Understand how Tether cryptocurrency works

Understand how Tether cryptocurrency works
on May 22, 2018

How does the Tether cryptocurrency work? How come its value is pegged to U$ 1? In this article we talk briefly about the curious case of a cryptocurrency that was created, from the start, to be pegged to the US Dollar fiat currency.

Many cryptocurrencies had the purpose of representing some real world value. There was a crypto for gold, silver and bronze for example. But these currencies seemed to miss the point, at least according to cryptocurrency purists: gold isn’t decentralized, it’s a physical good, therefore it cannot benefit from a decentralized medium. All you need is a note that represents gold, regardless of how this note is represented. The argument is, then, that gold and other physical goods do not benefit from decentralization. Any form of digital money would suffice to represent these goods.

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.

Enter Tether.

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 central banking, showing average users 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 once in a while. The result is that we have over U$ 5 trillion printed by the FED since 2008 crisis: 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 with registration in Hong Kong and offices in Switzerland. Not much is known about where they keep the USD reserves which guarantee the value of Tether against U$.

The Tether token itself is built on top of Omni Layer, which is a 2nd layer application built on top of the Bitcoin blockchain. Therefore 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.

Conclusion

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”.