What is Tether – is it a Ticking Time Bomb for Bitcoin?

Tether (USDT) is a stablecoin pegged to a fiat Dollar, meaning it’s unaffected by wild price swings of cryptocurrencies. The main reason people use Tether is for liquidity and the ability to easily get in and out of crypto trades.

In the last 24 hours Tether has reported over $90 billion in trading volume, making it the most liquid cryptocurrency, even more liquid than Bitcoin. Not only is Tether the largest stablecoin, but it’s also the fifth largest cryptocurrency by market cap.

The idea for a stablecoin materialized into Mastercoin, which aimed to use a new “second layer” on the Bitcoin blockchain. In July 2014, a few team members from the Mastercoin project established their own startup called Realcoin, using the same second layer technology renamed as the “Omni Layer Protocol”.

Later that year, Realcoin was renamed to Tether, referencing its ties to fiat currency. By definition, a tether is a line tied to an object to restrict its range of movement. This connection is represented digitally, meaning each Tether coin is equivalent to one US dollar or alternant reserve currency essentially. Making it a “digital dollar.”

Bitfinex, which is a subsidiary of Tether, claims: “Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities. Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether
at 1 USD.”

How does Tether work?

Besides being a stablecoin, Tether is a unique cryptocurrency that exists on different blockchains. Currently there is a Tether token on the Omni Bitcoin platform, Ethereum, EOS and on Tron. The difference between the four coins has to do with the properties inherent to the blockchain hosting Tether. For instance, for maximum safety some investors may prefer the Bitcoin Omni version of Tether. Other investors might prefer the ERC20 Tether token as it can be used in DeFi to earn a passive income.

With the OMNI layer OG version which is based on Bitcoin. Tether’s technology consists of a 3-layer stack: the Bitcoin blockchain, the Omni layer protocol, and Tether Limited. The Bitcoin blockchain is the bottom layer that serves as a transactional ledger and runs the consensus algorithm.

The second layer, Omni, is used to create and destroy digital Tether coins, as well as track and report the tokens in circulation. This layer also enables users to send and store these tokens securely and anonymously.

The third layer, Tether Limited, is the business entity that manages fiat deposits and withdrawals from the Tether reserve, along with management of Tether’s web wallet and compliance logistics. When a user deposits fiat currency into Tether Limited’s reserve, the business issues the corresponding amount of digital dollar tokens to the user that can then be sent, stored or exchanged. If a user deposits $100 USD, they will receive 100 tether tokens.

These Tether coins are destroyed and removed from circulation when the user redeems the tokens for fiat currency. Bitcoin’s secure blockchain and it’s network effect helped Tether gain popularity over other stablecoins operating on different blockchains.

USDT has proven to be the most used stablecoin in the ecosystem, with a sizable lead in volume compared to USDC. Tether has been subjected to additional controversy within, and outside, the crypto space, from allegations of price manipulation, security and commercial paper linked to Chinese real estate.

Tether was also hacked in November 2017, that resulted in the theft of $31 million USDT, and then implemented a hard fork making the stolen funds untraceable. Tether and Bitfinex, recently settled a class-action suit where  it was claimed they used their USDT reserves to manipulate the price of Bitcoin during the bull run of December 2017.

The fact that their reserves have never been officially audited, only adds fuel to the fire, and, in fact, in March 2019 the company changed their long-standing statement that all USDT is backed by the same amount of cash to say that all USDT are indeed 100% backed, but as we stated earlier “by cash and cash equivalents.

Is Tether is safe?

The truth is that Tether probably won’t blow up and go out of business tomorrow. It’s been around for more than six years and will probably last well into the future.