What is USDT? Understanding the Tether stablecoin

USDT, also known as Tether, is a stablecoin that's pegged to the value of the US dollar. It operates on multiple blockchain networks, including Ethereum (ETH), Tron (TRX), Algorand (ALGO), Solana (SOL), and Bitcoin's Omni Layer Protocol. The asset is issued by the company Tether. As of January 2024, USDT continues to hold its position as the third-largest cryptocurrency by market cap, trailing only Bitcoin and Ethereum.

USDT can be minted or destroyed by Tether Limited, its issuing entity. Crucially, it can be rapidly and affordably sent to individuals across various blockchain networks. Tether Limited maintains the continuous backing of USDT by allocating the equivalent USD amount to its reserves each time new tokens are generated, making sure of full collateralization with cash and equivalents.

What are stablecoins?

Stablecoins are digital assets designed to maintain consistent purchasing power, which makes them a useful tool for both crypto traders and those making international payments. USDT is a centralized, fiat-collateralized stablecoin that aims to bring stability to the often volatile cryptocurrency market.

In the case of USDT, each token is intended to maintain a value equivalent to one US dollar. This pegging mechanism helps mitigate the price volatility commonly associated with other cryptocurrencies like Bitcoin or Ethereum. Consequently, stablecoins like USDT provide users with a reliable medium of exchange and a store of value in the digital realm.

What is USDT backed by?

Initially, Tether claimed that each USDT was backed 1 to 1 reserve by cash reserves held in a bank account. However, after various legal disputes, the company had to adjust its claims to include non-cash assets. USDT was launched as Realcoin on Bitcoin's Omni Layer Protocol in 2014 and was quickly rebranded as Tether, with the aim of providing stability to the crypto market.

In January 2024, Cantor Fitzgerald's CEO, Howard Lutnick, attested to the legitimacy of Tether, commenting: "They have the money they say they have." Lutnick further explained that Tether had reported assets totaling $86 billion in June 2023, effectively backing $83 billion of its USDT tokens.

What's the adoption and growth of USDT?

Since its launch, stablecoins have seen significant growth, with USDT remaining dominant in terms of market cap. In addition to its growing adoption in the crypto market, USDT has also seen new use cases emerge, including cross-border payments and adoption in decentralized finance.

2023 was a major year for USDT. Tether significantly increased USDT token issuance to reach a total of 22.75 billion, minted on the Tron blockchain. Meanwhile, in Q3 2023, USDT captured a 2.6% gain in stablecoin market share, even as the token's market cap remained flat.

USDT's major adoption in selected international markets has underlined the advantages brought by fiat-backed cryptocurrencies. In Brazil, 80% of all cryptocurrency transactions involve USDT, according to the country's revenue service agency. This makes USDT Brazil's most traded digital asset in 2023.

The momentum is anticipated to continue in 2024, with Forbes declaring it as the breakout year for stablecoins. The publication reported, "With even Tether taking measures to improve the transparency around reporting reserves, the AICPA issuing frameworks and practice guides around reporting connected to stablecoins, and Circle continuing to benefit from higher US interest rates, the sector is slowly becoming more accepted among mainstream financial, legal, and accounting circles."

What are the benefits of using USDT?

One of the key benefits of using USDT is its stability, which is maintained by being pegged to the value of the US dollar. This makes it an attractive option for those looking to trade in a consistently priced asset, especially in the often volatile crypto market. USDT's centralized, fiat-collateralized structure also makes it a more secure option than other stablecoins that rely on algorithmic mechanisms to maintain their stability.

Many crypto advocates would point to specific advantages of USDT over traditional banking methods. This includes faster transaction speeds, particularly when using the token for international transfers. Many also consider USDT to bring lower fees when compared to traditional methods.

What are the controversies around USDT?

Despite its popularity and dominance in the stablecoin market, USDT hasn't been without controversy. The company's initial claims of 1 to 1 reserve backing by cash reserves have been called into question, leading to various legal disputes. Additionally, USDT's centralized nature has been criticized by some in the crypto community who prefer decentralized solutions.

Who founded Tether?

Tether's inception in 2014 can be traced back to the collaboration of early crypto enthusiasts and Bitcoin advocates within the Mastercoin protocol. Co-founded by Brock Pierce, Craig Sellars, and Reeve Collins, the trio played pivotal roles in both Mastercoin Foundation and Tether's establishment.

Originating from the Mastercoin Foundation, Tether's precursor, "Realcoin," emerged in July 2014 and issued its first tokens in October of the same year. Renamed Tether in November 2014, it entered the private beta phase with three currencies: USTether (for USD), EuroTether (for EUR), and YenTether (for JPY).

Notably, Pierce has contributed significantly to crypto and entertainment projects, including Blockchain Capital and Block.one, while Collins and Sellars have successful entrepreneurial backgrounds and affiliations with various organizations such as Omni Foundation and Bitfinex.

What's the future of USDT?

Despite its controversies, USDT's dominance and growth in the stablecoin market are likely to continue as new use cases emerge. The crypto's stability, coupled with its widespread adoption, makes it an attractive option for those in the crypto industry and those making international payments.

Meanwhile, USDT could grow in mainstream adoption, becoming an option for everyday financial transactions including paying utility bills and online shopping. Such adoption would require new partnerships between Tether and financial institutions, helped by the coin's stability.

Additionally, as institutional inflows to crypto were strong in late 2023, USDT could benefit from continued interest among this user base. This opportunity is helped by movements towards the arrival of a Bitcoin and Ethereum Spot ETF. In November 2023, asset management firm BlackRock officially applied for an Ethereum spot ETF. The move followed the company's application for a Bitcoin ETF in June 2023.

The final word

In conclusion, USDT is a stablecoin that's pegged to the value of the US dollar and operates on multiple blockchain networks. Its centralized, fiat-collateralized structure makes it a secure option for those looking to trade in a consistently priced asset, especially in the volatile crypto market.

Despite its controversies, USDT's growth and popularity are likely to continue, making it an important player in the stablecoin market. Whether you're a crypto trader, or making international payments, it's important to understand what USDT is and how it can benefit you.