The cryptocurrency market continues to attract more and more people. Investors are not only interested in Bitcoin but also in less volatile cryptocurrencies tied to various assets. These are called stablecoins, and the most popular token among them today is USDT (Tether). The capitalization of this cryptocurrency in 2024 exceeded $110 billion.
USDT is a cryptocurrency pegged to the US dollar exchange rate. Each coin is backed by fiat currency reserves held on the balance sheet of the issuing company, Tether Limited.
The creation of USDT began in 2015. A short time before that (in 2013), the MasterCoin protocol was created in the Bitcoin blockchain, which later became Omni Layer. It became the foundation for the appearance of the future stablecoin.
Tether History
In 2014, the Realcoin project appeared on Omni Layer. Over the next year, the project was refined and received a new name — Tether. In January 2015, the initial coin offering (ICO) of Tether took place on the Bitfinex exchange.
USDT is a stablecoin, so this digital currency has several advantages:
Stability. Tether is pegged to the dollar, so the value of the cryptocurrency is little affected by “external” factors. The USDT rate remains stable even when the cryptocurrency market is “feverish.”
Fiat currency reserves. According to the issuing company, all coins are backed by the dollar. This means that all holders can exchange USDT for USD. This also strengthens the stability of the cryptocurrency.
Trust. For many participants in the cryptocurrency market, Tether is a “safe haven.” Thanks to the dollar backing, it is trusted not only by crypto investors but also by other companies ready to accept payment using USDT.
Convenient transactions. The speed of operations with USDT exceeds even standard bank transfers, not to mention other cryptocurrencies.
Universality. Thanks to the peg to the dollar, USDT is supported by most cryptocurrency exchanges and wallets worldwide.
The issuance of USDT is not limited. The number of issued coins depends only on the volume of fiat currency on the balance sheet of Tether Limited.
How USDT Works
The issuance of new USDT coins is handled by Tether Limited. To achieve full backing by fiat money, the company sells cryptocurrency to users and attracts investments through loans or partnerships with various financial organizations. Thanks to this, the digital assets of USDT holders do not lose their value.
Tether does not have its own blockchain network. USDT technology allows the issuance of coins on the basis of other blockchains. The most popular are:
Tron (USDT TRC-20)
Ethereum (USDT ERC-20)
Omni (USDT Omni)
Binance Smart Chain (BEP-20)
Algorand and others
Wide integration with different blockchain networks makes the cryptocurrency a universal coin for everyone. At the same time, in any network, it costs $1.
In addition to the US dollar-pegged USDT, Tether also issues stablecoins pegged to other national currencies: the euro (EURT), the peso (MXN), and the offshore yuan (CNHT). There is also a coin backed by gold — XAUT.
The USDT operation scheme is quite simple. To understand it, it is enough to remember that the coin is a digital twin of the USD. Let’s consider an example.
A user wants to enter the cryptocurrency market but does not have digital assets. They contact Tether Limited and transfer a certain amount in dollars. The company issues USDT in this amount and transfers them to the user’s account.
Once the user decides to withdraw the existing cryptocurrency in dollars, they can exchange it for USDT coins, transfer them to their account at Tether Limited, and exchange them for fiat dollars.
What Can USDT Cryptocurrency Be Used For? Since it is a stablecoin, the main goals of holders are:
Preservation of assets. Tether has less volatility than other cryptocurrencies. Therefore, it will be easier to survive the instability of the cryptocurrency market and preserve the value of digital assets.
Earning interest. Some cryptocurrency exchanges and wallets offer to hold USDT on their deposit accounts. The user receives interest in this case. The rate is often higher than in ordinary banks for fiat currency.
Trading on the cryptocurrency market. Cryptocurrency traders use USDT for fast exchange between different coins.
Transfers. Thanks to the stable price, USDT is actively used when conducting transactions between cryptocurrency exchanges and their clients.
DeFi (“decentralized finance”). The application possibilities of USDT in this area are quite wide — from lending to staking.
It is also worth noting that in some cases, traders use Tether as a way to diversify risks in their investment portfolio. In this variant, the cryptocurrency acts as an analog of the national currency.
Where to Store USDT? Thanks to its universality, with this cryptocurrency, you can use any convenient options for you personally: a USDT wallet Tether Limited, internal wallets of cryptocurrency exchanges, or a separate wallet. The latter option is considered the most reliable. All popular wallets — Trust Wallet, Trezor, Ledger — support USDT.
How is the USDT Exchange Rate Stability Ensured?
The stability of USDT is ensured by Tether’s reserve assets. Until 2019, the company planned to use only US dollars to back USDT. However, the conditions were revised, allowing the use of other assets as reserves.
At the end of March 2024, the company released a report on what exactly backs the cryptocurrency:
84.05% — fiat monetary funds, their equivalents, and short-term deposits. This includes US Treasury bills (79.88%), repurchase agreements (12.2%), money market funds (6.77%), bank deposits and cash (0.11%), non-US Treasury bills (0.13%), and reverse repurchase agreements with a fixed term (0.09%). 4.87% — Bitcoins. 4.29% — secured loans (for unaffiliated parties). 3.45% — investments. 3.31% — precious metals. 0.02% — corporate bonds.
