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Everything You Need to Know about Tether (USDT)

Everything You Need to Know about Tether (USDT)
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Tether has made headlines over the past few years as one of cryptocurrencies most controversial projects. The even more interesting thing with Tether is that it barely even qualifies as a cryptocurrency.

The most controversial cryptocurrency in the industry functions more like a central bank printing money than a decentralized cryptocurrency like Ethereum or Bitcoin. And that function as the central bank of cryptocurrency has led to all the controversy with the project. 

This article will explore all the controversy and tell you everything you need to know about Tether (USDT).

What is Tether (USDT)?

Tether is a cryptocurrency called a stablecoin. Stablecoins function much differently than other, more traditional cryptocurrencies like Bitcoin or Ethereum. As the name “stablecoin” implies, a stablecoin has a stable value. 

Projects have emerged that peg stablecoins to different currencies and even cryptocurrencies. In Tether’s case, it is pegged to the US Dollar. One tether is equal to one US Dollar. 

This peg is maintained because Tether claims to have one dollar for every tether currently in existence

Now, the reason Tether is not a decentralized cryptocurrency is because Tether’s dollar reserves are simply held in a normal bank account

This has led to industry insiders referring to Tether as the central bank of cryptocurrency. The centralized nature of Tether, a few conflicts of interest, and court testimony have led to so much controversy for the stablecoin.

What’s so controversial about Tether?

The controversy surrounding Tether is easily enough to write an entire book. The company has been plagued with controversy pretty much since their launch in 2015. They have picked up more heat in 2021 as well. 

Anyway, this section will break down some of the controversies surrounding Tether. 

Tether Isn’t Fully Backed 

The biggest controversy with Tether is that the company has admitted multiple times to not being a fully backed stablecoin. It happened once in 2017 during a lawsuit with the New York Attorney General when one of Tether’s lawyers testified that Tether only had $0.74 per tether token in reserves

Tether being only 74% backed was a problem. Making matters was the fact that Tether’s backing was cash and cash equivalents. 

In other words, Tether was putting loans to Bitfinex and commercial paper as a cash equivalent. Commercial paper and loans to parent companies are not particularly liquid. A bank run would cause the entire project to go underwater. 

Tether more recently released a report in 2021 stating that only 2.9% of the circulating supply is backed by cash. Nearly 70% of the supply of tokens is backed by commercial paper. 

Note: There has been a lot of speculation amongst those in the commercial paper business that Tether does not have that much commercial paper. However, no official investigation has been done into the status of Tether’s commercial paper holdings.  

To summarize, Tether is not fully backed by cash. They had originally covered this up and even lied about it. But all of this came out during a series of lawsuits with different government agencies in the United States. 

The good news is that Tether no longer claims to have full cash backing. The company admits to not having cash on hand. Of course, this is a huge problem for a stablecoin because a “bank run” would cause the company to fold. 

Holders Have No Contractual Right to Exchange

Another point of controversy surrounding Tether is that holders of the token have no contractual right to exchange the token for cash. 

This makes Tether useless if everyone were to stop accepting it. Again, Tether did not always have this stance, but the series of lawsuits have caused the company to begrudgingly admit that they do not have much cash in their vault. 

Tether To Manipulate The Price

Finally, there have been allegations that Tether is used to manipulate the price of Bitcoin. This would be rather easy to do because the company has never actually been audited. 

Basically, Tether could print all the tether tokens they want and use those to pump the price of cryptocurrency. Tether could essentially work as a money printer because everyone agrees that 1 tether = 1 USD. 

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Does this happen?

There is no way to know for sure. But there has been some interesting research done into the minting of tether combined with a price surge in Bitcoin on the cryptocurrency exchange Kraken. Of course, correlation does not equal causation, but it is worth considering as a possibility given the behavior of Tether management in the past. 

What to use Tether for?

The evidence overwhelmingly shows that Tether is not fully backed by cash. In fact, the cash backing is as low as 2.9%. 

This might lead you to think that Tether is small and rarely used in the cryptocurrency industry. 

That is wholly wrong. Tether has a lot of uses in the cryptocurrency industry. It actually has the 4th largest market cap of any cryptocurrency with a market cap of approximately $70 billion USD. Only Bitcoin ($1.2 trillion), Ethereum ($510 billion), and Binance Coin ($90 billion) have a higher market cap. 

A very impressive size for a stablecoin that is not fully backed. 

Anyway, some uses for Tether include the following:

  • As a dollar replacement for exchanges that do not have access to US Dollars.
    • This is an extremely common use for Tether on exchanges based in non-western countries.
  • A way to store gains without using a centralized exchange (ie. making yourself known).
  • A dollar replacement on DeFi apps.
    • This is one of the larger uses of Tether. Tether has been losing market share to competitors, though.

Those are just some of the uses of Tether. You should think of Tether as a replacement for fiat currency on the blockchain because there is no way to integrate the banking system into the blockchain

Is holding Tether safe?

Holding tether comes with risk. Every cryptocurrency has risk. Every asset has risk to it, even holding US Dollars is risky because of the runaway inflation that has occurred over the past two years.

With that in mind, tether is one of the riskier holds you can find in cryptocurrency. It has all the downsides of holding regular fiat currency (inflation) with none of the upside of holding fiat currency (always being able to spend it).

It is the worst of both worlds. 

Are we saying that you should never use Tether?

No, tether is oftentimes the only option if you want to use certain exchanges. Many yield farms will even pay out better rates for tether liquidity pools to account for the riskiness of holding it

What you probably should not do is hold a large amount of Tether in your cryptocurrency wallet. That exposes you to a lot of inflation and the risk that the stablecoin will lose its peg. Our recommendation is to only use tether when necessary, do not hold it. Inflation will eat away your money.

Closing Thoughts

That sums it up for everything you need to know about Tether. The cryptocurrency is one of the more controversial ones around because it appears to be some sort of scam or fraud. If it is not one, then the team has not done a particularly good job at reassuring the public about the liquidity of the company. 

Despite all these problems, Tether still remains the largest stablecoin by market cap. Tether is not backed 1:1 nor is the company legally obligated to redeem tokens for cash, but that has not stopped people from all agreeing that the price of the stablecoin should equal $1. 

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