What is Tether and Why do exchanges use it instead of USD?

Tether, originally known as Realcoin, was first issued on 6th October 2014. In the crypto-world, it is referred to as Stable coin’.

In my previous write-up, I referred to the concept of trust wherein we as a species tend to depend on centralized institutions for proper governance. However, blockchain provides us with a platform for our money to be in our control and stay decentralized. In light of this concept, Tether Limited came up with a coin that attracted a lot of investors and controversies as well.

Tether, a cryptocurrency of a hybrid nature, was introduced to our market where moderately conservative investors or hodlers can find a safe haven for their funds. This hybrid coin claims to be backed by the US dollar in the ratio of 1:1. This means its value remains the same as USD and each token issued to the investors has a dollar’s worth of reserve in banks. Ever since its birth, this coin’s market cap has risen to $2.8 billion. To this date, around 44 exchanges are using Tether, due to its unique properties.

Below are the main features that highlight the differences between Tether and other cryptocurrencies:

Features:

1. Stability

Tether is a delicate maneuver. It eased the recent volatility present in the crypto-market and also made it suffer. For instance, Bitcoin and Ether fluctuate between 10% and 20% each day. This makes it hard for investors to rely on. The Dollar usually fluctuates at around 1%.

In addition to provisions of consumer loans, Tether offers a stable investment avenue on the blockchain technology.

2. Liquidity

Crypto-exchanges seem to face a challenge while dealing in dollars with banks. This is because cryptocurrencies are on the blockchain and the counter-party isn’t.

Nevertheless, USDT provides a solution since we already have a backup reserve. Furthermore, they also get to bypass the banking regulations. Customers will also have the benefit of easy issuance and redemption of their Tether.

3. Proof of Reserves Process

The Proof-of-Reserves process proves to be an alternative to the Proof-of-Solvency and is verified in cryptology. Many exchanges tend to take this audit and allow auditors to verify the total amount of coins held by the exchange, to equal with the outstanding set of customer balances.

To attract the trust of investors, any exchange would practice the process of reassurance through external audits. Tether affirms that the company holds a transparent reserve account holdings.

4. No Transaction Fees

We know that cryptocurrencies are some of the burgeoning asset classes since 2016. However, we still need to pay our brokerage or transaction fees to the exchange, in order to allow us to buy or sell cryptos. Most exchanges charge between $0.003 and $2.6.

Astonishingly, Tether has no transaction fees at all. However, the cost of the transaction from a tether wallet to a bank account is 10 basis points or $20.

5. Trading in Tether

Trading provides the best image to Tether. One can always convert their coins to USDT and use them as a hedging instrument in the crypto-market which has a high threshold of volatility.

6. Reserves in other currencies

Tether also has Euro and Yen pegged to it which are denoted by EURT and JPYT to increase its demand amongst traders. It’s a dicey move, though a fair audit for all the reserves is still blank in the minds of customers and the crypto community in general.

7. Decentralized or Centralized

This decentralized cryptocurrency is backed by a fiat currency. Thus, this makes it easier for non-technical customers to understand. Being an open-source and browser-based system; it also has an encrypted wallet system to support it.

With all the benefits that Tether offers, one cannot simply ignore the challenges it possesses. From audit flaws to chances of fiat backup going bankrupt, there are numerous problems that Tether Limited needs to resolve. In the short run, it seems like the customers are poised to reap the benefits of Tether. However, looking at the large demands that it has set in the market, one needs to focus on taking calculated risks while being heedful of the pros and cons of investing in such a hybrid instrument.


Is this a step closer to a global utilization of crypto? Let us know your thoughts in the comments section below.


About Bank Of Hodlers

Bank of Hodlers is building a customer-centric bank on the blockchain, by providing financial services like cryptocurrency-backed loans and cryptocurrency-backed cards.

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