🤔 What is Tether(USDT) ?
Tether is a stable coin whose price is pegged to US dollar. 1 Tether ie USDT = 1 US dollar.
Tethers are issued by Tether Limited, which is a for-profit company based in Hong Kong.
Currently, tether stable coin is available on various blockchains like Etherium, Solana, and Avalanche.
📝 Origin of Tether
Tether was founded as “Realcoin” in 2014 by Brock Pierce, Craig Sellars, and Reeve Collins. Tether Limited, the company behind Tether was supposed to hold equivalent US dollar reserve for every Tether issued.
Tether website claim in 2014:
The user can also redeem their Tether by giving Tether back to Tether limited and receive actual US dollars. The company will also burn the received Tether so that the money in their reserve is always equal to the outstanding Tether supply.
Tether Limited also promised to publish daily reserve holdings and undergo frequent professional audits to gain user confidence in 2014.
Tether reserves were audited for the first time in 2018 by Friedman LLP. However, the audit could not be completed because Tether bailed in middle of the audit complaining Friedman was asking for”excruciating details”.
Founders of Tether were the same people who also ran Bitfinex, one of the largest crypto exchange.
Tether and Bitfinex used Crypto capital bank for their backend operations to receive wire deposits from their users. Crypto capital bank came under investigation in 2019 because of some shady business, resulting in approx 850 million dollars of Bitfinex being frozen.
Bitfinex was insolvent if they could not access their 850 million frozen funds. The team used Tether reserves to bail themselves out.
Tether limited also got attestation from Delteck bank to show their reserves were in order.
After the attestation, the team changed their website ie Tether are backed by their reserves.
Bitfinex and Tether were charged by New York attorney general in 2021. They were also banned from operating in New York.
😌 What problems does it solve ?
- Users can conduct cross-border payments without exposing themselves to extreme volatility of cryptocurrencies.
- Traders can close their positions by selling crypto assets for USDT instead of fiat.
🤖 How does it work ?
Tether limited promises to keep assets to back every Tether out in circulation.
Currently(Jan 2022) their reserves to back outstanding Tether are as follows:
🏛️ Governance model
Tether is a centralized project. Tether limited decides:
- How much and whom to give Tether.
- How are tether reserves managed.
Tether has many competing stablecoin projects. They use different models to maintain peg to US dollar:
- Rising demand: Demand for stablecoins is growing.
- Network effects: Number of places that accept Tether will grow as Tether ecosystem becomes more popular.
😨 Risks and challenges
- Tether limited company is registered in Hong Kong and has history of using shady banks. The team does not need to consult anyone on how to use the reserves. They have also never been audited.
It is possible that outstanding Tether are not one-to-one backed by equivalent dollar value.
- The project’s governance lacks decentralization. Tether team decides whom to give Tether and how to invest reserves.
- Many governments are looking at solutions to digitize their currencies ie CBDC and ban all the other stable coins.
- Competition: There are many stablecoin projects that are in direct competition with Tether.
🧐 Indicators to watch out for
- Number of Tether in circulation are growing:
- Daily transaction volume is growing:
- Twitter following is growing:
👋 Final remarks
It is difficult to believe that a centralized company is able to issue stablecoin without telling what are the reserves backing their token. But this is exactly what Tether has been able to do.
It will be interesting to see how long the company will be able to run the show and who will get punished once the truth comes out.
😊 Do further research
You can continue your research by using following resources: