It’s the third-largest cryptocurrency by market capitalization and serves as a facilitator for many of the crypto-to-crypto transactions that happen each day. Despite all of that, many still wonder, “What is USDT?”
In this article, we take a look at what makes USDT unique and discuss its history, advantages, and disadvantages so you can make the most of your crypto investing.
What Is USDT?
The answer to the question “What is USDT?” involves four specific parts:
- USDT is an abbreviation for the term United States Dollar Tether
- United States Dollar Tether (USDT) is a blockchain-based cryptocurrency
- USDT is also known as Tether
- USDT is the symbol under which Tether tokens trade
But USDT is much more than just those four details. At its heart, it’s a centralized, fiat-collateralized stablecoin.
Before we dive into those details, let’s take a look at how USDT came about.
What Is USDT: History
In 2012, entrepreneur J.R. Willett developed the concept for a type of crypto that could live on a separate layer of the existing Bitcoin blockchain.
This secondary layer — first called Mastercoin — was the technological foundation on which Tether was built.
In July of 2014, a group of entrepreneurs formed a startup called Realcoin, which was renamed Tether Limited later that year.
USDT was originally launched using a platform for creating and trading digital assets on top of the Bitcoin blockchain (the Omni Layer protocol). This protocol also supports the minting and burning of Tether coins.
USDT has since migrated to other blockchains like Ethereum.
As we mentioned earlier, USDT is a breed of cryptocurrency called a stablecoin.
Cryptocurrencies such as Bitcoin, Ethereum, and many others are notorious for their volatility (i.e., their price fluctuations). This volatility makes it difficult for users to transfer value from one country to another without incurring high fees and experiencing long delays.
Stablecoins were created to keep cryptocurrency values stable, provide more stability to the crypto market, and prevent the price of cryptocurrency from fluctuating wildly from one moment to the next.
When the price of a specific coin remains stable (because it’s paired with USDT), investors can then use that coin pair as a more reliable medium of exchange and method of value storage, instead of just a speculative investment (whose price may go up or down at any moment).
In addition to being a stablecoin, USDT is also fiat-collateralized.
This is in sharp contrast to the other two categories into which stablecoins can fall:
- Crypto-collateralized (which use cryptocurrency reserves as collateral)
- Non-collateralized (which operate like a reserve bank to maintain the necessary supply of tokens)
A fiat-collateralized token is tied to the value of a fiat (or government-backed) currency — typically the U.S. dollar, the euro, or the yen.
Theoretically, the value of one USDT is roughly equivalent to the value of the U.S. dollar and can be traded at any time for that currency. However, in March 2019, Tether updated its disclosure statement to claim that its tokens are no longer backed 100% by U.S. dollar deposits.
Instead, Tether is now backed 100% by reserves, which include:
- Traditional currency
- Cash equivalents
- Other assets and receivables from loans made by Tether to third parties, which may include affiliated entities
That, along with other events, started a controversy around USDT that is still raging today. We’ll discuss more about the controversy surrounding USDT’s fiat-collateralization later on in this article.
USDT is a centralized cryptocurrency. That simply means that a single authority — such as a government, bank, or company — issues and controls the currency.
If you have a debit card or credit card in your wallet, the issuing bank or company is the centralized authority. For USDT, the Tether tokens are issued by Hong-Kong-based Tether Limited, which, in turn, is controlled by Bitfinex/iFinex Inc.
Most cryptocurrencies, however, are decentralized, meaning they don’t rely on a government, bank, or business. Instead, they use an interwoven system of users and their devices to manage the coins.
The decentralized nature of these tokens means that users don’t need a third party (e.g., a bank) to transfer wealth or ownership — they can do it right on the blockchain.
Controversy Surrounding USDT
Earlier, we touched on the fact that USDT is a fiat-collateralized cryptocurrency, which means that it is tied to and backed by the U.S. dollar.
At least, that’s what Tether Limited, USDT’s issuing company or centralized authority, claims. However, this claim hasn’t been verified.
