Cryptocurrency

What is Tether (USDT) | Whitepaper Summary

What is Tether (USDT) | Whitepaper Summary

INTRODUCTION

The first and most popular crypto stablecoin to ever exist is Tether. A stablecoin mirrors the value of a fiat currency by holding enough amount to back the supply, which gives investors more control over their crypto assets. USDT is anchored to the US Dollars and it plans to anchor to other fiat currencies too. As we all know how unstable and volatile cryptos are, introducing stablecoins as a measure to seek safety was a very welcoming move, but USDT had its fair share of controversies when it first came into existence.

Many people didn’t trust the ways USDT was able to have cash or cash equivalent reserves. Still, investors were relieved to have a stablecoin in the market, since banks didn’t like to get involved in digital currency exchanges because of the level of risk involved. Tethers exist on the Bitcoin blockchain and can be just like Bitcoin for P2P, a pseudo-anonymous, decentralized, cryptographically secure environment.

Tether Limited employs a simple but effective approach for conducting Proof of Reserves and significantly reduces counterparty risk. Since Tethers don’t rely on market forces, they are resistive to market risk events or liquidity crunches.

EMERGENCE OF TETHER (USDT)

The high volatility and risk associated with crypto led to the emergence of USDT. Tether whitepaper was first introduced on October 6, 2014, as Realcoin by Brock Pierce, Reeve Collins, and Craig Sellars, a member of the Omni Foundation. This helped them build Tether on Omni Protocol which helped in creating and trading smart-contract-based properties and crypto on Bitcoin’s blockchain.

It was on November 20, 2022, when the CEO of Tether announced that the name of Realcoin would be changed to Tether(USDT). In January 2015, USDT started trading on the Bitfinex exchange platform. Until 2017, all the transactions were happening through Taiwanese banks which were then transferred on to Wells Fargo.

Tether’s international transactions were blocked by US Banks on April 18, 2017, due to transparency issues. There were speculations that the Tether reserves didn’t actually exist and the whole structure would soon collapse. This led to a lot of volatility for USDT holders.

In theory, 1 USDT= 1 USD, which makes it more acceptable and legitimate than many other similar projects. It is widely accepted as a mode of payment and means of exchange by many vendors across different blockchains. It is also capable of performing all the activities as other crypto tokens on the network, which makes it a desirable hedge for traders and users alike.

Additional Read: USDT vs USDT

TETHER Whitepaper Summary – ARCHITECTURE

USDT has a three-layer stack and various characteristics that are best understood through the below diagram.

Source: USDT Whitepaper

  1. 1. The Bitcoin blockchain is the first layer. The Tether transactional ledger is embedded as metadata in the Bitcoin blockchain via the Omni embedded consensus system.
  2. The Omni Layer protocol is the second layer. Omni is a basic technology capable of:
    1. Granting (creating) and revoking (destroying) digital tokens represented as metadata included in the Bitcoin blockchain. in this instance, fiat pegged digital tokens, tethers.
    2. Monitoring and reporting on tether circulation using Omnichest.info (for example TetherUSD is represented by Omni asset ID #31) and the Omnicore API.
    3. Allowing users to buy, sell, and store tethers and other assets/tokens in the following manner:
      1. A peer-to-peer, pseudo-anonymous, cryptographically secure environment.
      2. In Omni Wallet which is an opensource, browserbased, encrypted webwallet.
      3. In a system that supports multisignature and offline cold storage.
  3. Tether Limited is the third layer, and it is largely responsible for:
    1. Accepting deposits in fiat currency and releasing the matching tethers.
    2. Making withdrawals in fiat and canceling the relevant tethers.
    3. Ownership of the fiat reserves that support all active tethers.
    4. Making audit findings and Proof of Reserves results public.
    5. Starting and maintaining connections with already-existing wallets, exchanges, and businesses that accept Bitcoin and blockchain.
    6. Using Tether.to, is an online wallet that enables users to effortlessly transfer, receive, store, and convert tethers.

Additional Read: 5 Things to Keep in Mind before Investing in Crypto

ADVANTAGES OF TEHTER (USDT)

The benefits of Tether stablecoin would undoubtedly be one of the main points of discussion. It’s interesting to note that Tether has certain benefits for individuals, businesses, and exchanges. Here is a list of Tether’s advantages in each of the three categories.

For Individuals

The Tether crypto tokens can open up the functionalities of blockchain-based tokens for individual crypto users without exposing them to volatility. The tether can offer the following benefits to individuals.

  • Available at all times
  • Increased transfer speed
  • Less volatile
  • Decreased transaction costs
  • Alternatives to fiat money that are flexible

For Businesses

Tether pricing can be used by businesses as a focal point for providing clients with a secure and liquid payment solution. Here are a few of the key advantages of Tether for merchants looking to integrate cryptos into their businesses.

  • Massive liquidity
  • Stability in volatile markets
  • Tether tokens can be easily integrated
  • Supporting several blockchain protocols in an innovative way
  • A smart alternative to Fiat Gateways

For Exchanges

Considering that Tether USDT is the most commonly traded asset, it offers promising benefits in powering up the cryptocurrency ecosystem. The advantages of the Tether token for exchanges are as follows.

