What is Tether?
Tether is a stablecoin that was created by Tether Limited, for purposes of addressing the volatility of the cryptocurrency market. It operates on the Omni protocol as a token issued on the Blockchain. Every Omni transaction is recorded in a Bitcoin transaction sharing the same transaction hash.
Tether in its simplest form, is a cryptocurrency (USDT) with a fixed price measured by a fiat currency, in this case, the U.S. Dollar (USD). It has become the world’s most popular stablecoin simply because it’s backed by the USD, ensuring that for every Tether issued, there is enough USD in reserve to back it up.
The concern surrounding market volatility and cryptocurrency stability is a major factor behind industry hesitation for mass adoption, specifically looking to Bitcoin, Ethereum, and Litecoin. While the three currencies have been used for several online transactions, they are not considered to be reliable for making day-to-day transfers because of their high volatility in price.
Without stability, a seller’s hesitance of trading goods and services in exchange for a cryptocurrency only increases.
Origins of Tether
Tether’s origins can be traced back to 2014, where two groups that believed the Bitcoin blockchain could also serve as a platform for issuing fiat currencies--Realcoin and the cryptocurrency exchange Bitfinex. Eventually, Realcoin and Bitfinex merged their efforts, forming the Hong Kong-based company, Tether Limited, which includes the same Chief Executive, Chief Financial Officer, Chief Strategy Officer, and General Counsel.
Tether originally launched and was issued on the Bitcoin blockchain via the Omni Layer protocol, a platform that was used to create and trade other digital assets on top of Bitcoin. The purpose of Omni Layer’s protocol, was to help enable the minting and burning of Tether tokens based on the amount under custody.
Tether’s ledger is stored on the Bitcoin blockchain and Omni Explorer allows users to view their verified transactions. As of 2020, Tethers are also available as assets on other major blockchains, including Crypto Exchange, Ethereum (ETH), Tron (TRX), and EOSIO (EOS), which allow for the creation of new native assets.
How Does Tether Stay ‘Fixed’ to Our US Dollar?
First, we need to debunk the years worth of public claims that Tether is in fact fully backed by the US Dollar. Tether’s website has publicly stated that “every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USDT is always equivalent to 1 USD”.
However, in 2019, that text has been replaced with the following, drawing major concern from industry experts:
“Every Tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USDT is always valued by Tether at 1 USD”.
In one interview with Breaker Mag, representatives of Tether further clarified the change to its Terms with respect to Tether’s fixed pricing:
“Tethers remain completely stable and 100% backed, so Tether’s reserves always equal or exceed the number of issued Tethers. The only change is that the composition of the assets that provide that backing includes a combination of cash, cash equivalents, and may also include other assets or receivables from loans issued by Tether”.
Following the announcement, Forbes described Tether as “an unregulated fractional reserve bank”, highlighting that “cash equivalents” are presumed to be other cryptocurrencies, while “reserves” are held in the form of loans that it has made to other parties.
Despite the clarification of Tether’s terms of service, the market is still receptive to Tether and its guarantee.
As of 2020, USDT remains the largest and most widely-used stablecoin. Since USDT has been in the market, Tether Limited’s vision has been embraced by many global companies, including Facebook’s struggling ‘Libra’ project.
Tether’s Initial Issuance
At the beginning of 2018, where bitcoin’s skyrocketed, the industry speculated as to Tether’s role in bitcoin’s surgical hike, which was supported by Litecoin founder, Charlie Lee on Twitter:
From February 2017 to the end of January 2018, the number of USDT in circulation grew by 10,000%, rising from $25 million to over $2.8 billion. In December 2017 alone, Tether issued 775 million more tethers (a 52.5% increase in its total supply) following the U.S. Commodity Futures Trading Commission (CFTC) subpoenas to both Tether and Bitfinex on December 6, 2017.
Tether’s Legal Dive into Public Scrutiny
Since 2017, Tether has had a difficult time convincing the crypto community of its legitimacy, with legal struggles with banks, like Wells Fargo, and of course, it’s incredibly close and lucrative relationship with its parent company, Bitfinex, where it used funds from Tether to cover up $850 million in alleged losses back in. CoinDesk and Forbes did a great job breaking this down.
Back in September 2020, Tether recovered and returned $1 million worth of USDT to a group of Chinese traders who, in error, sent the funds to a wrong DeFi address. On September 8, the group, which goes by the moniker ‘Bill,’ “accidentally” transferred the money to a Swerve token contract and could not retrieve it. On September 11, the funds were recovered and returned to the legitimate owners, as shared via Twitter.
In 2016, the world’s second biggest data leak took place, known as the “Paradise Papers”, where 13.4 million documents were leaked to the general public. More than half of the documents (6.8 million) involved a law firm and corporate services provider that operated together in 10 different jurisdictions under the name ‘Appleby.’
There were many aspects to this leak, but as it related to Tether, certain documents leaked by the International Consortium of Investigative Journalists, pointing to Yale University graduate, Phil Potter--the director of Tether and the chief strategy officer at Bitfinex.
For more information on the Paradise Papers, click here.
Both Gemini and Paxos serve to be viable competitors to the highly-controversial and plagued Tether.
The Gemini Dollar (GUSD), issued by the Gemini Trust Company, LLC (Cameron and Tyler Winklevoss’s brainchild) launched the Gemini cryptocurrency exchange as a more stable alternative to the Tether stablecoin. GUSD was launched on the same day as the Paxos Standard Token (PAX) on September 10, 2018.
In its attempts at filling the gap that Tether has left, the Winklevoss twins hope for the Gemini Dollar to become “a crucial link between the traditional banking system and the new, fast-growing crypto economy”.