Coin Study

What Is Tether (USDT)? A Crypto Coin Study

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tether logo featured

Tether is a cryptocurrency whose value is meant to mirror the value of a US dollar. The idea behind Tether was to create a stable cryptocurrency that crypto-users could spend, rather worry about market fluctuations and token value.

Tether trades as USDT, a nod to its links with the traditional US dollar, and is issued by Tether Limited using the Omni protocol. At the time of writing, there is over $2 billion Tether in circulation.

However, Tether is a cryptocurrency deeply mired in controversy. Here’s an overview of Tether, its pros and cons, what you might use it for, and whether it fulfills its role.

What is Tether?

Tether “is a token backed by actual fiat currency assets, including USD and Euros.” Tether aims to be the first cryptocurrency with serious fiat backing, “tethered” to real-world currency to ensure crypto-users always have protection “from the volatility of cryptocurrencies.” That means, in theory, that each Tether token issued has the actual backing of a real US dollar, at a 1:1 ratio.

tether logo

Tether, then, is sort of a hybrid between cryptocurrency and fiat, with feet planted firmly on both sides of the meridian. Tether is also considered a “stablecoin,” acting as a replacement for the US dollar on many popular exchanges. The use of Tether across multiple exchanges means it is a key source of liquidity throughout the crypto ecosystem, with the Tether trading volume remaining in the billions-per-day throughout the consistent downsizing of the overall crypto economy.

In that, Tether is designed to stop volatility in crypto markets while offering users a stable coin to cash out their assets, like a trusted third-party between all concerned.

Tether was originally launched in 2014, rebranded from its original project, Realcoin. Realcoin was founded by Bitcoin Foundation director Brock Pierce, working with software engineer Craig Sellars and serial entrepreneur, Reeve Collins. Pierce and Collins have since left Tether, but Sellars remains part of the project in an advisory position. Tether’s current CEO is J.L. van der Velde—who is also CEO of Bitfinex, a major crypto exchange and one of the primary issuers of Tether.

You can find Tether on over 60 exchanges.

How Does Tether Work?

Tether began life on the Bitcoin blockchain. Tokens were issued using the open source Omni Layer protocol, with each transaction recorded on the Bitcoin blockchain.

The Omni Layer is a platform built on top of the Bitcoin blockchain that acts as a dedicated bitcoin wallet that can also transact Omni network tokens, such as Tether, OMNI, and MaidSafe. Importantly, each Omni Layer transaction requires a small amount of bitcoin to process, allowing each transaction to record to the Bitcoin blockchain. Consequently, when the developer issues new Tether, it is tracked and recorded.

Tether is also issued through the Omni Layer on the Litecoin blockchain, in a similar process. There are four main Tether tokens:

  • Tether on Bitcoin’s Omni Layer
  • Euro Tether on Bitcoin’s Omni Layer
  • Tether as an Ethereum ERC-20 token
  • Euro Tether as an Ethereum ERC-20 token

At the time of writing, Tether transactions account for most of the Omni network.

The Tether: Fiat Currencies on the Bitcoin Blockchain [PDF] whitepaper explains the details of the 1:1 cryptocurrency. The whitepaper is useful to read for information on how Tether interacts with blockchains. However, here is a summary of the Tether Technology Stack which broadly explains how Tether works on a technical level:

Tether technology stack

  • Layer 1 is the Bitcoin blockchain. Tether transactions and ledger is buried in this layer, with meta-data coming from the Omni: Embedded Consensus System (the Omni Layer) above.
  • Layer 2 is the Omni Layer protocol. This layer breaks down into several smaller chunks detailing how Omni can:
    1. Create and destroy Tethers represented in the Bitcoin blockchain layer
    2. Track and report the circulation of Tether
    3. Enable users to transact and store Tether and other Omni-based tokens in a:
      1. P2P, pseudo-anonymous, cryptographically secure environment
      2. Open-source, browser-based, encrypted web-wallet (the Omni Wallet)
      3. Multi-signature and offline cold storage-supporting system
  • Layer 3 is the Tether Limited business entity which is responsible for:
    1. Accepting fiat currency deposits and issuing the corresponding Tethers
    2. Sending fiat currency and revoking the corresponding Tethers
    3. Holding the fiat reserves that back all Tether in circulation
    4. Publicly reporting Tether’s Proof of Reserves and other audit results
    5. Initiating and managing integrations with other Bitcoin/blockchain wallets, crypto exchanges, and merchants
    6. Operating the Tether.to web wallet

How Much Does Tether Cost?

