Understanding the Pros and Cons of Tether (USDT)

Tether (USDT) is a cryptocurrency with a value meant to mirror the value of the U.S. dollar. The idea was to create a stable cryptocurrency that can be used like digital dollars.

Coins that serve this purpose of being a stable dollar substitute are called “stable coins.” Tether is the most popular stable coin and even acts as a dollar replacement on many popular exchanges!

According to their site, Tether converts cash into digital currency, to anchor or “tether” the value of the coin to the price of national currencies like the US dollar, the Euro, and the Yen.

Like other cryptos it uses blockchain. Unlike other cryptos, it is [according to the official Tether site] “100% backed by USD” (USD is held in reserve) [this has changed slightly, please see the update below].

i.e. every Tether is supposed to be backed by dollars kept in reserve in a 1:1 ratio (this being a big selling point and a potential problem in the otherwise rather untethered and decentralized crypto space).

Ideally, this means Tether trades at $1 on all exchanges and can be used in place of a dollar. However, in practice, the price tends to fluctuate a little.

The primary use of Tether is that it offers some stability to the otherwise volatile crypto space and offers liquidity to exchanges who can’t deal in dollars and with banks (for example to the sometimes controversial but leading exchange Bitfinex).

With USDT you can, in theory, move into a coin that holds a stable value like USD… even when you are on an exchange that doesn’t deal in fiat! That is a big deal on its own, but it gets even better. Many exchanges also offer USDT as a trading pair, thus allowing you to buy coins with a coin that mirrors USD. That is very useful (especially when Bitcoin’s price is volatile).

However, everything good about Tether aside, Tether also presents some problems.

The reality is, there are some real considerations and concerns with Tether that any user should at least be aware of. There is concern that getting fiat for USDT might not work as intended at some point. There is concern that the crypto economy is now “tethered” to a somewhat centralized dollar substitute. There is concern based on the fact that some of the same people that run Bitfinex also run Tether (Bitfinex is a leading exchange that allows margin trading using USDT as collateral and that puts a lot of power in the hands of the few in this sense). There is concern that Tether isn’t always backed by the 1:1 ratio as claimed (and instead that perhaps there is some fractional reserve lending occurring). Etc.

In other words, there is some concern over the centralized nature of Tether and some concern over the fact that the public doesn’t have a way to fully verify the system that Tether has attempted to show via its documentation, public blockchain, and public audits.

The problems and benefits here all essentially revolve around the same concept. That is, Tethering of the crypto space to a dollar substitute, controlled by a central middle-man, and then setting expectations based on that.

That should sound ironic, because this problem of trust and centralization it was largely the exact problem crypto was trying to avoid in the first place!

The underlying problem then is that the company Tether, although they use blockchain technology, is not a decentralized distributed smart contract; they are a company run by potentially fallible humans (who are asking us to trust them). The same is true for Bitfinex. Bitfinex isn’t a decentralized peer-to-peer exchange; they are a company.

Of course, since we all currently use centralized exchanges, and we need these exchanges to have access to liquidity to function, we can make some really strong arguments that USDT is exactly what the doctor has ordered for this point in history in crypto.

At the end of the day, their centralized nature doesn’t make them bad. It simply puts them more in the category with Ripple and XRP then it does with Bitcoin (that is, they are companies who deal with crypto, not pure decentralized cryptos).

Still, to put concerns aside and to stress the bottom line: Tether is VERY useful in practice due to its steady value, ability to be used in trade for many cryptos many of the world’s major exchanges, and its ability to offer liquidity to exchanges.

To the extent that everyone agrees a Tether is worth $1, and especially to the extent that it holds true across exchanges including Bitfinex, is to the extent that the utility of Tether outweighs its potential issues.

Concerns and considerations aside, the reality is: Tether has worked rather well so far, and that has earned it a place as one of the top 20 coins by market cap as of early 2018.

UPDATE 2019; Is Tether Backed 1:1? Tether has changed the wording on its site regarding how Tether is backed. In short, Tether is not claimed to be backed 1:1 by dollars in a bank account anymore. Instead the new wording reads, “Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”

NOTE: In the crypto space people like to spread FUD. Sometimes the FUD is rooted in real concern. Sometimes the FUD is rooted in the fact that the person has a short position opened on an exchange or is looking for a lower entry point. Some Tether concerns are valid, but others are a result of FUD meant to drive the price of crypto down. If Tether were to go into a tailspin, it would almost certainly cause a temporary setback for crypto (thus those shorting the market would make out like bandits). This unfortunate reality is not helped though by the crypto community placing its trust in the hands of a single token that mirrors the US dollar. Put all that together, and you can start to understand why our page about Tether also is necessarily a page of pros and cons. See a closer examination of the pros and cons of Tether. Long story short, Tether has addressed each point of concern and attempted to put each point to rest. See the official “Tether Update” for Tether’s side of the story.

BOTTOM LINE: The concerns are real, but don’t let that stop you from “going to USDT” when it is the best short-term move for you. Tether’s pros, which is stable like a digital dollar secured by cryptography and not subject to as much speculation as other cryptos, are real benefits in the Wild Wild World of crypto. In the volatile world of crypto, it’s nice to have some stability. Thus, Tether is noteworthy crypto. Still, the FUD must be considered. You might not care about the FUD, but if enough people do it can throw a giant wrench in the wheel of the crypto train. The train will probably keep on rolling, but one doesn’t want to get stuck in Tether in a doomsday scenario. Not every crypto withstood the test of time, and neither has every stable coin. The only thing that remains solid so far is crypto itself.

TIP: Those who want stability but don’t want to go to dollars are between a rock and a hard place. Most stable coins have had issues like Tether does (such as fluctuations in price and a single entity issuing them). Meanwhile, the top cryptos BTC, ETH, and XRP, for example, aren’t all that stable. So there is no perfect answer. That said, not every stable coin and not every crypto claims to be backed in 1:1 ratio by dollars. Thus, not every alternative has the same risk.

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"What is Tether?" contains information about the following Cryptocurrencies:

Stable Coins