“Cryptocurrencies and digital assets are too volatile” is probably one of the strongest criticisms from those who have expressed reservations about assets like BTC, ETH or even DOGE. While crypto enthusiasts are quick to respond by saying, “volatility is a feature and not a bug”, Tether solved this problem by launching the industry’s first stablecoin.
Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or exchange-traded commodities. For example, Tether is a cryptocurrency with tokens issued by Tether Limited that was initially released as “Realcoin” in July 2014 by Bitcoin investor Brock Pierce, entrepreneur Reeve Collins, and software developer Craig Sellers. Tether is called a stablecoin because it was originally designed to be always worth US$ 1.
Tether with the USDT symbol plays a key role in the cryptocurrency ecosystem. As of mid-July 2021, Tether is ranked as the third-largest cryptocurrency with a market cap of almost $62 billion, adding over $42 billion within the last six months. Only Bitcoin and Ethereum are currently higher valued than Tether as of writing. Moreso, it often ranks as the coin with the highest daily trading volume, even surpassing Bitcoin.
The owners of Bitfinex control Hong Kong-based Tether Limited. According to Tether’s website, Tether Limited is a wholly-owned subsidiary of Tether Holdings Limited.
Tether is widely accepted on most crypto exchanges (both established and newer exchanges). It is one of the most liquid trade pairs and can be used to purchase other cryptocurrencies easily. Traders and investors frequently use it to maintain a stable store of value while still holding a position in the cryptocurrency market.
Newbies venturing into the cryptocurrency arena don’t have any difficulty understanding a dollar-denominated trade pair as compared with the BTC or ETH trade pair hence its popularity among almost all the exchanges. It also presents itself as a reserve currency for exchanges who find it difficult to set up a fiat bank account with mainstream financial houses. Most have resorted to holding their funds in Tether tokens.
How is Tether produced?
Unlike most cryptocurrencies like Bitcoin, Tether isn’t “mined.” Instead, Tether Limited generates new tokens and issues them via crypto exchange Bitfinex following fiat currency being deposited into its reserves.
USDT was originally issued on the bitcoin protocol through the Omni Layer but is now minted on other blockchains like Ethereum, with the ERC-20 USDT having the highest volume. It’s also issued on several other blockchains, including TRON, EOS, Algorand, Solana, OMG Network and Polygon.
Why is Tether important?
As said earlier, Tether plays a pivotal role in the cryptocurrency industry by bridging the gap between crypto and fiat currencies. As a result, investors can quickly obtain a one-to-one trade for the USD without being exposed to the volatility of other cryptocurrencies. By providing this stability, investors can hold a digital asset similar to a fiat currency but with the ease of trading for other coins on the crypto markets. Tether’s key features make it a popular coin – although from what we have seen, it isn’t entirely foolproof, we will get to that later.
What about DeFi? How does Tether help the growing sector?
The DeFi sector continues to see explosive growth within the past year, yet experts say it’s still early. As a way of unlocking earnings from crypto assets like BTC, ETH and otherERC-20 tokens , DeFi users stake their holdings and get loans (crypto-backed loans) from decentralised protocols. These loans are largely issued as stablecoins, the chief of which is Tether. Paolo Ardoino, CTO at Tether and Bitfinex while speaking to Cointelegraph on the topic of DeFi, said:
“We hope that the recent surge of DeFi can translate to more DeFi financing products and projects that will truly shape industry developments in a decentralized manner,“ Ardoino said. “USDT is among the biggest and fastest-growing stablecoins in DeFi and we will ensure that Tether continues to play an important role in supporting this alternative financial system and remains the reserve currency of DeFi.”
Controversies around Tether
Recall that we mentioned that Tether is backed by dollar reserves in the bank but to the tune of how much exactly? This has been a subject of controversy dragging Tether into regulatory hot waters, especially with the New York Attorney General’s office. Per NYAG statement, after sanctioning Tether and its parent company and mandating it to pay a fine of $19 million,
“Bitfinex and Tether recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines. Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie.”
Tether further drew attention from the industry stakeholders in May 2021 after it published the first of its regular reports on its business, including details of its funds held as reserves as mandated by NYAG. As per the report, 76% of its reserves were held in “cash or cash equivalents”, with the remaining portion held in secured loans, bonds and other investments—including Bitcoin. But that wasn’t really the subject of controversy except that of the 76%, commercial paper and fiduciary deposits made up 65% and 25%, respectively; the figures indicated that less than 3% of Tether’s reserves were held in cash.
As Francine Mckenna, an adjunct professor at American University’s Kogod School of Business, puts it, “all commercial paper is not created equal, because of the credit ratings of various companies. Even some of the multinationals that used to be pristine are not so anymore,” suggesting Tether is playing a risky game which could be detrimental to a large portion of crypto investors who are exposed to Tether.
However, between the end of May and now, Tether has added another $2 billion onto its market cap even while the overall crypto market continues to move in a downward trend. But there’s a top challenger that has grown to become Tether’s archrival in about two years since launch.
Challenger stablecoins to Tether’s dominance
USD Coin or USDC, which runs on the Ethereum, Stellar, Algorand, Hedera Hashgraph and Solana blockchains, is Tether’s fiercest rival. Since January, USDC has grown from a $4.1 billion market cap to $26.3 billion in July, making it one of the fastest-growing cryptocurrency in the industry today. So do you think USDC may displace Tether as the largest stablecoin in the future?