How does the Tether cryptocurrency work?
How come its value is pegged to U$ 1, exactly?
In this article we briefly discuss the curious case of a cryptocurrency that was created, from the start, to be pegged to the US Dollar!
Many cryptocurrencies are created with the sole purpose of representing ownership of some real world asset. There are gold-backed, silver-backed and even bronze standard cryptocurrencies, for example.
These currencies aren’t decentralized, though. For instance, gold can’t be decentralized because it’s a physical asset, so it gains limited benefits by being traded via a decentralized medium.
In essence, by tokenizing gold you’re simply leveraging cryptocurrencies as a deed of ownership. All you need is a piece of paper that represents gold, regardless of how it is represented. The argument is, then, that gold and other physical goods do not benefit from decentralization. Since the gold is physically deposited somewhere, any kind of verifiable digital contract could be used to prove ownership.
But the world of FOREX is an entirely different beast. The US Dollar is not a physical good. Neither is the Euro or the British Pound. They’re as abstract and as virtual as any other currency, crypto or not. It was only a matter of time before folks realized this and made a cryptocurrency that mimicked fiat money.
Tether began life as Realcoin, during the great bear market of 2014. It was renamed to its current brand later that same year. The purpose of Tether was to offer a cryptocurrency that could be traded as US Dollars on major centralized exchanges like Bitfinex, Bittrex and others. Since the USD is heavily regulated and most exchanges do not allow direct trade in fiat money, Tether was a plausible solution. The idea is that for every Tether, there exists a US Dollar somewhere. Although the reserves claim has met its share of criticism, we take their word for it for the purposes of this article.
So how does Tether maintain precisely U$ 1 value per USDT token? It’s a complex system and it works a little like this: every time demand for Tether would cause it to go above the equivalent value of U$ 1 in equivalent Bitcoin, more USDT is minted against Bitcoin. Whenever the value of Tether tends to go down in relation to U$, in the equivalent Bitcoin amount, Tether is bought off the markets and drained.
Essentially, Tether works just like real world central banks.
In fact, Tether has exposed how central banking works to the average person, helping traders understand how much power these centralized institutions hold over our day to day currency.
Central banks perform the exact same job in mainstream economy: they print money at will, via fancy names like Quantitative Easing, when they need to artificially boost the markets, and they (rarely) drain the markets by increasing interest rates or shrinking the balance sheet once in a while. (Only to expand debt even further a short time later.)
The result is that we have over U$ 5 trillion printed by the FED since 2008 crisis (U$ 4 trillion more printed in 2020 during the COVID-19 pandemic). This money never reached you or anyone you know, but remains with big banks for their own benefit. Japan and the European Union also printed trillions of their own currencies since the 2000’s.
Tether is a privately owned company. Last we knew, it had offices registered in Hong Kong and Switzerland. Not much is known about where they keep the USD reserves which back the value of Tether against U$.
The Tether token itself was initially built on the Omni Layer, which is a 2nd layer application built on the Bitcoin blockchain. Later, Tether began to use Tron, Ethereum and other blockchains so it could be traded in more exchanges.
You cannot mine Tether, it can only be minted by its contract controllers. In a sense it works a lot like a ERC20 token works on top of Ethereum, except this one uses Omni as its platform. All Tether activity can be tracked using the Tether explorer on top of Omni. There you can see how much is being minted, destroyed and so on.
We hope this brief overview of Tether has given you better insight into how it works and has clarified the basics of this fascinating cryptocurrency.
Tether is responsible for a large share of cryptocurrency liquidity in major exchanges.
Although it faces criticism from skeptical parties, until the time of this writing Tether has not been placed under any legal sanctions.
The value of Tether is kept on par with the US Dollar through traditional monetary controls and, in a way, Tether works a lot like US Dollars, Euros and Pounds do in “the real world”.