Cryptocurrencies may have written a new chapter in the history of money, but if one wanted to purchase a cup of coffee, I highly doubt they’d opt for crypto. Granted that cryptocurrencies are an excellent means of exchange and great for speculation, but given the inherent volatility in prices, cryptos have not fared well when it comes to real-world adoption.
Could this dark, dark cloud have a silver lining after all? Yes.
A solution to the problem of price fluctuation in cryptos was found in the form of stablecoins. Stablecoins are simply cryptocurrencies that have a fixed price with a value ‘pegged’ to a stable asset, like gold or the US Dollar. Stablecoins, therefore, have comparatively less volatility and enable greater use cases than traditional cryptocurrencies.
One such popular stablecoin is Tether, a hybrid coin that bridges the gap between cryptocurrencies and traditional fiat money to combine the benefits of both. Tether’s value is tethered to the US Dollar in a one-to-one ratio, hence, 1 USD is always equal to 1 Tether token, i.e. USD₮. In a nutshell, it forms a stable, digital substitute of dollars to facilitate the transfer of funds around the world. Initially, Tether was anchored to the Bitcoin blockchain via the Omni Layer Protocol, a software layer on which the Tether tokens are deployed, but since June 2017 has shifted to Litecoin instead. Tether leverages the use of blockchain, and adheres to the highest security standards, as well as complying with all global governmental laws and regulations, including KYC processes.
In addition to the dollar, Tether also supports Euros (EUR₮) and has plans to expand the network to inculcate the Japanese Yen (JYP₮).
Tether is issued by Tether Limited, a company incorporated in the British Virgin Islands. Tether Limited manages the currency reserves to ensure that Tether’s digital tokens are actually backed by fiat currencies. Accordingly, Tether works on the Proof-of-Reserves configuration to simplify the process of attesting every tether issued or redeemed to be equal to a deposit or withdrawal of funds. Furthermore, reserve holdings are regularly audited, published on their website, and verified by professional auditors in order to confirm that the tokens in circulation match with the reserves.
This means that Tether can be sent, stored, and received across exchanges, platforms, and wallets with zero to minimal fees at fast transaction speeds, therefore integrating the patronage of traditional currencies with the power of blockchains. Thought Tether doesn’t offer any financial gains since the value of fiat currency decreases with inflation, Tether is still highly useful. It serves a key source of liquidity for exchanges, a good alternative to Bitcoin in terms of volatility due to the relatively steady exchange rate of USD, and allows for trading altcoins with minimum risk as opposed to trading with volatile cryptocurrencies themselves. Tether circumvents the danger of facing insolvency events by exchanges, and also lessens the counter-parity risk of users holding fiat on exchanges. Tether allows both individuals and merchants to do with USD₮ what they could do with Bitcoin.
That being said, like any cryptocurrency, Tether has also been in the spotlight for all the wrong reasons. Since the system is dependent on Tether maintaining the currency peg, and to make sure it doesn’t slip, many have raised concerns about Tether’s centralization- The exact opposite to the principles of a trust-less system that cryptocurrencies wish to develop. Things also took an unfortunate turn when a hacker stole $31 million from the company’s treasury wallet back in November 2017. The company also doesn’t guarantee redemption of Tethers, and with the issuance of 300 million tokens this March 2018, Tether has been accused of not having sufficient reserves to back Tether tokens. In addition to this, Tether came under further heavy fire over the close nature of relationship with popular exchange and sister company, Bitfinex, which critics claim allegedly used Tether to manipulate the prices of Bitcoin. Later, prompted by subpoenas from US regulators, Tether went underway to conduct an audit in order to alleviate fears, only to suddenly cancel it the next month.
In conclusion, whether Tether is the ultimate answer to crypto’s innate volatility, or proves to be a ticking time bomb is best left up to time to tell.