In January 2018, Tether Limited failed to conduct the necessary audit to ensure that the company was maintaining its real-world reserves (its fiat-collateralization). Instead, the company announced that it was parting ways with the firm that would have conducted the audit.
Soon after, the U.S. Commodity Futures Trading Commission (CFTC) issued subpoenas to both Bitfinex and Tether Limited disputing their claims that Tether is “always backed 1-to-1 by traditional currency held in our reserves.”
Since then, and because of Tether Limited’s lack of transparency, many in the crypto market worry that the company doesn’t have enough in its reserves to back the Tether coin as they claim.
But the matter didn’t stop there. In April 2019, New York Attorney General Letitia James accused Tether Limited’s parent company of hiding a loss of U.S. $850 million worth of client and corporate funds from investors.
In court filings, the New York Attorney General claims that this money was given to Crypto Capital Corp. (a Panamanian entity) without contract or agreement and that Bitfinex allegedly took at least U.S. $700 million from Tether’s cash reserves to hide the gap in the accounting.
Then, in October 2021, the U.S. Commodity Futures Trading Commission (CFTC) alleged that Tether Limited made misleading statements about having sufficient dollars to back all the Tether coins in circulation.
Because of that, Tether agreed to pay a $41 million fine but continued to assert that all USDT are backed by the company’s reserves: a combination of cash, commercial paper, other crypto, and similar securities.
In other words, USDT is redeemable 1:1 for dollars, but it’s not fully backed by legal tender alone.
Despite this ongoing controversy, USDT continues to be a popular cryptocurrency. Here’s why.
Advantages Of USDT
One of the biggest advantages of USDT is that it is much more stable than traditional cryptos, like Bitcoin and Ethereum.
This gives investors an alternative that is less of a risk and makes it a bit easier for them to get involved in the market.
USDT serves as a gateway cryptocurrency through which more and more people can start buying, selling, and trading without as much inherent risk.
2) Fewer Fees
Because of the way USDT is structured, there are fewer fees on transactions associated with the Tether coin.
This makes it more attractive to investors who want to minimize the capital they lose during transactions and maximize their profits.
3) Bridge Between Tokens
Pairing a traditional token with USDT — as opposed to actual fiat currency — makes it easier to conduct crypto-to-crypto and crypto-to-fiat-currency transactions.
The presence of USDT in the trade stabilizes the price of the pair, lowers costs, and reduces delays that often impede crypto-to-crypto transactions.
4) Access To Unavailable Areas
Because USDT is a fiat-collateralized stablecoin, it facilitates transactions in areas that are unavailable for straight cash trading.
This gives cryptocurrency users a wider geography in which to operate while making it easier to bring the cryptocurrency market to a more mainstream audience.
Ultimately, that’s one of the first steps toward scaling up the cryptocurrency market so it can compete with other financial markets.
Disadvantages Of USDT
1) Backing Controversy
As we discussed, Tether Limited claims that USDT is redeemable 1:1 for dollars but is not fully backed by legal tender alone.
This ongoing controversy over the coin’s true collateralization means there’s no way to tell if it is fully guaranteed or not.
2) Fluctuating Price
Even though USDT was designed to be stable (linked to the U.S. dollar), its price does fluctuate above and below the price of that fiat currency.
Typically, this isn’t a major issue as the price only varies by a few cents here and there. But, if you decided to invest in a large amount of USDT, the difference could really start to add up.
3) Limited Availability
While USDT is available on a large number of exchanges, it’s not available on all of them. This lack of penetration could cause issues if the exchange you choose doesn’t offer access to the Tether coin.
Invest In USDT With Vauld
Now that we’ve answered the question, “What is USDT?” you’re all set to make an informed decision on whether or not to include it in your portfolio.
Whether you’re lending, borrowing, or trading USDT (or any crypto/USDT pair for that matter), choose Vauld for the best benefits and features across the board.
Partnering with Vauld means receiving competitive crypto interest rates on USDT in addition to quality customer service, an arsenal of security features, a knowledgeable community of like-minded crypto users, and so much more.
Sign up with Vauld today to experience all of the benefits that an innovative and customer-centric crypto exchange has to offer.