What is Tether and How Does it Work?

Last Modified:7 Mar 2021 19:53:58
What is Tether and How Does it Work?

If you are familiar with the digital currency market, you have probably heard of “Tether”.

In this article, we start with the history of Tether and then we try to answer all the questions that may have arisen for you about how it works and its further details. In the end, we will discuss the problems and controversies created by this digital currency.

The History

Tether started operating in 2010 when technology experts believed that Blockchain had the potential to make different digital currencies work on its platform.

Its introduction to the market started in 2015. At that time, two new tokens were introduced; USDT and EURT, meaning United States Dollar Tether and Euro Tether. Trading transactions were done through these two tokens.

A startup called Realcoin and Bitfinex, a digital currency exchange in Hong Kong, started working on the idea to use Blockchain as a platform for fiat currencies (such as dollar, euro, and yen).

Eventually, both projects combined the results of their works to create Tether. Tether was launched in 2014 under the name Realcoin on the Bitcoin Blockchain. iFinex company is the owner of all organizations of this crypto and was first presented on Bitfinex exchange.

Today, Tether company allows its users to transfer and store this cryptocurrency on major digital currency exchanges around the world. Later, this company introduced another type of stablecoin called “USDT Gold” which was backed by gold.

Tether was first named USTether and then USDT. Later, in addition to Bitcoin Blockchain, it was developed on the Blockchain of other cryptocurrencies such as Ethereum, EOS, Tron, Algorand, SLP, and Omega.

Who Are the Founders?

Tether, formerly known as “Realcoin” was created in 2014 by Brock Pierce, Reeve Collins, and Craig Sellars.

Brock Pierce, a well-known entrepreneur, is the founder of prominent projects in the field of cryptography, gaming, and entertainment industry.

In 2013, he founded a company called Blockchain Capital. By 2017, it raised more than $80 million. In 2014, Pierce became the director of Bitcoin Foundation, a non-profit organization established to help improve and promote Bitcoin.

During the first two years of this project, Reeve Collins was the CEO of the company. Before this project, he had founded successful companies such as Traffic Marketplace, the online advertising network, and RedLever entertainment studio. Since 2020, he has also been the head of “SmartMedia Technologies” advertising company.  

In addition to working on this stablecoin project, Craig Sellars has been a member of Omni Foundation for more than 6 years. The comprehensive protocol of this project allows users to create and trade smart-based assets and currencies on the Bitcoin Blockchain.

Sellars also works for several other cryptocurrency companies and organizations, including Bitfinex, Factom, Synereo, and MaidSafe Foundation.

What Is Stablecoin?

Stablecoins are cryptocurrencies whose value depends on other assets such as the dollar.

Stablecoins are the same as digital currencies, but their prices are fixed. The purpose of creating stablecoins was to create a stable alternative to the U.S. dollar and counteract the inherent fluctuations associated with cryptocurrencies.

These types of stablecoins, specially Tether, serve as an alternative to dollar in many exchanges. According to their website, Tether converts cash to digital currency or raises the value of the coins to the level of national currencies such as the U.S. dollar, euro, and yen.

Tether, like other cryptocurrencies, uses Blockchain; and unlike other cryptocurrencies (according to the its official website), it is backed by the U.S. dollar (as a precaution, the U.S. dollars are kept in reserve).

This means that each Tether must be backed by U.S. dollars on a 1:1 ratio, (this rate has become a big selling point and a potential problem in the decentralized and unlimited environment of cryptocurrencies).

Ideally, this means that in all exchanges, the transactions of this crypto will be equal to one dollar and can be used instead of dollars.

However, in practice, its price fluctuates to some extent. Investors use these cryptocurrencies as a way to escape bearish markets without having to convert coins into fiat currencies.

In most stablecoin scenarios, the value of the token is pegged to a fiat currency. In the case of Tether, the USDT divides its value by the U.S. dollar. In fact, 1 USDT is traded exactly 1 U.S. dollar on exchanges.

What Keeps Stablecoins Prices Fixed?

From a traditional point of view, stablecoins are backed by a “reserve” asset. Unlike other digital currencies whose prices are determined by market supply and demand, stablecoins are looking for a price that does not fluctuate and is fixed.

This reserve is related to the number of stablecoins in circulation, which can include collateral for any asset whose total price can be agreed upon.

In other words, if there are 500,000 stablecoins (backed by dollar) in circulation, at least $500,000 should be set aside. For example, this support can include physical currencies, other cryptocurrencies, or assets such as gold and real estate.

The Concept

Tether is a dollar-based digital currency with a fixed value of $1.

It is one of the dozens of stablecoins in the digital currency market. It is a cryptocurrency that is supposed to be very close or equal to a common fiat currency, (such as the U.S. dollar).

The main idea of creating this coin was to create a stable currency that could be used as a digital dollar. Tether is a currency that provides liquidity to exchanges. So traders can use it to avoid market fluctuations. There are currently two types of this cryptocurrency for dollar and euro.

How Does It Work?

Tether tokens, unlike other digital currencies like Bitcoin and Ethereum, are generated by iFinex company in a centralized manner.

Therefore, simply put, when a person intends to purchase a large amount of Tether, iFinex adds this amount to its cash reserve and generates the needed tokens for the customer.

The same goes for high-volume Tether sales. This means that when a person wants to convert his/her Tether into dollars, he/she can sell it to its company. In this way, it can be removed or taken out of circulation, or sold to other customers by the company.

Currently, the daily trading of Tether by ordinary users, similar to other cryptocurrencies, is widely done on digital exchanges and intermediary companies.

