USDT: What is it and how it works?

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Tether (USDT) is the world’s most popular stablecoin. As such, it serves multiple purposes in the market making it a core cryptocurrency in many investor strategies. Tether helps to provide liquidity and a hedge against market volatility. It’s able to accomplish this task because it is what’s known as a Stablecoin.

Announced in July 2014 by Brock Pierce, Reeve Collins and Craig Sellars as Realcoin, Tether (USDT) is the most popular and liquid stablecoin in the crypto-currency ecosystem. It is a token that was first issued on the Bitcoin blockchain using the Omni Layer platform, however it has since been launched as a token on various other blockchains (Ethereum, Tron, EOS and Algorand).


What are Stablecoins?

Stablecoins are blockchain instruments that have their value pegged to outside commodities. However, the advantages these coins bring to the market are undeniable. For one, their stability helps curtail the volatility of cryptocurrencies as a whole. Investors depend on stablecoins as a way to escape bearish markets without converting funds back into fiat currencies. However, in most stablecoin scenarios, the token will have its value pegged to a fiat currency. When it comes to Tether, USDT shares its value with the US dollar. In essence, 1 USDT is worth $1. Additionally, anyone can choose to redeem their 1$ of fiat currency through Tether Unlimited at any time. Interestingly, Tether helped to spawn a new class of stablecoins. Today, there are multiple fiat stable coins. Additionally, there are stable coins pegged to nearly every major commodity (gold, diamonds, and even oil).


How does it Work?

Many people trading on exchanges, will use Tether to buy other cryptocurrencies like bitcoin. Tether Limited argues that using this method to buy virtual currencies allows users to move fiat in and out of an exchange more quickly and cheaply. Also, exchanges typically have rocky relationships with banks, and using Tether is a way to circumvent that.

“Exchange users know how risky it can be to hold fiat currencies on an exchange. However, with the growing number of insolvency events, it can be quite dangerous. As mentioned previously, we believe that using tethers exposes exchange users to less counter-party risk than continually holding fiat on exchanges,” the company explains in a whitepaper on its website.


The Importance of Tether (USDT)

Tether is one of the most dominant cryptocurrencies in the market. It provides investors with additional flexibility as it serves as a dollar replacement on many popular exchanges. Here are just some of the reasons Tether continues to see adoption:

Exit Strategy – Market volatility is a major concern in the crypto sector. When the bears start to take over the market, investors only have a few options to consider. They can sell their holding and convert them back into fiat. This process is time-consuming and involves the most fees possible. Or they can ride the bear market out and take the losses. Tether adds a third option to the equation. Convert to Tether and avoid the fees and volatility.

Reducing Friction – Since Tether is another blockchain asset, converting from Bitcoin or any cryptocurrency into Tether is as easy as exchanging Bitcoin for Ethereum. This conversion introduced a frictionless way for investors to avoid volatility and remain in the cryptomarket.

Accounting – Another major advantage of using Tether as a means of payment is accountability. Since its inception of Bitcoin, there has been confusion surrounding its use as payment in terms of accounting. Businesses that pay for goods or services with crypto are often left to estimate the value of their payment against the US dollar. Stablecoins eliminate this concern because they always equal their fiat counterparts.

Transit Cryptocurrency – Lastly, Tether facilitates the transfer of real cash into digital cash. This is a major task in some regions of the world. Remember in some locations it’s a difficult task to convert crypto into fiat currency. In some countries the practice is illegal. For all of these regions, Tether is a smart alternative.


Advantages & Disadvantages

PROS:
  • Useful for quickly swapping between cash and crypto in exchanges.
  • Stable, useful for preventing short term losses by volatile crypto markets.
CONS:
  • Long term investments may lead to losses.
  • Reliant on fiat remaining stable.

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