Tether Use Case

Stablecoins have been touted as the antidote to the volatility of digital assets like Bitcoin. Their most famous stablecoin, Tether, has been in and out of the spotlight for the past few years and has achieved a place in the world’s top cryptocurrencies. However, not all the news has been good. Some have claimed Tether to be misleading users about the backing of its stablecoin.

Still, Tether has managed to maintain its position as a leading cryptocurrency and the main method of trading Bitcoin to fiat currency. What has made Tether the major player it is today?

What is Tether (USDT) and What is Tether’s Use Case?

Tether (USDT) is a blockchain cryptocurrency that is backed by the US Dollar. It claims to have $1 in reserve for every one of its Tether tokens in circulation. In theory, for every $1 a user deposits into Tether’s account, Tether mints 1 USDT in return. Originally named Realcoin, Tether was designed by cryptocurrency exchange Bitfinex in 2014 to create a useful connection between fiat currencies (like the US dollar or the Euro) and cryptocurrencies while offering the speed, transparency and low cost of standard cryptocurrencies.

Tether brings liquidity and stability to the cryptocurrency market as well as easy access for the average user to the broader cryptocurrency market. It is currently the most traded cryptocurrency as a result, with daily trading volume surpassing Bitcoin in 2019. It has become an easy way to move US dollars without the transaction fees and time that are involved within traditional financial institutions. As of November 2021, there are 74 billion tokens in circulation according to CoinGecko.

Tether is available on several different blockchain networks. Originally based on the Omni Layer protocol on Bitcoin, this has been expanded and now Tether is available on networks such as Ethereum, Bitcoin and Tron. It has become an important asset for crypto exchanges online as a good medium of exchange between crypto markets and traditional financial markets. Tether is also popular as a secure way to hold funds without the inherent volatility of most digital currencies.

What are Stablecoins?

Since the creation of cryptocurrencies, one of the main barriers to mainstream adoption has been price volatility. Banks and merchants have been hesitant to use cryptocurrencies in everyday e-commerce as their prices can rise or fall hugely in a short amount of time.

The spikes and crashes have been seen as a major risk to investors and financial institutions looking for long term investments. What could be equivalent to $20,000 held in Bitcoin one day could change very dramatically within 24 hours if the market drops.

Stablecoins have been designed to combat this issue and connect the world of cryptocurrency to the traditional financial world. The concept behind stablecoins is that if you have a cryptocurrency that is tied or “pegged” to the price of a more traditional stable asset (such as gold) or fiat currency, this will prevent the major price swings currently seen.

Tether Use Case: Reduce Market Volatility

Tether is designed to be pegged to the US Dollar. Essentially 1 USDT is equivalent to 1 US Dollar. Unlike other cryptocurrencies, tokens are not “mined”. Instead, for every dollar deposited in the reserves held by its parent company, Tether Limited, 1 USDT is minted in return. This keeps the value of Tether tokens stable as it is backed by the reserves held by Tether Limited.

Tether retains many of the benefits of the cryptocurrency ecosystem, such as efficiency, speed, and security, while prices remain steady in conjunction with its backing asset. It also benefits from having vastly lower transaction fees than traditional finance.

This enables investors to have more security with their virtual currencies. Say that an investor has a large amount of Bitcoin tokens and is worried the price is going to drop hugely. They can easily and quickly trade their tokens for Tether and hold the value of their investment.

Doing this by cashing out into US Dollars instead can take much longer and be costly to the investor. Tether is seen as a useful cryptocurrency to weather crashes in the crypto market. Many exchanges have adopted Tether as a way to hold their own virtual currencies with less risk than other cryptos.

Tether Use Case: Crypto Trading

Tether is used extensively for trading in digital currency exchanges partly due to the lower risk but also for quick trading. Investors can hold their funds in Tether tokens and use them to trade with other cryptocurrencies.

This means that investors can move fast when they see opportunities or growth in a cryptocurrency and invest without the delay of trading US Dollars that could take days. This can create huge profits for savvy investors. Investors can retain the value of their funds using Tether when needed and still have easy and quick access into the wider crypto market.

Tether has another use in trading online. Tether is designed as a bridge between fiat currency and cryptocurrencies. Some exchanges are purely digital and, as a result, are incompatible with fiat currency. Tether provides a stable entry point to these exchanges. And although many major exchanges have integrated fiat currency, there has been a huge growth in a type of digital exchange known as Decentralized Exchanges or DEXs.

These are exchanges that exist on-chain and can only work with assets on-chain.  They essentially cut out the intermediator in digital exchanges. So transactions are made peep-to-peer rather than through the exchange provider. This cuts down on fees and regulations even further. Tether can provide collateral and stability to investors on these exchanges.

Tether Use Case: Fast, Efficient Transactions

Tether retains the blockchain technology that makes cryptocurrency and decentralized finance so attractive. Transactions are carried out efficiently and validated without the use of financial institutions. This means a major advantage of holding funds in Tether rather than fiat currency is the speed of transactions. Traditional financial institutions often function within banking hours and take time to verify transactions between accounts and others banks. This can lead to transactions taking several days to clear.

However, with Tether, transactions can be conducted on weekends or evenings across the globe and recipients will get their funds quickly without a long waiting time and without the volatility of other cryptocurrencies. If someone in America wants to transfer $5,000 to an account in Asia on a weekend, this has to be converted and cleared with different banking institutions along the way. This can lead to high transaction costs, days of delay and value lost in conversion. With Tether USDT this can be transferred within an hour, retaining its value and with minimal transaction costs.

Is There a Lawsuit Against Tether?

Between 2017 and 2018 the amount of Tether minted grew hugely, from 10 million to close to 3 billion. Alongside this, Tether accounted for 80% of Bitcoin’s trading volume compared to just 10% before. Thus raised concerns about the validity of Tether’s dollar reserves, with many speculating that Tether didn’t have enough dollars to back up each USDT coin, leaving the currency vulnerable.

In 2018, Tether Limited failed to undergo an audit on its reserves, instead cutting connections with the firm responsible. By late 2018 US federal prosecutors were looking into these claims.

2019 led to further controversy as the New York Attorney General sued Bitfinex, claiming it was using Tether’s reserves to cover up losses of over $850 million. This $1 trillion lawsuit was settled in February 2021 for $18.5 million, with U.S District Judge Katherine Polk Failla ruling in Tether’s favour.

The Future of Tether

As the world’s oldest and largest stablecoin, Tether has proven its usefulness time and time again. Providing an easy access point into the broader cryptocurrency market for investors and financial institutions, Tether has created a viable alternative to the volatility of most cryptocurrencies. Being backed by a currency accepted and recognized worldwide brings stability and familiarity.

It can be seen as a bridge between the US dollar and the world of decentralized finance. It is the most used medium of exchange between fiat currencies and Bitcoin as well as a popular way to hold online funds. Tether claims to have all the “benefits of open blockchain technology and traditional currency”. It combines the low-risk aspect of a fiat currency with the beneficial features of a cryptocurrency, speed, efficiency, security and low costs.

However, its future will depend on its ability to weather the controversies surrounding it and maintain public confidence. A drop in confidence in Tether could lead to token holders trying to redeem their tokens en masse, leading to huge insolvency problems for Tether and the exchanges using it to store funds.