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How Tether (USDT) works: A guide to stablecoins

How Tether (USDT) works: A guide to stablecoins


One of the most beneficial innovations in the modern world has been the introduction of cryptocurrency. The emergence of digital assets has drastically changed and reinvented the dated finance and banking systems on a global scale. With the conception of digital assets, society now has new and exciting ways of purchasing, investing, and sending money to every corner of the globe.

With such a variety of cryptocurrencies available on the market today, each coin has its own specific features and purposes. However, despite the elegant technology surrounding these digital assets, one factor that makes them a tough nut to crack is their volatility. In 2018, the world saw the great Crypto Crash, leading to pretty drastic fluctuations in the market. These changes in the crypto space were primarily caused by low-liquidity, a young market, and the initial mistrust surrounding the adoption of decentralized technology. 

Enter the age of the stablecoin

These digital giants have started to gain massive traction in the crypto sphere and one of the most popular stablecoins used today is Tether (USDT). But before you dive into the world of Tether, you first need to know what a stablecoin is and how it works. 

What are stablecoins?

As the name suggests, these coins were initially designed to give more stability to crypto investments by pegging them with fiat currencies as a reserve asset. Usually, stablecoins are ‘pegged’ after something with value; this can either be fiat money or another cryptocurrency.

Stablecoins can be split into the below four categories:

  • first-collateralised stablecoins
  • commodity-collateralised stablecoins
  • crypto-collateralised stable-coins
  • non-collateralised stablecoins. 

Since its introduction into the market, various types of stablecoins have been popping onto the scene. While there are many stablecoins in the market, only a few variants remain successful and reliable. 

Kinds of stablecoins

Below are the different types of stablecoins you can encounter in the crypto sphere today.

  • Collateralised off-chain 

One of the most well-known asset types, these are backed by fiat holdings and regulated/verified daily by outside auditors. Collateralised off-chain has two types which are fiat-collateralised and commodity-collateralised stablecoins. 

    • Fiat-collateralised- These coins are backed by fiat currencies. Examples include Libra, Tether, and Gemini Dollar.

    • Commodity-collateralised- Mostly pegged by everyday commodities like gold, oil, and silver. An example of this is the Digix Gold or DGD. 

  • Collateralised on-chain

One of the easiest stablecoins to use is the collateralized on-chain. These coins are fixed by none other than cryptocurrencies. Ethereum is the most popular backer for this type of stablecoin. 

  • Non-collateralised 

These assets are neither backed by fiat nor crypto assets. To protect this stablecoin from fluctuations in the market, it relies on an intricate set of algorithms and smart contracts. 

Importance of stablecoins

  • Lessens volatility

The purpose of stablecoins is to provide a fiat peg for the crypto assets that will give it stability while providing swift and cheap transactions. 

  • Useful for cross-border payments 

Stablecoins are useful for sending cross-border payments and remittances. You can send money to other countries at a much faster and cheaper rate. 

  • Good for crypto-investment 

If you’re investing in crypto and want to keep your coins safe from price fluctuations, you can use stablecoins to ensure the value of your digital assets will hardly ever drop.

For example, if you’re investing in Ripple and you don’t want to risk its value, you can convert your assets to Tether. When you’re ready to use your crypto again, you could convert your Tether funds back to XRP. 

Different types of stablecoins

Just like fiat, there are various types of stablecoins available on the market today. Here are the top recommended variations. 

  • TrueUSD

Known as one of the most reliable and most-used stablecoins, TrueUSD earned its reputation from its fiat reserves. Currently, there is a supply of $26,017,572 TRUSD in the market. Additionally, this coin is also popular among users because of its updated transparency reports. 

  • DAI

DAI runs on Ethereum. Unlike USDT and TrueUSD, DAI is backed up by a company called Maker platform. One of the most notable features of this stablecoin is that it allows users to create and destroy the tokens. 

  • Paxos Standard (PAX)

PAX is a regulated stablecoin developed by the Paxos Trust Company. Like USDT, PAX has a 1:1 ratio. It’s back-up fiat assets are kept in FDIC-insured banks in the United States. Additionally, Paxos is one of the most utilised coins, currently catering to t 40+ currencies. 

What is Tether? 

Tether (USDT)is one of the largest and most-utilised stablecoins in the market today. With a whopping capitalisation of $4 million, Tether is ranked as the fourth-largest. Tether (USDT), functions on a 1:1 ratio, meaning 1 United States dollar is equivalent to 1 Tether.

How does Tether work?

Tether functions as a hybrid cryptocurrency, catering to digital and fiat assets alike. The creators of Tether wanted to give cryptocurrency more credibility in the market by providing stable assets that cannot be easily affected by market fluctuations. 

So, let’s say you have 20 dollars and you decide to store it into your Tether wallet. Since the ratio for Tether to USDis 1:1, that same 20 dollars would instantly convert into 20 USDT. 

The fiat currencies used by Tether to back up crypto funds are stored by Tether Limited. This works by merging fiat currencies and blockchain to easily exchange cash into crypto assets. Moreover, USDT is tied to various crypto assets like Bitcoin and Ethereum, which can be converted into Tether. 

The technology behind Tether

The transactions behind Tether are possible through an open-source platform called the OmniLayer. To provide a decentralized gateway that goes through a peer-to-peer platform, Omni is layered on top of the Bitcoin blockchain technology. 

