What is Tether and How Does USDT Cryptocurrency Stablecoin Work?

Let's reveal all secrets behind the most used cryptocurrency stablecoin & finally understand what is Tether, how USDT work, and their risks

Updated on September 6, 2022
What is Tether and How Does USDT Cryptocurrency Stablecoin Work?

Tether (USDT) is popular stablecoin cryptocurrency enthusiasts have used for years to leverage their cryptocurrency trading. Furthermore, pegged to the US dollar, in theory, it is not affected by market volatility that can dramatically affect the valuation of other cryptocurrencies such as Bitcoin. Keep reading what Tether is and how USDT cryptocurrency stablecoin work.

What Makes Tether Unique?

There are many stablecoins out there, and some of them are pegged to the US dollar. While offering almost the same things as these competitors, the popularity of USDC (and also one of its main competitors and USD Coin (CRYPTO:USDC) sets it apart.

Tether has a higher market cap than any other stablecoin. But more importantly, its daily trading volume is much higher. Tether generally has the highest 24-hour trading volume of any cryptocurrency and thus plays an important role in the digital token ecosystem.

The advantage of stablecoins over other types of cryptocurrencies is that they maintain a predictable price range under normal circumstances. However, they are not volatile, so they are used differently than cryptocurrencies that people buy as investments. So, here are the most common ways to use stablecoins like Tether:

  • First, send money digitally anywhere in the world.
  • Transferring your own funds between cryptocurrency exchanges.
  • Third, borrow your stablecoins to earn high-interest rates (some lending platforms pay over 10%).
  • Finally, store funds on an exchange so you can quickly exchange them for other cryptocurrencies.
  • Tether’s popularity and also high trading volume make it easier to use than other stablecoins. For example, it is available on most major crypto apps if you want to buy, sell, or trade Tether. And the trading volume means you shouldn’t have any problems using your USDT.

While USDT is Tether’s largest cryptocurrency token, it also has tokens pegged to the euro, yuan, and gold.

Where Did Tether (USDT) Come From?

Founded in 2014 by Brock Pierce, Reeve Collins, and Craig Sellars. The Tether project was originally called Realcoin but changed its name to USDT shortly after its launch. Tether Limited, the company behind USDT, issues and manages the reserves.

Bitfinex was the first major cryptocurrency exchange for offering USDT trading, starting in January 2015. Although Bitfinex and Tether Limited are separate companies, the Paradise Papers leak revealed in 2017 that Bitfinex employees founded Tether Limited. And in 2018, a spokesperson for both companies said they had the same CEO.

How Does Tether (USDT) Work?

Talking about how Tether work, you need to know that Tether is a cryptocurrency token issued on several significant blockchains. Tether works for 1 USDT to exchange for $1. USDT Limited maintains reserves to support the tokens it issues to achieve this.

In order for Tether Limited to mint 1,000 USDT, it needs to have a reserve of $1,000 to ensure buyers get their money back when they get it back. While Tether should work this way in theory, the reality is a little more complicated. There is a problem with the reliability of Limited in terms of reserves. The company initially claimed that each USDT was individually backed by $1. This turned out to be wrong.

Tether Limited’s lawyers said in 2019 that 74% of USDT tokens that backed by cash or cash equivalents. But when it published its reserves in 2021, only 2.9% of USDT tokens were cash-backed. The remaining reserves include secured loans, corporate bonds, and commercial paper.

To summarize, Tether works and guarantees USDT 100% for the company’s reserves. However, these reserves are a mix of assets, so it’s not just about cash. And also, it is worth noting that there is no legal guarantee that a USDT token will be redeemable for $1.

Can I Make Passive Income With Tether?

So, after knowing how Tether work, you can earn passive income with USDT through a cryptocurrency lending program. One option is to deposit USDT using a decentralized lending protocol such as Aave (CRYPTO: AAVE) or Composite (CRYPTO: COMP). These decentralized financial platforms (Defi) allow you to lend cryptocurrencies without signing up for an account.

There are also cryptocurrency exchanges that have their own lending programs. Exchanges that allow you to earn interest by borrowing USDT include Celsius and KuCoin. Please note that US residents are prohibited from using KuCoin.

