USDT, also known as Tether, has become an integral part of cryptocurrency markets since its launch in 2014. Pegged 1:1 to the US dollar, it is the most widely used stablecoin with a market capitalization of over $83 billion as of October 2023. But it is also controversial, with opaque reserves and questions around its long-term viability.
Here is an in-depth look at how USDT works, its importance in crypto, and the risks it presents.
What is USDT? Overview of Tether Stablecoin Cryptocurrency
At its core, Tether functions as a stablecoin, meaning each token is backed by an equivalent amount of traditional fiat currency.
This peg to the dollar aims to minimize volatility compared to other cryptocurrencies like Bitcoin and Ethereum. USDT operates on different blockchains like Bitcoin, Ethereum, Tron and others, allowing it to be transferred seamlessly between different networks.
Crypto traders rely on USDT as a stable store of value when trading between different digital assets. It is also widely used on decentralized finance (DeFi) platforms for lending, borrowing, and making payments.
USDT price: $1
USDT Market Cap: ~$83 billion (as of October 2023)
Key Features of USDT Crypto
The key features that define Tether include:
- Pegged 1:1 to the US dollar – USDT aims to maintain parity with the dollar
- Operates on different blockchains – Enables transfer between networks
- Hedges against crypto volatility – Acts as a stable haven when markets are fluctuating
- Wide adoption – Used extensively in crypto trading and DeFi protocols
How Does USDT Maintain Its Dollar Peg?
According to Tether Limited, the company behind USDT, every token in circulation is backed 1:1 by their reserves, which include both traditional currency and cash equivalents. When buyers purchase USDT by depositing $1 per token, new tokens are issued while the dollars are held in reserves.
This mechanism theoretically allows users to redeem each USDT to USD. By allowing two-way convertibility between USDT and dollars, the supply can adjust to maintain the 1:1 parity.
However, Tether’s reserves have been shrouded in secrecy over the years, leading to allegations that the company does not hold sufficient dollar reserves to back all USDT in circulation. Tether settled a case with the New York Attorney General in 2021, agreeing to release periodic reports on its reserves.
So far, the redemptions have generally maintained the dollar peg. But questions linger over…
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