Tether (USDT) is a stablecoin that aims to maintain a peg to the US dollar. As a stablecoin, Tether provides the benefits of cryptocurrencies––faster, cheaper, permissionless transactions––without the price volatility. Tether's issuer claims to have backing in the form of bank reserves and loans that match or exceed the value of USDT in circulation.
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A brief history
Originally known as “Realcoin,” Tether was founded in July 2014 by Brock Pierce, Craig Sellars, and Reeve Collins. Tether aims to solve two major issues with existing cryptocurrencies: high volatility and convertibility between fiat currencies and cryptocurrencies. To address these perceived issues Tether created a cryptocurrency that is fully backed 1:1 by deposits of fiat currencies like the US dollar, the euro, or the yen. This makes Tether a fiat-based stablecoin, which differs from other stablecoins such as crypto-collateralized stablecoins, which use cryptocurrency reserves as collateral. Tether relies on a Proof-of-Reserve to ensure that reserve assets match circulating USTD tokens. Doing this requires a third party to audit Tether’s bank accounts on a regular basis to show that the reserves are held in an amount equal to the outstanding tokens. Tether uses an IOU model where each USDT represents a claim for $1.00 held in Tether’s reserves.
USDT in practice
On Bitcoin, USDT tokens are issued through the Omni Layer protocol- a protocol built as a layer over Bitcoin that allows for the issuance of tokens representing any type of asset. On Ethereum, USDT is issued using the ERC-20 protocol. The goal of Tether is for 1 USDT to be interchangeable for $1, and in order to accomplish that, Tether maintains reserves to back the tokens that it issues. For example, in theory, if Tether wanted to mint 1,000 USDT, it would need to have $1,000 in its reserves, ensuring that if buyers want their money back, they can get it. It is more complicated, however, since These reserves are a mix of assets, not all cash. It's also worth noting, however, that there's no legal guarantee a USDT token will be redeemable for $1