Following the overly successful launch of Bitcoin in 2008, blockchain’s innovation and adaptation has proceeded exponentially, evidenced by over 1,600 cryptocurrencies released since then. Bitcoin was created as a digital, decentralized currency based on an electrotonic payment system that incorporates cryptographic proof instead of trust during a transaction involving two parties thereby eliminating the need of a trusted third party. But one predominant shortfall of Bitcoin is its price instability to the US Dollar leading to a highly volatile market that has the effect of either causing enormous loses or substantial profits to cryptocurrency.
To solve the problem of Bitcoin’s price volatility, a group of developers met in 2014 and launched Tether. Tether was therefore regarded as the first ‘stablecoin’ with each token issued backed by one US dollar.
This guide will take you through the basics of Tether and everything you need to know.
• Tether is an asset-pegged cryptocurrency developed by Tether Limited to mirror the US Dollar and can be used as a replacement for the dollar on various exchanges
• Tether aims to provide a simple interface for cryptocurrency enthusiasts to access a blockchain-based cryptocurrency having a 1-to-1 ratio with the US dollar.
• With lack of a cryptocurrency bank, Tether acts as a “crypto bank” thereby solving the difficulties crypto startups experience in maintaining a real-world banking relationship.
• Since its launch in 2014, Tether has grown rapidly with a current trading volume of around $3 billion.
• Despite the recent allegations of lack of transparency, Tether has a massive potential of completely replacing the dollar and developing to become a significant payment network in the crypto space.
What is Tether?
Tether is a cryptocurrency which was created as a proxy for the US Dollar meaning that its value equals one dollar and therefore can be used as a digital dollar. Additionally, it cannot fluctuate to the dollar like other cryptocurrencies making it a suitable cryptocurrency to convert traditional currencies to digital currencies, in turn, anchoring its value to the price of national currencies like the US dollar, the Euro and the Yen. The fact that every tether is always backed 1-to-1, by the traditional currency held in their reserves(1USDT=1USD) makes it listed by most popular cryptocurrency exchanges as a replacement to the dollar.
How is Tether Different from Bitcoin or other Cryptocurrencies?
Tether was primarily created to act as a bridge between cryptocurrencies such as Bitcoin and fiat currency by replacing the dollar in the cryptocurrency space. Unlike Bitcoin, Tether tokens are backed by fiat currency (US Dollar) reserves held by Tether Limited. Bitcoin was designed to offer an alternative to traditional centralized currencies by operating on a peer-to-peer level without the need of a third party. On the other hand, Tether was designed as a replacement to the dollar to enable the natural conversion of fiat currencies to a digital asset.
If you want to understand how stablecoins work, check out our guide here.
How Does Tether Work?
A) Tether Blockchain Technology
The blockchain technology has a feature that makes it possible to be used as a means of representing another asset. This can be achieved by effecting a program that makes it convertible to another asset at a specific ratio let’s say one to one ratio. The code basically adds another layer on the blockchain by using various approaches such as the “colored coins” or the Omni Layer. Tether achieves the 1USDT=1USD by employing the Omni Layer protocol approach. The Omni Layer protocol is a software constituting an open source code that adds a layer on a blockchain warranting the release and conversation of a cryptocurrency token with an asset which can either be Bitcoin or dollar.
B) Tether’s Funds Flowing Process
The process of USDT flow involves some different steps that occur subsequently. First, users are required to deposit funds into their bank accounts. Tether limited enables each individual to create their own personal accounts and credited with the same amount of funds they have deposited. After their accounts have been credited, the peer-to-peer transactions commence allowing users to send and receive the currency. Users can then redeem their substantial funds with Tether tokens. The final step of the fund flowing process is the destruction of the issued tokens with the fiat tokens being sent back to the user’s individual bank accounts.
Users have the option of transacting Tethers through cryptocurrency exchanges with the most notable exchange being Bitfinex which has partnered with Tether Limited to ensure the circulation of Tether in the vast cryptocurrency market.
C) Proof of Reserves
Proof of Reserves is the primary algorithm in which the workability of Tether is achieved as they are the ideal protocol employed by the network. Proof of Reserves along with the Proof of Solvency processes are the key indicators that USDT has a backing reserve with the same exchange ratio to the US Dollar. Proof of Reserves is also employed in coming up with balance sheets and profit and loss accounts that are employed by auditors.
In essence, the functioning of Tether relies on three processes: Omni Layer Protocol, Funds Flowing Process and the Proof of Reserves. These processes ensure the transparency, integrity, and reliability of the asset-pegged platform. Security of the platform has also been enhanced thanks to effective security protocols and algorithms, blockchain technology, and Omni Layer Protocol which makes it almost impossible for hackers to steal funds either in the reserves or in circulation. Several banks such as Cathay United Bank and Hwatai Bank also contributes to the functioning of the platform.
Where Can You Buy Tether?
The fact that Tether, being an asset-pegged cryptocurrency can act as a replacement for the dollar in the cryptocurrency space fuels its demand to exceedingly unexpected levels. In 2017 for instance, Tether’s trading volume had exceeded its market capitalization value clearly pointing out to its high demand. Tether is also very stable as the prices are influenced by prevailing market conditions such as demand and supply making it ideal for investments. Below are some of the platforms where you can buy and trade Tether.
• Cryptocurrency Exchanges
Cryptocurrency exchanges facilitate the buying and selling of cryptocurrencies with others allowing the exchange of cryptocurrencies with fiat currencies. Therefore, there are two main types of cryptocurrencies exchanges, i.e. cryptocurrency to cryptocurrency(C2C) exchanges and fiat to cryptocurrency exchanges. Cryptocurrency exchanges operate in different ways and charge different transaction fees. There are a number of cryptocurrency exchanges that facilitate the buying and trading of Tether. Some of these exchanges include Bitfinex, Kraken, Poloniex, etc. Users should go for exchanges with strict verification criterion, good public reputation along with reasonable transaction fees.