By doing this, Tether can facilitate cheap, transparent, and swift transactions. Additionally, the OmniLayer Platform can also handle smart contracts for coins like Ethereum. In 2017, Tether collaborated with Ethfinex to create an Ethereum-based Tether, that is cheaper and faster with a clock time of 15-30 seconds. 

The lifecycle of Tether

Here are the five steps in the funding flow lifecycle works in Tether. 

  • Deposit your fiat currency into a Tether-based platform like Tether Limited bank account. 

  • Once Tether Unlimited has confirmed your account, they will issue you with credits in USDT. Since the ratio is 1:1, you’ll get the exact amount that you have spent in USDT.

  • Once funds are converted to USDT, you can spend them and store them in your crypto wallet. 

  • When you want to convert back to fiat you can go ahead and do so. 

If you want to make sure USDT is backed up with actual money, Tether Limited has provided a ‘proof of reserve’ their users can access on their website or transparency page.

Where to purchase Tether? 

USDT is available to purchase on most crypto exchange sites. Want to know where you can get hold of some Tether? Here are the different digital asset exchanges that you can head over to.:

  • Binance

As one of the leading crypto exchanges on the market, today, Binance offers reliable services as well as a wide range of to choose from. Additionally, it has the most USDT exchanges. However, Binance has country restrictions, so first check if they offer services in your location. 

  • StormGain

If you’re a margin trader and you want to make sure you’ll gain from your assets, your best option is StormGain. Many margin traders use StormGain because it has ludicrously low commission rates of 0.08%.

Moreover, they offer different types of trading pairs like Bitcoin, Litecoin, Ethereum, Ripple, and Bitcoin Cash. You’ll gain more with StormGain because of their up to 100x multipliers. 

  • Kucoin

With an impressive volume and range of services, Kucoin will give you great margins on your USDT. Additionally, it offers currencies including Bitcoin, Ethereum, Litecoin, Ripple, and KCS.

  • Bitmex 

Run by highly-skilled developers, economists, and competitive traders, Bitmex is known in the crypto sphere for its exceptional range of services and overall reliability.

Currently, Bitmex trades in 7 different coins including Bitcoin, Bitcoin Cash, Cardano, Ethereum, Litecoin, and Ripple, and USDT.

Different kinds of Tether wallet 

USDT should be stored in a safe and well-protected wallet. Having a safe and secure wallet for Tether assets should be your priority if you want to use them for investments.

Since these coins will hold your crypto assets, finding a wallet is a must. Luckily, there are various Tether wallets perfect for experienced and first-time investors alike. Here are the best and most reliable Tether wallets on the market today. 

  • MyEtherWallet 

Made for ETH crypto users, MyEtherWallet is one of the most popular and frequently used amongst Ethereum investors today. This web browser wallet enables you to connect it to your chrome extension, making it easy to access.

  • OmniWallet 

 OmiWallet’s security is top-notch due to its intricate algorithm blockchain technology. The only drawback is that it’s not easy to navigate for beginners. 

  • Tether Wallet 

Tether has its own wallet users can access on their site. However, this is not strongly recommended by experts due to security issues. However, some users still opt for the Tether wallet because it’s easy to use and navigate. 

  • Coinomi 

Listed as one of the most-recommended mobile wallets to store USDT on, Whether you’re using Android or IOS, you can ensure that Coinomi works well with both systems. Its security features don’t disappoint either. Designed with IP Anonymisation, Coinomi can protect your real IP address from hackers and phishers. 

  • Exodus 

Exodus is a diverse wallet that accommodates Tether, Bitcoin, Ethereum, Dash, Litecoin, and Zcash. This wallet is accessible to most gadgets including desktops. With its simple interface, Exodus is the perfect wallet for beginners and experienced investors alike. 

  • Ledger Nano S

Ledger is known for its sturdy and well-protected hard wallets. If you want to take extra precaution for your funds, Ledger Nano S is your best choice. One of its best features is that you can keep your private key inside the wallet itself. Moreover, if you want to send or receive funds, you can use a VPN protocol to protect your IP address. 

Advantages of Tether

Tether has been proven and tested by many crypto investors. Because of its advanced technology that can help control the volatility of digital assets, many investors are using it to secure their funds. 

Here are some advantages of using USDT: 

  • It’s backed up by a real-world currency value system. This makes it more promising for investors because it can control the volatility of cryptocurrencies. Moreover, it runs on the Bitcoin blockchain making it secure and swift. 

  • Despite Tether being young in the market, many big companies and groups like Poloniex, Ambisafe, and Spaceshift back it up. 

  • Another factor is its transparency. If you visit Tether’s website, you can see they have a page containing all the information about the holdings of the company. You will see how many reserve assets they have in their bank.

  • Transferring funds from wallet-to-wallet is affordable. Additionally, funds travel in a matter of seconds. 

What does the future hold for Tether?

The age of digital currency will continue to flourish and expand in the coming years. This expansion will create more opportunities for USDT since investors need the security and assurance of their assets from the changing tides in the market. 

Investing in cryptocurrencies is easy, but maintaining and growing your assets in an unpredictable economy is difficult. Before you dive into the crypto sphere, make sure you know how to face the rapid changes in the market by learning how the technology works and how you can use it to its full potential. 

Words by: Rain Quintana

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