USDT the Almighty – Fact or Fiction?
It's no wonder that most of us have at least heard of cryptocurrency for worldwide media have lately been quite persistent in promoting this subject to the broad masses so that even those who are not much sophisticated in finance start taking a keen interest in this field.
The aim of this article is neither to make one of those many reviews of the well-known cryptos such as Bitcoin or Ethereum nor to get into a detailed comparative analysis of them. We will mainly try to focus on the coin that looks like gaining more and more popularity over the past years and the name of this phenomenon is Tether USDT.
So, what exactly is USDT? Let's just provide a clear definition (or at least consider what can be found on the Web) – Tether USDT is a stablecoin created in 2014 by Tether Ltd.... and here we may presume your first query: but what is a stablecoin?
Although such classically known cryptocurrencies as Bitcoin or Ethereum provide a wide range of advantages (e.g., worldwide payments without limitations, decentralized networks, security of the blockchain, low fees and no tax charged, user's privacy), they have a serious minus which reveals itself in their price fluctuation and totally unforeseeable nature. And since the majority of people tend to deal with quite stable assets like fiat money, precious metals or bonds that are not subject to dramatic value change over a short span of time, the volatility of BTC or ETH is often an obstacle for newbies.
As far as we can figure it out, the non-fluctuating character of the stablecoin is even suggested by its name. The value of the stablecoin is pegged to some external assets such as fiat currencies, other collateralized cryptos or even special algorithms.
Types of Stablecoin
As of today, there are three types of stablecoins known to market specialists:
- Fiat-Collateralized Stablecoins (sometimes called “Asset-Collateralized Stablecoins”)
- Crypto-Collateralized Stablecoins
- Algorithmic Non-Collateralized Stablecoins
Fiat-collateralized stablecoins are backed by global currencies such as American dollar, Euro, Japanese Yen and some others commodities e.g., gold. The mechanism of such stablecoins is quite logic: the number of tokens must be equal to the number of fiat reserves stored on the bank balance of an entity issuing such a crypto. The backing assets are usually kept up by third party custodians and regularly audited for compliance by third party auditors.
The main banefits of asset-collateralized stablecoins are their efficiency (they provide fast, convenient and secure conversions), their concept simplicity for average consumers and their stability (making them a store of value).
Another type of stablecoins is crypto-collateralized stablecoins which are pegged to other cryptocurrencies or the most commonly to a mix of cryptos to lower or share risks. Still, this formula does not seem very much safe since the backing asset is another crypto (or even a bunch of cryptos) which may result in excessive volatility. In addition, quite a large amount of collateral cryptocurrencies is necessary to ensure a very small amount of stablecoin tokens.
The major advantages of such stablecoins are their decentralized nature, fast and secure conversions, transparency of the transactions on public blockchain.
E-USD, Alchemint (SDUSD), BitShares (BitUSD), Bridgecoin (BRC) and MakerDAO (DAI) are examples of crypto-collateralized stablecoins.
Algorithmic non-collateralized stablecoins are not backed by any reserve asset. They leverage a special algorithm when the cryptocoins are either created or burned to maintain the target value (e.g., the algorithm issues more coins when the market price rises and destroy them when the price drops.
In fact this is the least popular type of stablecoin, though it also has some benefits: it requires no tangible asset, it is autonomous and not influenced by outside markets, it is decentralized, quite stable and transparent.
The stablecoins with the greatest market capitalization are Ampleforth (AMPL) and Empty Set Dollar (ESD).
So, now that we have a knack for stablecoin features, let's find out what kind of category USDT belongs to, what particular traits it has and what benefits it offers.
First mentioned in November 2014, Tether launched three stablecoins on the market using Bitcoin blockchain and its Omni Layer Protocol: USDTether or USDT pegged to US dollar (1:1), EURTether or EURT pegged to Euro and YenTether or JPY USDT attached to Japanese Yen. The company announced that each of them could be redeemed at any time with no exchange risk. So, this is a typical stablecoin in every way.
Just Bit of History...
The three tokens were initially introduced on the Bitfinex exchange platform and immediately sparked immense interest among traders. But as it often happens, success brought forth numerous hows and whys. The reliability and solvency of Tether were called into question especially when the connection between the issuer and Bitfinex was established showing that also both companies share the same executives. Ensuing controversy and 2017 Bitcoin bull run (researchers claimed that speculations with USDT caused Bitcoin's surge that year) resulted in markets' negative reaction and even in American regulators' subpoenas trying to clarify if Tether had unlowfully allocated funds to conceal multi-million dollar losses. The chain reaction followed and partnering banks (US Bank and Wells Fargo) quit the game. All this could not but severely impact the general status quo and operations. However, the company managed to find a solid banking support in Taiwan due to the country's pro-crypto policy. In 2018, another exchange, Poloniex, joined followed by Kraken and other platforms . In 2019, Tether outperformed Bitcoin in trading volume and became the most traded cryptocurrency on the market .
Today, USDT uses not only the Omni Layer Protocol, but also Omni Layer of Litecoin, ERC20 of the Ethereum blockchain, Tron, EOS and other ptotocols.
As of January 2021, the capitalization of Tether USDT is around 31.6 billion dollars.
How USDT works
Like we have already said before, USDT is pegged to the price of American dollar and one Tether token is equal to one US dollar. This equilibrium was initially ensured by the amount of fiat money kept by Tether Limited in reserve. Since March 2019, the company included loans to affiliate facilities to back USDT and avoid insufficiency of assets.
The stablecoin can be easily traded, transferred or stored in respective crypto-wallets (e.g., Omni-compatible for Omni-based USDT tokens or ERC20-compatible for Ethereum-based ones).
USDT Key Benefits
So, what on earth makes Tether one of the most reputable and promising cryptocurrency today and worldwide and is it really worth investing in?
As practice shows, Bitcoin, Ethereum and other cryptos are highly volatile and cannot be deemed as stable and reliable assets. USDT, in contrast, can be a trustworthy asset owing to its pegging to American dollar (or other fiat when we speak of EURT or JPY USDT). The price steadiness is the first important advantage of this stablecoin.
Another benefit is the possibility to rather easily exchange it for either other cryptocoins or fiat money. And we bet, fast cashing-out may often be a very helpful option especially for unskilled traders or in countries where such operations are illegal. On top of that, most exchange platforms do not accept fiat but willingly deal with Tether.
As compared to fiat currencies, a USDT transaction takes no longer than a few minutes, while operations with USD, Euro or any other conventional cash may require even days to meet all banking regulations. This convenience for businessmen, stock brokers and other traders is pretty significant.
In terms of accounting, Tether might pose a little less problem as, for example, Bitcoin, owing to its stablecoin nature and anchoring to real US dollars.
As for stock exchanges, today USDT is seen as a smart way to avoid direct fiat dealings and thus not to apply certain anti-money laundering or know-your-customer regulations that traditional fiat currency transactions must meet.
USDT - Cons
Now that we have addressed all the most attractive features of USDT, let us have a look at its downsides.
In fact, the major drawback is the fact that Tether users supposed to have confidence in the issuing company's honesty and diligence, for Tether Limited is the one which ensures the balance between the stablecoin and its collateral asset and assume obligations to redeem USDT at any circumstances. But does the principle of trust always work?
So, is USDT really a powerful crypto-instrument? As it appears to be, yes. This stablecoin's popularity is not coincidental and it may serve as an example of a successful undertaking in the field of contemporary finance challenges. Tether created and expanded a totally new space where stability is a must and things seem much clearer and more tangible to either experts or newcomers.