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What is Tether (USDT) and How Does it Work

by Sandip Das from
What is Tether (USDT) and How Does it Work

Read this beginners’ guide on what is Tether (USDT) and how does it work to know more about the stablecoin Tether (USDT). Tether (USDT) is the first and the most widely used stablecoin. Launched back in 2014, Tether’s goal is to bridge the gap between government-issued fiat currencies and crypto coins by maintaining a stable value relative to each other. So, to understand what is Tether (USDT) and how does it work, we first need to discuss the meaning of stablecoins.

1. What Is a Stablecoin?

If you want to fully know what is a stable coin you should first understand that one of the basic rules of investing in cryptocurrencies is that they are highly volatile by nature. It’s common for crypto like Bitcoin’s value to go up or down by even 10% or more in a span of a few hours. Since one of the central ideas behind cryptos is to use them as a medium of exchange, just like the US dollar, the fluctuating value poses a serious challenge.

Now, what if we can ensure that the value of a cryptocurrency remains stable over time? This will make such crypto much more reliable and an effective medium of exchange. Stablecoins do just that. Stablecoins are cryptos that are pegged to real assets like another currency, commodity, or financial instrument. Based on how a stablecoin’s value is maintained, there are three different types of stablecoins:

  1. Fiat-based stablecoins: The value of these stablecoins is backed by fiat currencies such as the US dollar.
  2. Crypto-collateralized stablecoins: These stablecoins are pegged to other crypto assets to maintain their value.
  3. Algorithmic stablecoins: The value of these stablecoins is maintained by controlling their supply through algorithms.

Most commonly, the value of a stablecoin is pegged to fiat currencies like the US dollar. Tether (USDT) is the most prominent crypto-collateralized stablecoin. Some other examples of stablecoins are USD Coin (USDC), Binance USD (BUSD), and True USD (TUSD). Now, let’s look at what is USDT.

2. What is Tether (USDT)?

After knowing about stablecoins, let’s now look at what is Tether (USDT) and how does it work. Tether is the most established stablecoin of today. Also, with a current market cap (as of December 2023) of more than $89 billion, Tether (USDT) is the 3rd most-valued cryptocurrency after Bitcoin (BTC) and Ethereum (ETH).

Tether was launched in 2014. It was designed to maintain its value at a 1:1 ratio with the US dollar. The stable value of Tether is maintained through reserves (which consist of US Treasury bills, US dollars, and other assets) that are managed by Tether Limited Inc. the company behind Tether.

About half of the USDT tokens exist on the Tron blockchain while a significant portion exists on the Ethereum blockchain. Tether Inc. promises to become a fully transparent company by periodically publishing details about its reserves. However, this has not always happened in the past - leading to several controversies (more on this towards the end of the post). After knowing what’s USDT, let’s now look at how does USDT work.

3. How does Tether work?

Tether is a crypto token developed on several blockchain platforms including Ethereum, Solana, EOS, Liquid Network, Avalanche, Near, Polygon, and Omni. Therefore, Tether is compatible with several blockchains. Tether is like the digital dollar. It offers a high amount of liquidity to crypto exchanges, as you can seamlessly convert other crypto to Tether. Since the value of Tether remains stable, it offers a great tool to crypto investors to avoid the crypto market’s volatility, and you can find out how to invest in crypto in 2024 in our related article.

Tether’s supply is controlled in a way that its value remains stable relative to the US dollar. Whenever a user demands Tether by exchanging their fiat money, a corresponding amount of new Tether is created and put into circulation. Once issued, a USDT can be used as other cryptos or stored in a Tether (USDT) wallet.

On the other hand, when users redeem their tether tokens for fiat currency, a corresponding amount of Tether is taken out of circulation and destroyed. Since the price of Tether is pegged to the US dollar in a 1:1 ratio, you generally need to pay $1 to buy 1 USDT.

Tether is accepted by most major crypto exchanges. You can conveniently use Tether to buy other cryptos or convert other cryptos to Tether. So, you can easily convert Tether to Bitcoin or BTC to Tether. Because of Tether’s price stability, crypto exchanges often denominate the price of other cryptos in Tether to reflect their fiat value.

Therefore, in short, Tether is a stablecoin (a type of cryptocurrency) that is supposed to act as a fiat currency equivalent in the crypto economy for seamless conversion and price stability. Tether is also one of the most actively traded cryptos.

4. The Significance of Tether in the Cryptocurrency Market

Tether’s goal is to provide a safe crypto token, the value of which is unaffected by the market dynamics. Since crypto is an extremely volatile market, having a stable currency is essential to store value and use as a medium of exchange. Tether (USDT) serves this purpose.

Let’s look at the main reasons Tether is important for the crypto market:
  1. Price stability: Since the price of Tether is pegged to real-world assets like the US dollar and US Treasury Bills, its value remains stable over time.
  2. Liquidity: As other cryptos can be seamlessly converted to Tether and Tether can be used to buy other cryptos, it offers high liquidity to crypto exchange
  3. Medium of exchange: Tether’s price stability makes it one of the most appropriate cryptos that can be used as a medium of exchange.
  4. Store of value: Because of high volatility, most crypto assets like BTC or ETH are quite unreliable as a store of value. However, Tether’s price stability helps it act like an efficient store of value.
  5. A hedging tool: Tether (USDT) can be used as a crypto investing hedging tool against high volatility in the crypto market.

