What Is Tether? | USDT – Step-by-Step Guide to USDT


Tether (USDT) offers the familiarity and stability of the dollar, but in digital form, moving through blockchain networks. As one of the first stablecoins of its kind, Tether is the #1 stablecoin by market cap.

Nonetheless, Tether’s reputation has been tarnished, to say the least. In the event of a bank run, would all Tether holders be able to redeem their US stablecoins? dollars without the USDT price crashing? The entire decentralized finance (DeFi) ecosystem depends on it.

Tying financial stability in a volatile world

Of all the activities in blockchain networks, which is the most valued? In a nutshell, deposit a cryptocurrency as collateral to obtain a loan. This is the main DeFi service available on hundreds of dApps, some of which are DAOMaker, Curve, Aaveor Composite.

Sharing the stablecoin market with DAI and USDC, USDT (grey) has been the leading provider of stability in DeFi dApps. Source: Dune Analytics

The problem is that when people use cryptocurrencies to secure their loans, they typically have to over-guarantee them multiple times. This is necessary because new cryptocurrencies, with drastically lower circulation compared to any fiat currency, are prone to wild price fluctuations. Otherwise, the loan could easily reach liquidation price.

Overcollateralization neutralizes this problem, but only to a certain extent, as demonstrated during the collapse of Terra (LUNA). As a result, investors have greater peace of mind when using stable coinspegged to fiat currency on a one-to-one basis

That means a Tether can be redeemed for $1. The result is that stablecoin-backed loans do not require excessive collateral, making DeFi dApps more accessible to a wider range of income levels. The demand for this stability was the main driver of Tether since its launch in 2014.

9d3sgtJp9VWaaP8jZtA8R3m9xMkOq342IptZ8WMRdTLxowKp43IUDJ6pSdiLiMVzdnXnxCCAs0bCxLfmYM9BTNcc Vi7aHkVjJEYmX8rWHKYVuldNrIVvzDJF78QVfjjjrTt3 yfCkRRnEnRa0XLF9Dr0xyMG UJW5iKLifAUJuqXEoU4dbsOrVCnw
Tether market cap. Source: CoinMarketCap

In the summer of 2020, when Ethereum started hosting viable lending dApps, Tether went into a parabolic demand overdrive. At one point in April 2022, it was worth $83 billion.

But this raises an important question. If Tether remained well below the $5 billion market capitalization for six years, how was it possible that a much larger amount could be redeemed so soon after?

How do USDT stablecoins work?

As noted above, Tether tokens are pegged to the value of the dollar, USD, one to one. The Tether issuance and redemption process follows five steps:

  1. In accordance with the know-your-customer (KYC) rule, an individual, merchant, or exchange issues a request for USDT by depositing fiat currency into Tether’s bank reserve account.
  2. Upon that request, Tether issues USDT tokens, representing the value of USD, which are sent to the requester’s wallet address. Minus the transfer fee, the amount is equal to the amount of USD deposited.
  3. As digital assets, users can store or transfer USDT tokens between compatible wallet addresses and blockchain networks. Investors often store USDT in their wallets as they prepare to buy cryptocurrencies, such as Bitcoin (BTC). When this happens on centralized exchanges, it is an indicator that there is a lot of whale action going on, resulting in market speculation.
  4. USDT holders can at any time redeem their Tether for USD at Tether.to, or at any mediating cryptocurrency exchange.
  5. Once Tether tokens are redeemed, they are removed from your circulating supply.

Only Tether is in charge of issuing or withdrawing its tokens from circulation, making it a centralized stablecoin that relies on the traditional banking system. But is Tether fully backed with redeemable cash reserves and other liquid assets or not? It’s a question that has been investigated by regulators and law enforcement officials in the US.

Tether (USDT) Origin

The Tether stablecoin originated from the cryptocurrency exchange space. Hong Kong-based company iFinex owns both the Bitfinex exchange and Tether. Long before the Ethereum dApp ecosystem was developed, back in 2014, forward-thinking crypto enthusiasts launched Tether.a platform for tokenizing fiat currency.

The main goal of Tether is to facilitate 24/7 money transfers that are almost instantaneous and affordable, something that is not possible with the cumbersome SWIFT system. For example, sending international payments by bank transfer must be confirmed by multiple banks, which creates additional delays and fees.

What'sNearProtocol

What is the NEAR protocol?

A step-by-step guide to a key challenger blockchain for Ethereum

With Tether, your transfer speed depends on the performance of the blockchain network itself, be it Ethereum, Tron, or Avalanche. For a long time there have been questions about the links between Bitfinex and Tether.

Tether Reputation History

Tether first came under increased scrutiny when Bitfinex used Tether (USDT) to mask $850 million that disappeared In April 2019, the New York Attorney General ordered iFinex to stop moving USDT from Tether bank accounts to Bitfinex bank accounts. The attorney general estimated that at least $700 million was depleted from the Tether pool.

Tether had to pay an $18.5 million fine to settle the investigation two years later. In October 2021, the Commodity Futures Trading Commission (CFTC) issued an order for Tether to pay a $41 million fine for his misleading claim that USDT was fully backed by US dollars.

At the congressional hearing on stablecoins in December 2021, Tether did not send any representatives. Needless to say, this was rather strange given that Tether was the largest stablecoin issuer in the world at the time. John Betts, the former CEO of Noble Bank International, which at one point held Tether funds, aroused even more suspicion when he said that:

“It’s not a stablecoin, it’s a high-risk offshore hedge fund.”

Verification of Tether USD holdings

Centralized stablecoins are usually audited quarterly by an independent accounting firm. Tether now issues a limited amount “warranty” by an accounting firm that includes the assets in its reserves. On June 30, 2022, Tether reported $66.4B in assets backing USDT. Cash and bank deposits made up 8% of the reserve, with US government bonds comprising about 44%. The rest was made up of corporate bonds, precious metals and other assets.

Sam Bankman-Fried, the CEO of FTX, the crypto exchange, the CEO of FTX, the billionaire has expressed confidence USDT will not be unstuck:

“I think the really pessimistic views on Tether are wrong… I don’t think there’s any evidence to back them up.”

Has Tether (USDT) ever taken off?

The true reserve test of a stablecoin occurs in extreme market conditions when investors flock to stablecoins to redeem their tokens for fiat currencies. This scenario played out after Terra crashed in early May 2022, wiping out $44 billion immediately and many billions later through crypto contagion.

Cryptocurrency broker Voyager Digital, lending platform Celsius, and crypto hedge fund Three Arrows Capital (3AC) were just a few of the multi-billion dollar bankruptcies. Selling pressure rocked USDT’s peg to the dollar, but only briefly.

TbdgcRhPVo2ulTan3ic1BFodVPWJ5a79KMJXZENsbIi yIDwizIeYH8EgsNTLVh BU7 OHzPafXGGRnZkJmM2y7p3w eyhVi5qRPv5UbsknrFxIfjosBH0rjj7bzPeaI7L
USDT price. Source: Kaiko

Compared to many algorithmic stablecoins, which completely crashed, USDT parity never dipped below $0.98, which was just under 2% of $1. This happened in a single day, after which the parity stabilized at the usual ~99.99%.

That May spike was worth $10 billion worth of USDT swaps, meaning that Tether successfully passed its stress test.

Series Disclaimer:

This article in the series is intended for general guidance and information purposes only for beginners involved in cryptocurrencies and DeFi. The content of this article should not be construed as legal, business, investment or tax advice. You should consult with your advisors regarding all legal, business, investment and tax advice and implications. The Defiant is not responsible for lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.