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In the cryptocurrency markets, where prices change drastically in a matter of minutes, a safe haven is needed to preserve the value of your assets. And the answer you may just be looking for is USDT—the first-ever stablecoin, issued by Tether Limited, which is closely associated with Bitfinex, a crypto exchange.
What is USDT?
USDT is classified as a stablecoin, which is a cryptocurrency designed to minimize and ultimately get disposed of price volatility by being pegged to an asset like a fiat currency, which in most cases is the US dollar. It plays a pivotal role in crypto by being a medium of exchange and a short-term store of value. Unlike cryptocurrencies such as Bitcoin or Ethereum.
Tether claims to be backed by a combination of fiat currencies, cash equivalents, and other assets like Bitcoin, which, in the bigger picture, are just a small allocation of the entire portfolio. To maintain its peg with the US dollar, USDT should hold a corresponding amount of dollars to the tokens issued.
The subject of Tether has been discussed by the crypto community many times. That’s mainly because Tether doesn’t conduct any third-party audits, making it nearly impossible to estimate how much in assets they hold.
Why use USDT?
With all this uncertainty, you may wonder if it’s a good idea to use Tether. There’s a full selection of stablecoins available after all. Despite all these concerns, Tether is the most recognized stablecoin, with much more liquidity than others, and has been in the market longer than any other. If you’re into trading, the pair is mostly denominated in USDT, so there’s no way to get around it unless you particularly want to limit yourself to a great extent.
USDT, just like USDC, is available on many platforms, including Ethereum and Solana. Depending on the network of your choice, transactions may be swift or quite slow. USDT can act as a hedging tool to prevent large drawdowns of your portfolio during times when the market goes down for a period of time. It’s also programmable money, which has its bright and dark sides, as your address can be easily blacklisted and your assets frozen.
How USDT works
USDT operates on multiple blockchain networks, each supporting smart contracts. USDT holds the 1:1 peg with the US dollar most of the time; however, deviations occur and allow market participants to get the most out of these arbitrage opportunites.
The issuance and redemption process is very straightforward. A party deposits a portion of its cash reserves with Tether Limited, and once the deposit is verified, a corresponding amount is issued to the user’s wallet address. Similarly, the redemption follows similar steps, during which USDC tokens are burned and a bank transfer is made.
In order to transfer your USDT between wallets, you should initiate the transaction in your wallet. The transaction is then broadcasted to the network and confirmed after some time. After a few blockchain confirmations, the USDT will appear in the recipient’s wallet or exchange.
USDT's timeline
Tether was launched in 2014 by Brock Pierce, Reeve Collins, and Craig Sellars. The goal was to create a digital dollar, which would exist on the blockchain. In 2015 it gained traction because of the integration with Bitfinex. In 2017 it expanded to networks like Ethereum or the Omni Layer. In 2018, both Tether and Bitfinex faced criticism and regulatory scrutiny due to not following best practices and lack of transparency. Since then there have been some efforts made to reassure users and provide transparent details, but to this day not enough progress has been made.
The risks of USDT
When comparing to USDC, USDT is a much riskier asset. Tether Limited’s transparency is unacceptable and based mostly on trust. This behavior may only encourage fraudulent activities, which can ultimately lead to the collapse of the peg.
Tether is extremely prone to regulatory risks and stricter rules as well as fines, which may follow in a not-so-distant future. Because of all the controversies surrounding the entity behind USDT, it becomes very easy to manipulate the price, causing the token to depeg by a few cents.
It’s also remarkable for a company with so few employees to generate an income of $6.2 billion in 2023, which either highlights great management and product or shady activities taking place behind closed doors.
Why USDT matters
USDT serves as a fundamental stablecoin every crypto user should be aware of. It provides access to huge liquidity and allows traders to trade and investors to store value. As the most popular stablecoin, it’s integrated into a wide range of dApps, and despite being considered shady, it’s used by the majority of cryptocurrency users. Will USDT give in to regulators or continue to operate in these murky waters in a few years from now?
