Tether is a stablecoin originally issued on the Bitcoin blockchain’s Omni Layer that is designed to be fully-backed in a one-to-one ratio with the United States Dollar. Despite a somewhat contentious history, Tether has significance both as the earliest stablecoin to have a meaningful impact across the industry, and for retaining its size and centrality, even in the face of increased competition from emerging peers, well into 2020. Tether’s 2019 expansions into additional blockchains, to include functioning on the Ethereum, EOS and Tron blockchains, reinforced its central role in the industy.
Tether gained prominence for its place among the earliest stablecoins, cryptocurrency that maintains a stable price through a peg to an underlying asset, in this case the United States Dollar. Tether is designed to offer token holders a low-volatility asset and provide key industry entities—most notably crypto exchanges—a source of liquidity. Tether’s original executive team, including CEO JL van der Velde, CFO Giancarlo Devasini, and CSO Philip Potter, was eventually revealed as identical to Bitfinex’s, making Tether a side-project of a prominent exchange. Prior to rebranding in February of 2015, Tether was known as Realcoin.
Tether offers users a tokenized claim on the project’s United States Dollars holdings. Users can send fiat currency to Tether (the off-chain incorporated entity) and Tether issues a digital token (Tether) representing that currency on the Bitcoin blockchain using the Omni Layer. Tether claims to retain all fiat currencies in designated bank accounts, with each Tether purportedly entirely backed by US dollars held in reserve. Many have questioned this claim, and Tether so far has been unable to furnish an official audit from an accredited auditor that satisfies critics.
Tokens are redeemable for the underlying fiat, though Tether’s legal terms of service state that the project is not legally obliged to do so in every instance. However, a December 2018 report by Bloomberg indicated that it had seen Tether bank statements indicating that it did hold the backing funds over a prior four month period. In March 2019, Tether updated its Terms of Service to indicate that it’s reserves may not be exclusively fiat and can include other assets and loans receivable.
Tether’s issuance originally utilized the Omni Layer, a colored coins protocol for creating and trading decentralized digital assets, but expansins now include operations on additional chains including Ethereum, EOS and Tron. The Omni Layer can attach data to individual Bitcoins, thus ‘coloring’ them to represent both the coin’s underlying Bitcoin value (typically a tiny fraction of a Bitcoin) and the Tether value. All issued, redeemed, and existing Tethers, including transactional history, are publicly auditable via the tools provided at Omniexplorer.info. A smaller number of Tethers also exist as ERC-20 tokens upon the Ethereum blockchain. Users can exchange newly created Tether tokens on a permissionless basis, or between accounts, such as accounts on different crypto exchanges. Tether charges no fees on transactions between Tether wallets or blockchain wallets, and approximately $20 on deposits and withdrawals to fiat bank accounts.
Tether is a stablecoin. Holding the token confers users the right to reclaim the token’s underlying pegged asset. New tokens are issued when users send fiat, typically USD, to Tether’s reserves and tokens are removed from circulation when users reclaim reserved assets. Exchanges are a primary Tether user, as Tether allows exchanges to easily settle outstanding fiat-like balances. Tether is also attractive to cryptocurrency market participants as a means for avoiding volatility within the crypto sector.
Further analysis and commentary about Tether can be found in S+C’s extended report.