  • High trade volumes result in unparalleled liquidity
  • Various blockchains are supported
  • Efficient operation with quicker transactions and lower fees

Additional Read: USDC Whitepaper Summary

TETHER Whitepaper Summary – TOKENOMICS

In terms of market capitalization, USDT is currently ranked third on coinmarketcap, just behind Ethereum and bitcoin. Its market cap is currently $65, 850,693,765. There is no maximum restriction on the supply of USDT tokens as there is no limit to the number of tokens in custody that are tied to USD.

There are currently 65.84 billion USDT tokens in circulation. In recent years, Tether’s core tokenomics have come under question. Tether states that it keeps enough dollars on hand to back each USDT token with one. However, the company recently settled with the New York Attorney General’s office, which required it to shell out $18.5 million in fines and disclose for the first time a breakdown of its reserves.

Only 2.9% of its reserves were held in cash, according to the breakdown. The rest was composed of various “cash equivalents,” including treasury bills, fiduciary deposits, commercial paper, and reverse repo notes. In actuality, just 75.85% of Tether’s entire reserves were made up of cash and currency equivalents. The remaining components included secured loans, precious metals, corporate bonds, and other digital assets.

USDT’S RISE IN MARKET CAP OVER THE YEARS

USDT Market cap | Source: Tradingview

USDT FACES STIFF COMPETITION

Though USDT is the most popular stablecoin out there, it faces tough competition. Some of its competitors are:

  1. USD Coin(USDC)
    USDC is managed by a company called Centre, which is owned by Circle, which is a P2P payment company. It was founded in 2018 and runs on various blockchain networks including Ethereum, Solana, etc. One of the major advantages of USDC is that because of its clean record, it is backed by Goldman Sachs, and is gaining popularity day by day.
  2. Binance USD(BUSD)
    BUSD is Binance’s stablecoin, which was created in partnership with Paxos, which is also a blockchain company. Binance is one of the largest crypto exchanges in the world, and BUSD is regulated by the New York State Department of Financial Services. This makes BUSD a preferable choice for many because of the trust involved. It focuses majorly on three aspects- accessibility, flexibility, and speed. BUSD runs on three blockchain networks: Ethereum, Binance smart chain, and Binance chain.
  3. True USD(TUSD)
    TUSD was created by TrustToken in 2018. It utilizes escrow accounts to ensure customer privacy. To hold TUSD, one has to first pass Know-Your-Customer(KYC) and Anti-Money-Laundering(AML) tests. After one passes these tests, freshly minted TUSD gets transferred to the user’s Ethereum address as it is built on Ethereum’s ERC-20 protocol. This makes it more trustworthy and transparent. It can also be staked and farmed on various DeFi platforms.
  4. DAI
    DAI was created in 2017 by Rune Christensen. Its price stability is regulated by its own decentralized community MakerDAO. DAI is built on ERC-20 protocol and is minted via its native Maker Protocol platform. DAI is also used in MakerDAO’s lending ecosystem. For every loan taken out from MakerDAO by a lender, a certain amount of DAI is minted. Then, when the lender pays back their loan, DAIs are burned. Even after such fierce competition, investors prefer USDT because of its advantages. Tokenomi

Additional Read: Should you invest in Crypto for Long Term or Short Term

CONCLUSION

Tether’s launch has provided a significant boost to the crypto domain. It provides stability while guaranteeing the needed liquidity for apprehensive investors about using crypto assets. The Tether token, or USDT, is one of the most well-liked stablecoins and offers a variety of advantages to exchanges, retailers, and individual traders.

Tether has accelerated it’s growth thanks to its backing by fiat money and growing support for several blockchain networks. Most importantly, Tether’s acceptance over the year despite some controversies has fuelled its popularity. Even though the company claims that it has never failed to fulfil a redemption request from any of its customers up to this point, nothing in investing or cryptocurrency is guaranteed.

Users of crypto should also be aware of digital assets’ evolving regulatory landscape. Transparency, the availability of sufficient collateral, and liquidity are all necessary for the future of Tether and other stablecoins.

HOW TO INVEST IN TETHER (USDT) 

Use this three-step process to buy your first USDT token using the CoinDCX, crypto investment app.

  • Sign Up for the CoinDCX account: Enter a valid email address and a user name on the sign-up page. Once the Email Id has been verified, set a strong password to secure your account.
  • Verify the account: You need to complete your KYC, to buy USDT token on the CoinDCX platform. All you need to do is upload the documents and your account will be set up in 15 minutes.
  •  Buy USDT: After the account has been verified, you can deposit any amount of fiat currency you are comfortable with and start your crypto journey!

Additional Read: Ethereum Whitepaper Summary 


Disclaimer: User Generated Content – Original Content created by a member of BITS Pilani, under the consultation of Dr. Amit Dua, Assistant Professor, Computer Science Department, BITS Pilani, Pilani Campus in association with CoinDCX. The views and opinions expressed within this post belong solely to the author.
Author: Saatvik Mittal, Aman Bansal


 

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