What is Tether and how does it work

If you’ve scrolled through any crypto market tracker in recent times, you would have run into “Tether” in the top ten rankings. Tether, abbreviated as USDT, is a cryptocurrency stablecoin pegged to the U.S. dollar and backed “100% by Tether’s reserves,” according to its website↗︎. This article aims to provide a comprehensive understanding of Tether and shed light on how it operates within the cryptocurrency space.

Tether is used by investors who want to avoid the volatility typical of cryptocurrencies while holding funds within the cryptosystem. Volatility is inherent to many digital assets, with their prices experiencing substantial fluctuations. Tether was designed to address this issue by providing stability within the crypto market. It achieves this by pegging its value to a fiat currency, primarily the US dollar, ensuring that one USDT is equal to one US dollar. This feature makes Tether a stablecoin, as its value remains relatively constant compared to other cryptocurrencies.

Tether’s Operating and Stability Mechanism

Tether operates on multiple blockchain platforms, including Ethereum, Tron, and Solana. These platforms provide the necessary infrastructure for the creation, issuance, and transfer of Tether tokens. Tether tokens are created and managed by Tether Limited↗︎. Each Tether token is backed by an equivalent amount of fiat currency, typically held in reserves.

To ensure the stability of Tether, the company claims to maintain sufficient reserves to back all Tether tokens in circulation. These reserves are audited by reputable accounting firms to verify the adequacy of the backing. The idea is to instil confidence among users that their Tether holdings are fully collateralised.

Moreover, Tether allows users to redeem their tokens for fiat currency through authorised exchanges. This redemption mechanism is another vital factor contributing to the stability of Tether. It provides users with an exit option, allowing them to convert their digital assets back into traditional money whenever needed.

Tether Utility

Tether’s stability and liquidity have made it a popular choice among cryptocurrency traders, investors, and businesses. It provides a seamless bridge between the traditional financial system and the crypto space. Many exchanges rely on Tether as a means of facilitating trading pairs and offering a stable store of value.

Tether’s integration extends beyond exchanges, with various decentralised finance (DeFi) protocols incorporating USDT into their ecosystems. Users can lend, borrow, or provide liquidity with Tether, benefiting from its stability while participating in decentralised financial activities.

Tether vs USD Coin

Tether (USDT) is the oldest and largest stablecoin, known for its controversial history and opaque backing. It claims to be backed by an equivalent amount of US dollars, although this has raised concerns due to the lack of full audits. On the other hand, USD Coin is a stablecoin launched by Circle and Coinbase, which follows a more transparent approach. USDC is regulated, audited, and backed by reserves held in US bank accounts, providing greater assurance regarding its backing.

Market Capitalisation

As of June 2023, Tether was the third-largest cryptocurrency after Bitcoin and Ethereum and the largest stablecoin with a market capitalisation↗︎ of nearly $83 billion. This milestone underscores its significance and widespread adoption within the crypto community.

Takeaway

Tether has emerged as a significant player in the cryptocurrency market, offering stability and liquidity to investors and traders. As the largest stablecoin by market capitalisation, Tether’s popularity continues to grow, contributing to the broader adoption of digital assets. While controversies and regulatory concerns↗︎ have surrounded Tether in the past, its ongoing commitment to transparency and the audit of reserves aims to address these issues. As the crypto landscape evolves, Tether is poised to maintain its position as a crucial component of the digital economy.