption of stable coins will lessen the worry of having to time your purchase with the volatility of coins like BTC and ETH.
Therefore, the projects such as TiedCoin working on stable coins will bring us into a world where cryptocurrencies will be used to make our daily transactions.