Unique Risks

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

It also faced legal issues due to its relationship with Bitfinex. And in 2019, the New York attorney general sued both companies. He claimed that in 2018 when $850 million in Bitfinex funds disappeared, USDT used $700 million of Tether’s reserves to help cover the loss. Although the companies did not admit wrongdoing, the owner paid a fine of $18.5 million in 2021.

USDT aims to be more transparent. For example, USDT now publishes regular booking reports and includes information on its website. However, some still do not trust him due to previous mistakes.

Is Tether a Good Investment?

Tether is not exactly an investment because USDT is designed to maintain a price of $1. Therefore, the value will not increase like other cryptocurrencies and cryptocurrency stocks.

As mentioned earlier, and can use USDT to generate passive income. Additionally, many lending platforms available pay competitive interest rates for USDT. So you can earn more interest than a regular savings account.

Please note that this is not without risk. Your USDT cryptocurrency stablecoin does not insure or guarantee as money in your bank account. Generally remains valued at $1, but that could change in the future.

How To Buy Tether (USDT)?

To purchase Tether, join up for an account on a cryptocurrency alternate that gives USDT. Tether has several great places to buy as one of the largest cryptocurrencies.

After registration, deposit funds into your account. Bank transfer is the cheapest way to deposit funds and buy cryptocurrencies on most exchanges. In addition, you can shop from there.

When people think of stablecoins, USDT cryptocurrency stablecoin is one of the first words that come to mind. Despite its problems, USDT is a popular choice for borrowing and trading cryptocurrencies.

Should You Use Tether?

The truth is that the Tether is unlikely to explode tomorrow. And also, it’s been around for over five years now and will likely last a little longer. And yet… It might explode tomorrow! That’s the thing.

Aside from the Tether team, few people have a real idea of ​​what is happening behind the scenes with USDT. Although USDT publishes the value of its reserves daily, you and I cannot audit the reserves ourselves. So we have to believe in USDT.

Is USDT Safe – Tie Regular Posts To The Value Of Your Bookings

Also, if there are issues with Tether, and will almost certainly hide them until the last second. Tether is a trust game; if trust is lost, USDT could quickly become worthless.

Still, the risks involved in switching from Bitcoin to Tether for a few days are minimal. You’re probably fine if you use Tether to move money between exchanges or hold dollars for a week or two. Short-term tether trading is the name of the game.

What you don’t want is to hold the Tether for long periods! So, there is no good reason to stick with USDT for more than a week or two. Despite low trading volumes, stablecoins such as USDC and PAX have sufficient liquidity for the average retail investor.

Both currencies are regularly audited (USDC Audit, PAX Audit) and demonstrably supported 1:1 with dollars.

Even better, if you plan on leaving cryptocurrency, you can use an exchange like Kraken or Coinbase to sell in dollars that you can withdraw to your FDIC-insured bank account. There is simply no compelling reason to store your wealth in USDT.

If you want to use Tether for short-term trading, the best way to safely store it is with Exodus. The Exodus USDT Wallet is especially popular thanks to features like:

  • Support for 100+ crypto assets
  • Focus on premium design and also ease of use
  • Being the only wallet that supports desktop, mobile, and hardware wallet integration (Trezor)
  • You can exchange cryptocurrencies for other cryptocurrencies right from your wallet – without creating an account! (desktop guide, mobile guide)
  • Support for the best-decentralized apps like Compound Finance
  • Allowing you to bet some of the hottest cryptos for crypto passive income
  • The ability to sync your wallet between desktop and mobile
  • And 24/7 fast human support if you need help

Conclusion

After reading what Tether is and how USDT work, we know that Tether is a unique cryptocurrency in that it “exists” on many different blockchains. There is currently a Tether token on the Omni Bitcoin, Ethereum, EOS, and Tron platforms.

The Ethereum ERC20 version of Tether is the most popular. Most Tethers are held on the Ethereum network, with the rest split between the other three networks. So, the difference between the four coins has to do with the inherent properties of the Tether-hosted blockchain.