Types

OMNI Tether: It has been offered on various Blockchains. It was first launched on the OMNI Blockchain network, which is actually the Bitcoin Blockchain. This idea had many problems.

Practically, all the problems that appeared on the Bitcoin network also existed on the Tether network.

High fees, network disruptions due to hacker attacks, network congestion, and extremely slow transactions were among the many problems of the OMNI network.

Ethereum Tether (ERC-20): After arising problems on the OMNI network, developers reached an agreement to launch this token on the Ethereum Blockchain network.

This was very well received and it quickly made this digital currency even more popular. Higher transaction speed and lower fees are among the differences between the OMNI network and the Ethereum network.

The algorithm on which Ethereum wallet addresses are implemented is called ERC-20. Therefore, Tethers that run on the Ethereum network are also called ERC-20 Tethers.

TRON Tether (TRC-20): The emergence of DEFI projects on the Ethereum platform and widespread acceptance of these projects in 2020 caused the Ethereum network to become very crowded.

This led to an increase in Tether fees in the Ethereum projects. Accordingly, the developers prepared the TRON platform for the Tether development. The TRON network algorithm is also called TRC-20. TRON coin was once a derivative of Ethereum, but now has its own Blockchain and unique features.

The advantages of Tether activity on the TRON network include higher network speed and lower fees than Ethereum as well as benefiting from features such as airdrop and TRC-20 tokens staking reward.

This cryptocurrency is also offered on various other Blockchain networks such as EOS and BSC (Binance Smart Chain), which means it is not supported by many exchanges due to not being well received by users.

What Makes This Token Valuable?

What makes this cryptocurrency unique is its value, which is very close to or equal to a dollar. According to Tether, whenever a new token is introduced to the market, they save the exact equivalent of the produced Tether in dollars.

In this way, all Tethers are backed by cash. The fact that cryptocurrency markets are said to have high price fluctuations means that all cryptocurrencies can increase or decrease in price by 10 or 20 percent per day, but this token is safe in this regard.

It is interesting to know that in recent years, there has been a lot of controversy about the veracity of Tether claims regarding their dollar reserves.

The same issues have sometimes put its price at risk and reduced it to $0.88. Many investors are concerned that Tether reserves have never been fully audited by a trusted third party.

Is It Decentralized?

No, Tether units are produced by iFinex company according to the market demand at different periods. They are imported into the Bitfinex exchange, and then they are transferred to various other exchanges by traders.

Therefore, although USDT transactions are decentralized and are made on large Blockchains, the distribution of its units is completely centralized and cannot be called a decentralized digital currency.

Tether, Simple but Controversial

Although it is one of the most important digital currencies in terms of usage and market value, no other digital asset has ever been under the microscope and criticized like this digital asset. It is known as one of the most mysterious and controversial players in the digital currency industry.

When it comes to stablecoins, liquidity, stability, transparency, legality, resistance to censorship, and privacy are among the most important features. It is interesting to know that Tether has been repeatedly accused of failing to comply with some of these features.

Tether company has even blocked addresses containing digital currencies and made them unusable several times.

It has been proven many times in different articles that this digital currency has affected the price of Bitcoin and the direction of the digital currency market by manipulating the level of supply.

One of the most controversial of this digital asset interventions on the digital currency market was raised in an article by John Griffin, a professor of finance at the University of Texas. According to him, Bitcoin price fluctuations in 2017 were more than investors’ interest in Bitcoin.

Published studies show that at least half of the Bitcoin price spikes were due to coordinated price manipulation by the founders of this token.

In a 66-page article, John Griffin published his findings that the price fluctuations and general price trends were the results of the manipulation and illegal influence of the founders of Tether company.

According to this claim, iFinex company generated USDT units without support, bought Bitcoin with it, and caused the unrealistic increase of Bitcoin price. This resulted in small shareholders suffering from heavy losses by bursting the price bubble.

A critic of Blockchain has questioned the relationship between Bitfinex and Tether, accusing Bitfinex of producing “non-existent magical Tether”.

In September 2017, Tether published a memorandum of understanding with an accounting company indicating that it was fully backed by the U.S. dollar. However, a lawyer in the United States argued that the provided evidence does not prove that it is backed by dollars and should not be used as a reference.

Since then, the company has repeatedly claimed to offer audits that show all deposits are backed one-for-one by U.S. dollars, and it is lawyers and critics who have failed to review the provided evidence.

In 2017, about $31 million Tethers were stolen. Analysis of distributed ledgers showed that the theft was related to the January 2015 hacking of Bitstamp exchange.

In response, the company suspended its transactions and announced it was launching new software to implement “hard fork” in order to identify and deactivate the stolen digital assets.

In September 2017, Tether resumed wallet and suspended transaction services. It claims that it has all the amount of dollars needed by the customers who hold this cryptocurrency, and they can cash their tokens at any time they desire, however, in 2017, it was not able to cash out all the tokens in the market.

In April 2019, the Office of the New York State Attorney General accused this company of withdrawing $850 million in compensation for its losses, a claim that was denied by Bitfinex.

Shortly afterward, one of the iFinex lawyers admitted that only 74% of USDT units are backed by the U.S. dollar. When the allegations were published, users of the Bitfinex exchange withdrew their assets worth at least $90 million from Bitfinex wallets.

Meanwhile, there have been other legal and banking disputes over this digital currency. In one of these disputes, a Taiwanese bank, backing the Tether in the U.S. dollar is no longer willing to cooperate with the US banks. As a result, currently, American citizens can no longer buy it directly.