What is USDT? The Leading Stablecoin and the Backbone of the Crypto Economy

Peter Zoltan
| Editor:
Joseph Kennedy
February 28, 2024
9 min read

The cryptocurrency market is known for its volatility and stories of people turning tiny investments in dog-themed tokens into millions of dollars. However, while memecoins and high-risk trades make headlines, USDT is in the background, making everything possible and enhancing the usability of crypto both on and off the blockchain. 

USDT is a stablecoin designed to maintain a constant 1:1 value with the US dollar, and it’s the leading player among an increasingly crowded field of cryptocurrencies attempting to track the value of fiat currencies. While the concept may sound simple, understanding how USDT works, its benefits and the controversies surrounding it are crucial for any crypto trader or investor. Whether you want to navigate trades with less volatility or simply explore this essential piece of the crypto ecosystem, this blog post has you covered. 

Understanding USDT: Origins and Purpose

Tether (USDT) traces its roots back to 2014, when it was initially launched as Realcoin by Brock Pierce, Reeve Collins, and Craig Sellars. In November of 2014, the cryptocurrency was renamed Tether. The company behind USDT, Tether Limited, is incorporated in Hong Kong and operates with ties to the cryptocurrency exchange Bitfinex.

USDT was created to address the volatility prevalent in the cryptocurrency market by providing a stable store of value and a medium of exchange linked to a traditional fiat currency (the US dollar) within the blockchain economy. 

How USDT Maintains Its Peg

The key to USDT's stability lies in its reserves. Tether Limited maintains reserves of cash, cash equivalents (short-term, highly liquid assets), other short-term deposits, and commercial paper. In theory, these reserves should equal or exceed the value of USDT tokens in circulation.

When users want to purchase USDT, they transfer fiat currency to Tether Limited. The company then issues an equivalent amount of USDT tokens. Conversely, when a user redeems USDT tokens for fiat currency, Tether Limited removes an equivalent amount of USDT from circulation (it 'burns' the tokens) and releases funds from its reserves. This system has been extremely effective at maintaining the 1:1 peg between USDT and the US dollar. 

As this chart shows, USDT has shown remarkable price stability even during market volatility. Source: TradingView

Key Uses Cases of USDT: Far More Than Just On-Chain $USD

USDT's core design, aiming to mirror the price of the US dollar, may seem simple. However, this stability translates into incredibly versatile capabilities. Let's dive into the practical applications that have driven USDT's remarkable growth.

Trading: A Bridge Between Crypto and Fiat

USDT plays a vital role in the cryptocurrency trading ecosystem. Since many cryptocurrency exchanges don't offer direct fiat-to-crypto pairs for every coin, USDT acts as a bridge. Traders can convert their fiat currency (USD, EUR, etc.) into USDT and use it to purchase a wide range of cryptocurrencies.

For example, imagine wanting to buy a smaller altcoin that isn't directly tradable for fiat. You can first purchase USDT and then easily trade that USDT for your desired altcoin. Conversely, traders can protect their profits during market downturns by selling their crypto assets for USDT without being forced to cash out back into fiat.

Remittances: A Fairer Cross-Border Payments System

The global remittance market is massive. According to the World Bank, in 2022 alone, low and middle-income countries received approximately $626 billion in remittances. However, a considerable amount of remittances end up in the pockets of intermediaries like Visa, Mastercard, and Western Union. One UN report’s findings showed that an estimated $25 billion is spent annually by migrants on remittance fees. 

USDT provides a compelling alternative to traditional remittance services like Visa and Mastercard. Migrant workers can convert their wages into USDT and send them to their families in other countries with significantly lower fees than traditional methods. For example, sending USDT on networks like Tron and Polygon incurs nearly no fees. The recipient can then convert USDT into their local currency, allowing more transferred money to reach its intended destination.

Store of Value: Temporary Stability

When cryptocurrency markets face extreme volatility, traders may seek temporary refuge in USDT. While a longer-term store of value may still be sought in fiat currency, USDT provides a level of stability that other cryptocurrencies might lack during tumultuous periods.

Cross-Exchange Transfers: Faster and Cheaper

Moving funds between cryptocurrency exchanges can be expensive and time-consuming using traditional banking methods. USDT offers a solution. Traders can transfer their USDT holdings between exchanges much faster than fiat and with significantly lower fees, particularly for bigger transactions.