The beauty of Tether is that you always know what you are going to get. If everything is working as it should, one USDT will cost one US dollar. The USDT price may show slight variance but that is usually only in the range of a single cent or two either side of the mark. The following chart tracks Tether’s price over two years.

Tether price chart 2 years

Variance, as one would expect, but largely around the $1 mark. The chart shows why many users trust USDT to keep the value of the cryptocurrency during volatile downturns in the wider crypto ecosystem. In that, Tether appears to fulfill its role.

Tether is a Controversial Cryptocurrency

Tether carries a controversial label for a number of reasons. Perhaps the most poignant issue is the major part Tether trading took in bitcoin’s phenomenal rise toward $20,000 per coin during the latter stage of 2017 and early 2018.

In their “Is Bitcoin Really Un-Tethered?” [PDF] research paper, Professors John M. Griffin and Amin Shams from the University of Texas shows a pattern where “Tether seems to be used both to stabilize and manipulate Bitcoin prices,” in close collaboration with the Bitfinex exchange. The research shows Tether Ltd creating huge amounts of new Tethers and almost all moving straight to Bitfinex.

“Using algorithms to analyze the blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. Less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies”

When the bitcoin price drops after the Tether issuance, Bitfinex and other exchanges use their existing Tether to buy huge amounts of cheaper bitcoin “in a coordinated way that drives the price.”

The paper also asserts that Bitfinex continued to supply the market with Tether, regardless of the existing demand. The false orders create artificial demand for bitcoin, pushing the price higher. Furthermore, Griffin and Shams found that Tether was also sent to other exchanges to purchase bitcoin as a direct response to market dips.

Following the University of Texas research paper, the US Department of Justice moved the focus of their investigation into crypto market manipulation to Tether. The Commodities Futures Trading Commission (CFCT) subpoenaed both Tether and Bitfinex to investigate the finances and coordination between the pair further, and in November 2018 the DOJ and CFCT announced they would coordinate their investigations into the alleged market manipulation.

Auditing Tether’s USD Reserves

Another sticking point for Tether’s detractors is the lack of, and seeming resistance to, a third-party financial audit. If Tether Ltd doesn’t have the capital to back each Tether it issues, it is essentially practicing a form of fractional reserve banking.

On June 20, 2018, Tether released their transparency report. The “Tether Transparency Update—FSS Report” directly addresses much of the criticism leveled at Tether Ltd, including the allegations in the University of Texas bitcoin price manipulation research paper. It isn’t an actual audit, however. The report is the result of a two-week data gathering process by law firm Freeh, Sporkin & Sullivan LLP (FSS). Tether Ltd gave FSS direct access to their bank accounts at two separate institutions.

The report came after Tether reneged on financial auditing firm, Friedman LLP, who many felt were a more appropriate choice due to their experience in the field. That isn’t to say FSS are unqualified; they were founded by three former federal judges, one of whom, Louis Freeh, is a former Director of the FBI. But law firm and an audit firm have different skill sets, and that difference hasn’t gone unnoticed.

Regardless, the document shows that Tether does hold enough capital to back its currency.

Tether’s general counsel, Stu Hoegner, said that isn’t because Tether hasn’t tried, but “the bottom line is that an audit cannot be obtained.”

What’s Tether’s Future Potential?

The future of Tether appears mixed. On the one hand, Tether is currently vital to the cryptocurrency ecosystem, offering crypto users the chance to protect their investments during volatile market phases.

Conversely, the issues dogging Tether could derail the organization. Perhaps not tomorrow, perhaps not next week, but the issues surrounding financial auditing, pending investigations from the DOJ, CFCT, and the US Securities and Exchange Commission, the damning University of Texas research paper, and other banking issues could come back to haunt Tether.

Join the Tether Community

If you’d like to follow Tether, there are plenty of ways to do so:

Let us know your thoughts on Tether in the comments section.

Gavin Phillips
Gavin saw the potential in Bitcoin back in 2010, but was a dirt poor student living on eggs and without a penny to invest. Since then, he’s been tracking the development of cryptocurrency and blockchain, and he’s written about blockchain for several publications and ICO whitepapers, including Envilope.

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