One of the most well-known stablecoins on the cryptocurrency market, Tether (USDT), is a link between virtual assets and conventional fiat money. USDT is tied directly to the US dollar, so its value is always $1, making it a safe choice for storing funds or sending money without worrying about sudden changes in its worth.
The utility of USDT stablecoin goes far beyond that, so let’s learn more about its functionality and role in the global crypto and financial industry.
Background: The Origin Of USDT
The 2014-born cryptocurrency Tether runs on the Omni Layer protocol and has since been adopted by Ethereum and Tron, among other blockchain networks.
The intention behind the creation of USDT was to provide a stable cryptocurrency immune to the volatile swings typically associated with digital currencies. By pegging each Tether coin to a US dollar, they aimed to combine the stability of fiat currency with the technological advantages of cryptocurrencies.
The pegging is achieved through a method known as ‘fiat collateralization,’ where each USDT token in circulation is backed by an equivalent amount of real-world US dollars held in reserve by Tether Ltd.
This innovative approach has allowed Tether to maintain a stable value and has positioned it as a valuable tool within the cryptocurrency market, facilitating smoother transactions and offering a digital equivalent to the US dollar.
USDT For Business: What Do People Use Tether For?
From an investment perspective, stablecoins like Tether may not be the most appealing choice as they are not designed to appreciate value. Their primary role is to act as a stable store of value, wherein the value of one USDT consistently aligns with one US dollar.
Hence, while they might not generate profit through capital appreciation, they are crucial in maintaining value consistency. Let’s break down several advantages USDT has brought to the financial market.
Price Constancy
Many exchanges and companies accept Tether payments because the price of USDT, unlike other cryptocurrencies, is stable and predictable. If you want to make a cryptocurrency transaction but are concerned about volatility, USDT might be the safest choice.
*To accept USDT payments, companies simply need to use Tether Gateway, cryptocurrency payments processing platform via which they can accept USDT OMNI on the website for goods or services.
Fast Transitions
In a traditional banking system, deposits and withdrawals in USD frequently take 1-4 business days to execute. Tether transfers happen quickly, which is crucial for cryptocurrency users who wish to close deals in minutes rather than days. USDT transfers are also beneficial for people without convenient access to banking.
Low Transfer Charges
Exchange transaction costs might be very high, especially if you are using a fiat, as there is always a % on the transfer and a separate fee for currency conversion. Between Tether wallets, fortunately, there are no transaction fees. Therefore, consumers often prefer to invest in and conduct transactions in USDT to avoid excessive costs.
This is also accurate for those who receive payments in crypto, migrant workers, and foreign employees, for example, as it lets them avoid spending up to 7% of the amount they intend to return to family members abroad using traditional remittance methods.
Streamlined Worldwide Payments
International payments can be problematic, particularly in some nations where sending money outside can be expensive and complicated, such as those with weak financial systems. Users may easily access new financial solutions in the DeFi ecosystem thanks to stablecoins. Long processing periods and blocked monies are avoided when using USDT as payment.
Broad Access
Stablecoins are a great way to exchange goods and services and connect with those who don’t have easy access to banks, such as those who live in rural areas or are just unbanked. These assets can also significantly impact quick, low-cost payments due to their accessibility and convenience.
USDT has recently been utilized as a source of aid for areas affected by natural catastrophes for relief and to purchase commodities in light of the pandemic. It removed the inconvenience of transferring physical items and currency because banks were challenging to access.
Examining the Financial Position of USDT Payments
Despite the benefits of Tether, like its ability to provide stability in the notoriously volatile cryptocurrency market, it is not without its potential risks, chief among which are concerns surrounding its transparency.
Tether claims that each USDT token is backed by an equivalent amount of real-world US dollars held in reserve, thus maintaining its value. However, these reserves and the company’s finances have been subject to ongoing scrutiny.
The crux of the issue is that Tether has not been consistently clear about how these reserves are managed and audited. Critics argue that without regular, independent audits proving that an actual dollar indeed backs each Tether, users must largely trust Tether’s word. This lack of transparency raises questions about whether Tether always holds enough dollars to back all existing USDT.
Moreover, legal challenges have also cast a shadow over Tether. For example, a 2020 New York Attorney General lawsuit accused Tether’s operators of misrepresenting the degree to which USDT was backed by fiat collateral.
There are still questions regarding the true nature of Tether’s reserves and assets because a reputable third-party company hasn’t performed a thorough audit.
Global government organizations and regulatory bodies are becoming more watchful regarding stablecoin issuers’ adherence to anti-money laundering (AML) and know-your-customer (KYC) regulations. Some people blatantly want centralized stablecoins— also known as CBDCs or central bank digital coins—to take their place.
Conclusion
Tether, or USDT, is the biggest stablecoin and the third biggest cryptocurrency by market value. This shows that almost 75% of cryptocurrency investors have USDT in their digital wallets. It’s not a shock, as USDT has become one of the most handy, quick, and low-cost options for making transactions. However, how well it does in the future heavily relies on its transparency.
Even though Tether is widely used and holds a big spot in the market, these factors alone might not be enough for its ongoing success. With the growing need for clear rules in cryptocurrency, the importance of being open and accountable can’t be overstressed.