The Growing Demand for USDT 

The usefulness of USDT as a trading tool, a quick way to transfer value, and a temporary store of value has driven the enormous demand for this stablecoin. This is reflected in USDT's market capitalization, which has grown exponentially to around $100 billion and counting. Its dominance solidifies its place as a significant player in the cryptocurrency landscape. However, competition has been growing, and other stablecoin issuers, namely Circle’s USDC, have also seen their market caps grow by billions of dollars over the past few years. 

USDT’s market capitalization has been rising exponentially for years and is on the cusp of breaking above $100 billion for the first time. Source: TradingView 

USDT vs. Other Leading Stablecoins

While USDT holds a dominant position in the stablecoin market, it's essential to be aware of the alternatives. Several reputable stablecoins offer different levels of transparency, regulatory compliance, and backing mechanisms. Let's compare USDT to some of its top competitors:

  • USDC (USD Coin): Issued by a consortium formed by Circle and Coinbase, USDC is often lauded for its transparency and full 1:1 backing by cash and short-term U.S. Treasury bonds. It undergoes regular attestations by third-party accounting firms, giving credibility to its reserves.
  • DAI: A decentralized stablecoin governed by the MakerDAO protocol and designed to maintain its peg through a system of over-collateralized Ethereum-based assets. DAI offers transparency as its code and collateralization state are viewable on the blockchain.
  • BUSD (Binance USD): Issued by Binance and Paxos and once claimed to adhere to strict New York Department of Financial Services (NYDFS) regulations. However, BUSD is in the process of being removed from circulation by the issuers, who decided it wasn’t worth the regulatory risk after the SEC suggested that it was an unregistered security. 

While USDT remains the most widely used stablecoin, its competitors have made significant strides. USDC, in particular, has witnessed remarkable growth in market capitalization. This reflects a growing demand for fully-backed and transparent stablecoins that adhere to strict regulatory standards, which Circle has worked towards over the past few years. 

On the other hand, BUSD has fallen out of the race, and Binance is in the process of winding the entire project down. The decisions from Binance and Paxos to wind down the BUSD operation have driven the stablecoin’s market capitalization down to just $85 million, at the time of writing, from a high of $22 billion. 

  • USDT is issued by Tether Limited and has limited regulatory oversight. Its backing mechanism includes cash, cash equivalents and other assets.
  • USDC is issued by Circle & Coinbase and has strong regulatory oversight. Its backing mechanism includes cash and short-term U.S. Treasury bonds.
  • BUSD is issued by Binance & Paxos and has strong regulatory oversight. Its backing mechanism includes cash and U.S. Treasuries.
  • DAI is issued by MakerDAO and is decentralized. Its over-collateralized Ethereum-based assets.

Controversies and Considerations Surrounding Tether

Despite its widespread use, USDT has been entangled in a fair share of controversies that have sometimes resulted in crypto influencers and analysts driving the market towards alternatives such as USDC and DAI. To make informed decisions about using USDT, it's essential to explore these critical issues:

  • Transparency of Reserves: Tether Limited has faced ongoing criticism regarding its reserves' exact nature and composition. While the company has become more forthcoming, doubts about the complete backing of USDT persist. Several investigations and settlements over misrepresentations of reserves have fueled these concerns.
  • Regulatory Oversight: Stablecoins, including USDT, are facing intensified regulatory scrutiny globally. While Tether has made efforts to comply, regulators continue to express concerns about its systemic risk potential and whether it has sufficient reserves to weather substantial redemption requests.
  • Market Manipulation Allegations: Some studies and critics have suggested potential manipulation of cryptocurrency prices through the minting of new USDT tokens. However, no conclusive proof of this has been produced. 

USDT plays a significant role in the cryptocurrency ecosystem; however, its history and ongoing controversies make due diligence vital. Before utilizing USDT, research the latest news, examine reputable analyses, and carefully weigh the potential risks against the benefits. It is worth mentioning that none of the controversies or criticisms have been able to stop USDT from steadily growing its market capitalization, and it remains by far the most dominant stablecoin on the market. 

Final Thoughts on USDT 

From its beginnings in 2014 to its $100 billion market capitalization today, Tether (USDT) has undeniably transformed the cryptocurrency landscape. It propelled the concept of stablecoins into the mainstream, offering a crucial element of stability within the volatile crypto markets. 

Today, USDT plays a vital role in trading and remittances and as a temporary haven for investors, contributing to its substantial market dominance. Despite controversies surrounding its reserves and regulatory compliance, USDT is an undeniable success story, and it would be hard to imagine the crypto industry without it. 

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