• Cryptocurrency Brokerage Firms
Cryptocurrency brokerage firms operate similarly to exchange platforms however the main difference is that brokerage firms are more secure and charge their own transaction fees independent of prevailing market economic conditions. Nevertheless, cryptocurrency traders should be careful not to be exploited by these firms by charging extra transactions fees. The major brokerage firms charging reasonable fees where you can buy and trade Tether are Plus500 and eToro.
• Cryptocurrency Wallets
Cryptocurrency wallets enable users to privately store their currencies way from cryptocurrency exchanges while still having access to the services of peer-to-peer networking. Therefore, every cryptocurrency trader should have wallets to not only trade cryptocurrencies but also to ensure the security of their hard-earned virtual coins. Tether limited recommends Tether.to wallet which is a secure, reliable, and transparent platform where users can securely store their Tether coins. Tether.to wallet enables users to store cryptocurrency in either USD or USDT and also allows users to transact in any other kind of fiat currency. A Transaction on the Tether.to the wallet is speedy, secure and entirely free of charge.
How to Mine Tether
The other way of obtaining Tether other than buying is mining which involves verifying and evaluating transactions which add blocks to the blockchain (public ledger) with the miners being awarded new coins. Mining is the widely used method of obtaining Tethers. However, it is not established as compared to Bitcoins as it uses proof-of-reserves instead of proof-of-work consensus mechanism for mining.
How to Spend or Use Tether
As a cryptocurrency enthusiast, you are probably worrying about how to spend USDT after obtaining it. There are various ways in which you can use Tether. First, you can exchange it for cryptocurrencies such Bitcoin, Litecoin and Ethereum on a number of cryptocurrency exchanges. Secondly, Tether limited has partnered with various vendors to allow Tether to be used as a means of payment. Away from these, you can cheaply exchange Tether with other fiat currencies such as the Euro, British Pound, Yen, etc. without necessarily having dollars. Therefore, just like any cryptocurrency, Tether has a vast number of uses making it a popular cryptocurrency any trader can own.
Advantages of Tether
Tether has a number of advantages evidenced by its rapid growth from a daily trading volume of $40 million in 2014 to a current trading volume of close to $3 billion. Some of the significant advantages of Tether include:
Tether limited ensures the security of the platform via some means making Tether a transparent and reliable cryptocurrency to execute transactions in the cryptocurrency space. The protocols and algorithms discussed above employed by the network protects it from malicious and cyber-attacks thereby ensuring security. Additionally, there haven’t been any reported hacking of Tether hacking suggesting that it’s a secure platform.
• Regulated Activity
To ensure that the platform operates according to the set guidelines with no fraudulent activities, Tether limited invites an independent external auditor to audit its financial statements and bank reserves. This is a crucial indicator of transparency and makes the platform free of any fraudulent activity. Users are therefore assured of the reliability of the currency and have developed a sense of trust in the network.
Having a dollar reserve along with being associated with stable fiat currencies such as EUR, Tether is highly stable as compared to other cryptocurrencies thereby possesses minimum investment risks associated with instability and fluctuations. Traders, therefore, don’t need to worry about price fluctuations which can be costly leading to substantial losses of investments.
Tether has an established network infrastructure which integrates the blockchain technology with smart contracts ensuring the highest level of transparency and integrity. Its network framework is also not overly complicated making it ideal for beginners.
Tether achieves the highest level of transparency in the cryptocurrency world since they are backed by the U.S dollar. A trader can get the real amount coins for the dollar amount they own thereby eliminating any doubts of price transparency.
What Are Some of The Risk Of Tether?
There are always some risks associated with trading cryptocurrencies including market volatility and cyber-attacks. Tether like any other cryptocurrency has some risks discussed below.
• Market Fluctuations– Attributed to the demand and supply, the dollar’s value keeps fluctuating subsequently leading to Tether fluctuations. There are some risks associated with market fluctuations in the cryptocurrency. One such risk is the potential of creating the liquidity trap in the market which leads to enormous losses.
• Transaction Irreversibility– One immense limitation of Tether is that transactions cannot be reversed. In any financial system, transaction errors such wrong receiver addresses or wrong amount among others are very common, and therefore a system to rectify such errors should be in place. Such errors can lead to enormous irreversible losses.
• Loss of Coins– Tether is stored in Tether.to wallet and just like any other cryptocurrency wallet, the loss of a private key or public key through illegal activities such as phishing and hacking leads to a total unrecoverable loss of one’s coins.
What the Future Holds: Can Tether Develop to Be a Major Payment Network?
Tether has a bright future and can indeed grow to become a significant payment Network in the cryptocurrency space thanks to some features that make it essential in the crypto space. First of all, the fact that Tether replaces the dollar and provides real value in terms of dollars (1USDT:1USD) puts it at a more significant position to completely replace the dollar in the cryptocurrency space. Secondly, the integration of the blockchain technology with Omni Layer protocol to achieve the highest level of security develops a sense of trust in investors making Tether preferable than other cryptocurrencies. Additionally, the ability of Tether to be used efficiently on different kind of platforms for different purposes such as storage in Tether.to wallet which charges no transaction fees, selling and paying for various reasons makes Tether an all-around cryptocurrency required by any avid cryptocurrency trader.
To conclude, despite the recently arising allegations of the platform’s lack of transparency, Tether has a considerable potential to continually develop and become a central payment network by totally replacing the dollar in the crypto world.