What is USDT?
Tether (USDT) is what’s known as a stablecoin, meaning a digital currency that attempts to offer investors price stability through a mechanism that allows it to remain pegged to the value of a specific asset. In USDT’s case, its value is pegged to that of the U.S. dollar.
Stablecoins often represent a blockchain-based version of fiat currencies or commodities and allow investors to escape the volatility the cryptocurrency market is known for. Several companies and decentralized finance (DeFi) projects offer stablecoin-related services, including lending and borrowing.
USDT is issued by a centralized entity and isn’t mineable. The entity behind the stablecoin can freeze the balance of addresses on the Ethereum network, and has done so on a number of occasions in response to law enforcement requests and international sanctions.
Who Created USDT?
USDT is the flagship stablecoin launched by Tether, a company at the forefront of cryptocurrencies pegged to the value of fiat currencies. Apart from USDT, which is tethered to the US Dollar, the company has issued other cryptocurrencies pegged to the Chinese Yuan, the Euro, and gold, in the form of Tether Gold (XAUT).
Tether was co-founded by Brock Pierce, Reeve Collins, and Craig Sellars in 2014. The project initially debuted as RealCoin in July 2014, before being rebranded as Tether later in November of the same year. The co-founders brought their extensive experience in the crypto and tech industries to launch one of the first and most successful stablecoins.
USDT, originally launched on the Bitcoin blockchain, is now supported on multiple other blockchains. These include, but are not limited to, Bitcoin's Omni and Liquid protocols, Ethereum, TRON, EOS, Algorand, Solana, OMG, Polkadot, Avalanche, and Bitcoin Cash’s Standard Ledger Protocol.
As of September 2022, Tether’s adoption has been extensive, making it the third-largest cryptocurrency by market capitalization, behind only Bitcoin (BTC) and Ethereum (ETH). Tether dominates the stablecoin market, facing its main competition from USD Coin (USDC) and BinanceUSD (BUSD).
How Does USDT Stay at $1?
Stablecoins use a variety of methods to maintain their peg to the value of the assets they represent on the blockchain. While government-issued fiat currencies remain stable through monetary policy enacted by central banks, stablecoins reach their stability through other systems.
These systems can be as simple as having collateral to back up redemptions of their token for the asset. Other systems include being overcollateralized with cryptocurrencies, using algorithms to maintain the peg, and using seigniorage and adjusting their supply as necessary.
Tether’s USDT is backed by reserves in cash and cash equivalents, allowing token holders to redeem their USDT for USD. Tether gold, for example, is backed by physical bars of gold. By allowing redemptions, USDT’s value remains at $1.
During periods of heightened market stress, USDT’s peg to the U.S. dollar has been lost, but it has ended up recovering over time.
What is USDT Used For?
USDT is a widely adopted stablecoin with a variety of use cases. The cryptocurrency is used to bridge the gap between cryptocurrency markets and the traditional financial system, with many preferring to use cryptocurrency debit cards filled up with USDT because the stablecoin is based on a blockchain.
Being blockchain-based means that USDT can be easily transferred to any address, at any time for a very low transaction fee. Thanks to DeFi protocols and exchanges’ savings programs, many cryptocurrency users also save using USDT and other stablecoins.
USDT is also used as a payment method at thousands of merchants throughout the world. Its primary use case is arguably to help minimize volatility in an investor’s portfolio, and as a safe haven during periods of extreme market volatility.