The USDT exchange rate is pegged to the US dollar, and Tether’s backing allows the issuing company to exchange the cryptocurrency for fiat money and vice versa at any time. Sometimes the rate may fluctuate: for example, in 2017, there were jumps in the market price from $0.91 to $1.1 per token.
Tether ensures the stability of USDT through the constant buildup of reserves. Moreover, the stablecoin mechanism itself does not allow the issuer to issue tokens that will not be backed by the dollar or another valuable asset.
In addition, the stability of the USDT exchange rate is ensured by the issuance or burning of tokens by the cryptocurrency issuer. With an increase in demand and the receipt of the necessary amount of fiat currency, the issuance of new coins increases. And if the demand falls, then the surplus USDT tokens are burned. Thus, the value of the coin is additionally regulated.
Audit and Transparency of USDT Backing
Tether Limited regularly undergoes an audit of USDT backing. The results of the checks are published on the company’s official website. At the same time, not only the size of the available assets backing the cryptocurrency is evaluated. Moreover, Tether publishes its own quarterly report on available reserves.
In April 2024, the company successfully passed the System and Organization Controls 2 (SOC 2) audit. This is one of the most serious audits dedicated to control protocols for managing information security and privacy risks of client and company data.
Tether’s transparency is one of the stated foundations of the company’s operation. Information on issued tokens in circulation and aggregate assets backing them is updated on the company’s website daily.
Detailed auditor reports of the independent company BDO Italia are in open access. They describe how many tokens have been issued and what they are backed by.
Disclosure of data on issued Tether tokens
Thanks to regular audits and verification of USDT backing, the cryptocurrency maintains a high level of trust among both cryptocurrency exchanges and end-users. At the beginning of its development, Tether Limited did not strive to show the entire structure of the cryptocurrency backing, but after the intervention of US regulatory authorities, the company began to disclose information about this.
Why USDT is so Popular in the Cryptocurrency World
One of the main reasons for the popularity of USDT is that it was the first stablecoin. Now there are other cryptocurrencies working on similar technology. However, Tether managed to establish itself as a digital analog of the US dollar before its competitors appeared. And now USDT ranks third in the world in terms of capitalization and daily trading volumes. It is second only to Bitcoin and Ethereum.
“Another reason for the popularity is the low volatility of the coin. USDT continues to maintain its value while it is difficult to predict changes in the value of Bitcoin or Ether,” notes 0xprocessing co-founder Nikita Vassev.
The popularity of Tether is a direct consequence of the advantages of the stablecoin:
Stability. The value of the token is pegged to the US dollar and does not change. Liquidity. USDT is backed by Tether assets, so you can always sell the cryptocurrency and get fiat money. Convenience. USDT is accepted both on cryptocurrency exchanges and as payment for goods and services worldwide. Security. During the entire existence of Tether, there has not been a single case related to the security of using USDT.
USDT Disadvantages and Risks
Every cryptocurrency has its disadvantages or associated risks. One has extremely high volatility; another has constant theft or hacking cases. USDT has two main disadvantages:
Lack of transparency. Despite the fact that Tether Limited regularly undergoes audits and publishes the results of checks, the backing of tokens with reserves remains not entirely transparent. In the cryptocurrency community, discussions are still ongoing about how much USDT is backed by dollars. After the proceedings with the US Commodity Futures Trading Commission, the company admitted that the dollar backing is 74%, and the rest is securities and loans. Centralization. The cryptocurrency is managed by one issuer. This means that in case of its hacking or technical failure, user data and accounts will be at risk.
Uneven distribution. In 2019, a study by Intotheblock appeared, which stated that 70% of the total volume of USDT tokens are owned by only 104 addresses. This directly allows the possibility of manipulating the cryptocurrency exchange rate.
The main risk of using Tether is the possibility of USDT being recognized in the US as an illegally issued security. A similar story has already happened with the Binance stablecoin (BUSD) when its issuer, Paxos Trust, was sued by the US Securities and Exchange Commission (SEC). And this puts the very concept of the existence of a digital twin of the dollar at risk.
“With the appearance of restrictive norms that directly affect stablecoins and the formalization of market regulation, Tether will have to agree with them or stop working in jurisdictional territories,” notes Austin Campbell, adjunct professor at Columbia Business School.
The Future of USDT and Forecasts
The development of technologies and blockchain is changing not only the entire cryptocurrency market but also individual tokens. At the moment, the future of USDT, like other cryptocurrencies, is directly related to Bitcoin. Tether increased the volume of digital assets in Bitcoins to $5.4 billion in 2024. Moreover, the company is actively developing its own BTC mining to increase its own reserves and, as a result, strengthen its position in the stablecoin market. Thus, Tether has already launched its farms in El Salvador and Uruguay, investing more than $1 billion in them.
According to Forbes experts, the only truly serious threat to the successful development of Tether, both in old and new directions, may be the restriction of USDT circulation in different countries. The company is actively investing in innovations in the field of artificial intelligence, educational initiatives in the field of cryptocurrencies, as well as the development of technologies.
Investment company VanEck expects the stablecoin market to reach $200 billion in 2024. And Tether will have the leadership, which the company will only increase.
Stablecoins will continue to attract the interest of both investors and ordinary people. And as long as the cryptocurrency market continues to be characterized by high volatility, the future of USDT can be considered quite cloudless because there will always be a need for a stable digital currency.
