What Are Tether Tokens and How Do They Work?
Electronic versions of the cash are slowly taking control over the majority of the global financial systems. To transform any electronic currency record into cash is as easy as this: You go to the nearest cashpoint and press a few buttons. If you are more or less familiar with diverse kinds of electronic versions of currency, you know about the existence of cryptocurrencies, CBDCs, and stablecoins, of course. This module will focus on the latter one.
The Meaning of Tether and Tether Tokens Decoded
The names of Craig Sellars, Reeve Collins, and Block Pierce are closely linked to Realcoin, which is the initial name given to an alternative form of payment, a stablecoin that is today developed and used under the title Tether, also referred to as USDT. This token binds its value to the value of another asset. One of the finest examples here is the reserves of gold of the US dollar.
The creation of this stablecoin didn’t happen out of the blue: The first and foremost intention was to try to deal with the issues of high volatility as well as convertibility - these are so typical when it comes to cryptocurrencies and government-issued currency that is not supported by a commodity.
Though Tether tokens weren't an opening stablecoin type given to the wide public, it was among the first ones embodied based on the Bitcoin protocol of 2012. Again, being not the first stablecoin, it still was the fiat-collateralized model frontiersman and slowly developed into the most extensively exploited medium of exchange with a constant value.
What differentiates Tether from Bitcoin? Unlike its counterpart, whose prices are always unforeseeable, Tether tokens hold their value around specific assets. According to the recent explanation given by the COO of Many Worlds Token, ‘Despite the state of the market, you can continually count on being able to exchange one Tether token for one US dollar’.
Above that, this digital token can be widely applied across a distributed network. In the meantime, tokens by Tether are tied to various fiduciary mediums of exchange in addition to the USDT we mentioned a bit earlier: MXNT, EURT, CNHT, and gold.
How Are All Tether Tokens (USDT) Backed?
Despite all said, the question of how tokens are backed remains. Due to the fraud back in November 2017, Tether lost more than $30 million worth of USDT tokens which was the reason why it failed to live up to the requests for funds withdrawal. This period of the Tether's existence remains one of the darkest. It still casts a shadow over the entire brand.
Nonetheless, the same event became the driving force that made the creators back up the coin with loans in addition to the existing cash backups. Two years after the unfortunate event, Tether reported around 74% of their digital currency is supported by fiat currency or other hard currency. Since then, these tokens have remained the most widely spread stablecoins.
From the most recent news, “All tokens are tied with matching bills of exchange at the ratio of 1:1. Moreover, all tokens are entirely supported by the stockpile of Tether”.
Tether (USDT) vs. Other Pegged-Coins
Even though USDT by Tether dominated the pegged-coin market, there exist similar options accessible for use. They all differ on the entity of the issuer, the deposit that backs up their value, as well as the way their prices are tied to fiat money or any other currency type.
Algorithmic stablecoins: These are frequently referred to as programmable stablecoins that maintain price stability from any contract codes tailored to tamper with coins circulating supply, thus stabilizing the price of an asset around the peg. This model is looked at rather skeptically, and there’s a permanent thought about whether or not this sort of stablecoin has a future. Unlike algorithmic stablecoins, Tether tokens do not operate this way since it’s Tether’s decision to create new tokens bringing them into circulation or burning them.
Decentralized stablecoin by MakerDAO, DAI: It operates in accordance with algorithms and is supported by reserve assets. However, this currency is also overcollateralized. This term stands for a reserve holding way more funds (only cryptocurrency like USDC or ether) than the total value of DAI. A drawback widely discussed is the absence of a unified governing body: Each of the stakeholders has a part of the leadership responsibilities.
Circle’s digital dollar USDC: This is a different stablecoin kind that is indigenous to the Internet with the ability to run on various blockchains, primarily the most advanced ones. USDC doesn’t only have a centralized governing body but is also supported by real assets. Still, it’s the composition of reserves that one should pay close attention to. This digital currency holds short-term government bonds (US) in addition to cash. For this reason, USDC is deemed as fast, safe, and more efficient.
Compared to their closest counterparts, Tether tokens are characterized by a high deal speed, lucidity of settlement, low commission and volatility, the possibility to operate across blockchains, and a high level of protection from hackers and fraudsters.
How Do Tether Tokens (USDT) Work?
Tether operates on a custom architecture model that features three tiers:
Tier One is called the Button Tier, which is basically the blockchain mechanics. This very tier is not more than a transactional channel running the algorithms.
Tier Two is the Omni Protocol responsible for either establishing or smashing tokens, tracking and/or reporting the circulation of assets. Basically, via this tier, users do the transfers safely, easily, and anonymously.
Tier Three is Tether Limited created to easily manage compliance logistics, wallets, deposits, and withdrawals. This tier generates the relevant sum of money when a user deposits fiat currency and converts it to coins. The relevant sum is then sent, exchanged, and stored.
Finally, there exist several types of Tether wallets one can utilize depending on how much money one plans to store as well as what the wallet is planned to be utilized for. For example, there are hardware/cold wallets that are the safest way with offline storage and asset support. The software wallets (custodial/non-custodial) can be downloaded to your desktop or smartphone and are better suited for small amounts of tokens. Last but not least, online/web/hot wallets are accessible via a browser from different devices and are a perfect choice for comparatively small budgets.
It’s the flexibility of Tether tokens that makes the technology adaptable to the needs of users and widely utilized almost anywhere.