What Is Tether? An In-Depth Guide for Beginners

What is Tether?

Tether is the world’s first stablecoin, a type of cryptocurrency whose value is pegged to a fiat currency or traditional currencies like the U.S. dollar or euro. Tether aims to maintain a 1:1 ratio with the dollar. Successfully maintaining this ratio will make 1 USDT = 1 USD.

What are stablecoins?

Stablecoins are designed not to fluctuate in value. By eliminating volatility, stablecoins provide an alternate digital currency that’s more suited to everyday use compared to other types of crypto. That’s because a person doesn’t want to buy a car one day, but the next day, the same value in cryptocurrency can be enough to buy a house.  

Stablecoins are attractive financial assets for investors as they facilitate borderless payments, offer low transaction costs, and provide the benefits of stable fiat currency with cryptocurrency.

Simply put—and as the name implies—stablecoins, by nature, are made to remain stable.

All Tether tokens aim to maintain their 1:1 value with their corresponding fiat currencies through fully backed Tether reserves. Tether Limited Inc. claims to be a completely transparent company and publishes daily reports on the value of its reserves. 

How does Tether work?

Tether operates on The Omni Protocol algorithm, which allows users to create and use smart contracts and other smart-enabled functionalities on the blockchain. It also facilitates peer-to-peer transactions among users.

The Omni Protocol functions on the Omni Layer (OMNI), which has been constructed on Bitcoin's blockchain and supports extensive exchange features, including customized cryptocurrencies, decentralized exchanges, smart properties, etc. However, OMNI isn’t a cryptocurrency itself. OMNI's appeal comes from developers not having to substantially modify its protocol's settings. Instead, it essentially supports OMNI “out of the box.”

How are Tether tokens created?

Users first deposit their fiat currency into Tether’s bank account. Users can be individual investors, exchanges, trading firms, etc. However, they must be verified through Know Your Customer (KYC) authentication.

Tether then issues the corresponding amount of tokens and sends them to the user’s crypto wallet. This way, each token created by Tether has a fiat currency to back it up on a 1:1 basis.

The amount of tokens Tether puts into global circulation equals the amount the user deposits minus any transaction fees.

Tether makes money by investing the deposited dollars in low-risk assets. This allows them to earn money from deposits similar to how a traditional bank would. 

How to use Tether tokens

You can deposit your country's native currency into a Tether reserve in exchange for the corresponding token amount. For example, if you have $5, you can exchange it for $5 worth of USDT.

When users exchange Tether tokens for fiat money, the cryptocurrencies are destroyed or "burned" and taken out of global circulation.

You can also trade or convert your USDT back to your native currency. Tether can be stored, but its value will remain the same based on the fiat currency it’s pegged to.

Users can buy, sell, and trade USDT just like any other cryptocurrency and use them for peer-to-peer transactions across blockchains like BTC, ETH, and Tron (TRX). One of the largest use-cases of Tether is to act as a stable store of value between investments, without having to off ramp into fiat.

Are there any controversies surrounding Tether?

Tether doesn’t come without its controversies. Many argue that Tether isn’t as transparent as it should be and, in reality, doesn’t hold as much USD as it claims. If this were the case, Tether wouldn’t be able to maintain its dollar peg if individuals attempted to withdraw en-mass.

This wasn’t helped when an audit revealed that a substantial amount of reserves were in a non-transparent asset “Chinese Paper.” Tether has claimed to have significantly reduced its dependance on this asset. Additionally, iFinex Inc. and Tether Limited Inc. were under investigation by the New York Attorney General (NYAG) for allegations involving their funding. Nevertheless, both parties were able to settle: Tether isn’t allowed to conduct operations in the state of New York, which is the hub of the U.S. financial system.

Several of these investigations were conducted on the crypto exchange Bitfinex, owned by iFinex Inc. Multiple events involving the theft or loss of their clients' money have prevented them from establishing regular banking ties.

What are Tether’s advantages and disadvantages?

Despite its controversies, Tether was the world’s first stablecoin and introduced an innovative concept to the world of cryptocurrency. Let’s look at some of its benefits and drawbacks:

Benefits

1. Tether, by design, isn’t intended to fluctuate, meaning it’ll always aim to be equal in value to the U.S. dollar or other fiat currencies. (It’s important to note that Tether can be depegged from the U.S. dollar at any point.)
2. As the world’s first stablecoin and the third-largest cryptocurrency by market cap, Tether is a popular digital currency accepted by many as an exchange medium.
3. Tether is available across most crypto exchanges, making it a highly accessible cryptocurrency.
4. Users can buy and sell USDT within minutes. Transactions made between Tether wallets don’t incur any fees.

Drawbacks

1. Many users in the crypto community have reservations about Tether’s transparency and the legitimacy of the amount of backing in its reserves.
2. There are concerns that Tether’s true purpose is to maintain Bitcoin’s high price, resulting in accusations of market manipulation.

Tether vs. other stablecoins

As Tether was the world’s first stablecoin and is the third-largest cryptocurrency by market capitalization, behind only Bitcoin and Ethereum, it’s one of the most widely used cryptocurrencies in the world.

Other stablecoins, including USD Coin (USDC), Binance USD (BUSD), DAI, TrueUSD (TUSD), and TerraUSD (UST), have all found their way to the top of the crypto market. However, of all stablecoins created in 2014 (when Tether was launched), only 20% remain to this day, making Tether one of the last remaining stablecoins of its generation.

Tether is a fiat-backed stablecoin, which means its value is pegged to a fiat currency. However, other stablecoins use different forms of backing––including collateral, algorithms, and other cryptocurrencies––to maintain their value.

Tether is also a centralized stablecoin. This means that an intermediary like a bank oversees its tokens. Other stablecoins may be decentralized, which means any third parties don’t supervise them.

How to buy Tether

Tether is the world’s most popular stablecoin, which means you can buy Tether from many popular crypto exchanges like Coinbase and Kraken. To do this, you’ll first need a crypto wallet.

Crypto exchanges offer various services and incur varying transaction fees and other costs, so you’ll need to research before choosing an exchange that you think is right for you.

Once done, you can deposit your fiat currency and receive USDT or exchange your other coins and tokens, such as BTC or ETH, for USDT.

Wrapping up

To date, Tether has done what it exists to do; its value has never truly fallen from the U.S. dollar, barring a few occasions when its price went under or over USD by negligible amounts.

The world’s first stablecoin is a popular cryptocurrency widely available on most crypto exchanges and accepted as a valuable digital asset by many crypto traders. However, Tether’s controversies have raised concerns about its legitimacy and transparency.

Other cryptocurrencies offer complete transparency and value your privacy. One such company is Worldcoin. At Worldcoin, we aim to give every individual on the planet a share of our cryptocurrency for free. If you’re looking for stablecoins, we’re also airdropping free DAI to anyone who downloads the Worldcoin app. Subscribe to our blog to know more.