5. Tether (USDT) vs. Traditional Cryptocurrencies

Let’s look at the key differences between Tether (USDT) and traditional cryptocurrencies:

5.1 Price stability

The Tether coin, being a stablecoin, is significantly different from traditional cryptocurrencies. Tether is a stablecoin, which is a special type of cryptocurrency. As discussed above, the value of a stablecoin does not fluctuate because of the market forces.

However, the value of traditional cryptos is not pegged to real assets. This is why the price of traditional cryptos fluctuates by a wide margin. Price fluctuations make traditional cryptos unreliable as modes of payment or stores of value.

5.2 Creation and circulation

New Tether is created when a user wants to deposit fiat currency and convert the same into Tether. On the other hand, traditional cryptos are created through crypto mining or cryptocurrency staking. Tether does not involve any staking or mining. Also, Tether is taken out of circulation when a user redeems their Tether for fiat currency.

5.3 Centralization

The central idea behind traditional cryptos is complete decentralization. Traditional cryptos like BTC and ETH are decentralized. Even though Tether is a cryptocurrency, it is not completely decentralized. The Tether crypto is considered a centralized crypto as the company behind it actively manages its supply and reserves.

6. Real-life Applications of Tether

Tether is built on multiple blockchains to work as a stable and reliable digital dollar for the crypto economy. Tether is one of the most widely used crypto with an extremely high trading volume. Going by the 24-hour trading volume, the Tether stablecoin is often the most traded crypto in major exchanges. So, what is USDT used for?

Being a stablecoin, USDT serves several functions in the crypto economy. Here are some of the key roles of Tether (USDT):

  • A stable store of value and a medium of exchange: The stable value of Tether makes it a great tool to be used as a store of value or a medium of exchange.
  • Hedging: Just like investors hold gold at times of stock market uncertainties, one can hold Tether to hedge against crypto market volatility.
  • Multiple blockchain support: Since Tether tokens are supported by multiple blockchains, Tether offers seamless integration among blockchains Also, multiple blockchain support increases the applicability of USDT.
  • Fiat alternative: Tether’s table value makes it an excellent alternative to fiat in the crypto economy. Starting from Decentralized Finance (DeFi) protocols to crypto wallet apps, Tether has a large number of use cases.
  • Supporting multiple currencies: Tether (USDT) supports multiple global currencies such as the US dollar (USD), euro (EUR), Mexican Peso (MXN), and offshore Chinese yuan (CNH). Because of supporting multiple currencies, Tether is easily accessible to a large global user base.

7. How to Buy Tether?

If you are worried about where to buy Tether, read this section. Tether can be bought from any major crypto exchange using several payment methods like debit and credit cards and bank transfers. While you can buy Tether (USDT) from a large number of exchanges, it’s better to stick to the most reputed ones to keep your crypto assets safe.

Moreover, the best crypto exchanges provide unparalleled customer support. Lastly, you must conduct your due diligence before buying Tether. Considering safety, security, and ease of use, the top 5 crypto exchanges to buy Tether (USDT) are:

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8. Tether Risk Factors

Despite many benefits, the Tether cryptocurrency also has certain risk factors. Unlike traditional cryptos with the biggest potential, like Bitcoin and Ethereum, Tether (USDT) is a centralized crypto. This means it’s under the control of a central authority and not the users. In addition, there have been past controversies regarding revealing Tether’s reserve-related information. Tether Inc. has faced criticism in the past for not maintaining enough reserves to support the value of the crypto. In 2021, the company was fined by regulators for not maintaining full reserves as promised. Also, the crash of LUNA and UST in 2022 exposed the risk factors in so-called stablecoins.

Contrary to expectations, Tether's value has fluctuated in the past, shaking confidence in it as a stablecoin. Going by CoinDesk data, Tether’s value has fluctuated between $0.57 and $1.32 in recent years. Lastly, as Tether’s value is supposed to remain stable, it’s not a suitable crypto for you if you are looking for price fluctuations to earn quick gains.

9. What is Tether (USDT) and How Does it Work? - FAQs

9.1 ❓ What is the difference between USD and USDT?

Many crypto users often get confused about USD vs. USDT. USD or US dollar is a fiat currency issued by the US government. USDT or Tether is a cryptocurrency backed by real assets like USD.

9.2 ❓ Is Tether (USDT) safe?

Tether is safe to use because it’s a stablecoin. Stablecoins are supposed to keep their value unchanged with changing market conditions.

9.3 ❓ Is it legal to use Tether (USDT)?

Tether (USDT) is legal in all countries in which crypto transactions are allowed.

9.4 ❓ Why is Tether important?

Tether is the most widely used stablecoin which is pegged to real assets. This makes Tether a stable and reliable cryptocurrency that can be used as a medium of exchange or store of value. This post on what is Tether (USDT) and how does it work explains the importance of Tether (USDT) in great detail.

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Comments (2)
football-fanatic
football-fanatic 2 months ago
Really informative. Thank you!
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