Crypto 101

What Is USDT And How Does It Work?

USDT, aka Tether, is the most popular stablecoin in the cryptocurrency universe, and in terms of market capitalisation has vacillated alongside Ripple’s XRP for the third- and fourth-largest spot. Stablecoins, as the name suggests, are a subset of cryptocurrency innovations driven by a desire to tackle the problems caused by the wild volatility swings in the valuation of bitcoin (BTC).

Volatility has long been a widely recognised problem (the precursor to Tether, then named Realcoin, was announced in July 2014), but the notion of stablecoins arguably really came into its own after the meteoric rise of bitcoin through 2017 was abruptly halted, and the rollercoaster ride of valuations through 2018 and 2019.

Why stability is important for wider adoption of USDT

For a store of value to be of any practical use in a transactive real-world sense, it cannot display drastically volatile characteristics that undermine its utility as a medium of exchange (as an intermediary between two parties), or as an acceptable unit of account (as a means for comparison or inventory).

Enter stablecoins.

A price comparison clearly shows the relative stability of USDT vs BTC (CoinMarketCap data).

Source: CoinMarketCap data

The relative stability of stablecoins is achieved by pegging their value to some form of underlying collateral, be it a traditional fiat currency, which in Tether’s case (and many others) is USD, a basket of fiat currencies (such as Saga’s SGA), another cryptocurrency (like DAI to ETH), to a basket of crypto currencies, or to a commodity such as gold (PAX Gold).

The pegging of USDT to USD means that from a customer, business or investor perspective, payment can be made digitally – hence faster and cheaper than traditional methods – but essentially in a fiat currency.

In fact, once we begin to consider the collateralization of any token with an underlying asset that has value, the options are literally endless.

If the blockchain delivers its principle of universal decentralisation then any asset we choose could be digitizable – and some would argue that that is truly democratic and empowering. Individuals previously excluded by geography or deficient infrastructure from holding certain assets can now access an entire universe of assets through digital tokens. They are more empowered to express their investment philosophies, diversify their exposure and amplify their returns.

From monetary policy to regulating protocols

Fiat currencies are held stable (in the main) by the reserves that back them and the monetary authority (usually a central bank) that has tools to manage them. At the most basic supply-demand level, a central bank can utilise the sale of its foreign reserves for the purchase of its own currency (creating demand) to prop up its value, or sell its own currency and buy foreign currencies (creating supply) to weaken it.

Many stablecoins have some concept, or form of corrective mechanism, built into their blockchain or protocol to ensure that prices don’t stray too far from their chosen underlying asset – for those with underlying fiat currencies you can think of this as an algorithmic replacement of a central bank.

In Tether’s case, however, this has proven to be highly contentious because it uses its own so-called “Treasury” to mint new coins, in contrast to the decentralised nature of other coins mined along the blockchain. For the purist, here we hit an inherent contradiction in viewing stablecoins as cryptocurrencies. Central to Satoshi’s philosophy was the removal of “the inherent weakness of the trust-based model” that relies on third parties. This underpins the decentralised nature of bitcoin mining, whereas many stablecoins, Tether included, still require a centralised function with the (trust-based) promise that their coins are fully collateralised.

And trust has proven a thorny issue for Tether. In fact, the company is under official investigation by the New York attorney general’s office for an accounting cover-up involving sister company Bitfinex with regards to its reserves, and there remain serious doubts over its ability to collateralise all the tokens in circulation.

In March 2019, Tether changed its claim that all tokens were backed solely by USD, and now promises that, “Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”

With a current market cap (as of May 26, using CoinMarketCap data) of over USD8.8 billion it is hardly surprising that questions about it being fully collateralised persist.

Tether remains unaudited to this day.

Tether as a gateway coin

In theory then, 1 USDT = 1 USD, which in a practical sense, can be clearly understood by anyone unfamiliar with the cryptocurrency space. Try explaining to someone why BTC or ETH are worth what they are at any given moment and you face an uphill struggle; even the semantics get in the way immediately.

While BTC may be valued at X, we could spend all day arguing whether or not it is actually worth X. But with USDT, the 1:1 ratio with USD is clear. So for anyone who may be looking to get into the cryptocurrency space, Tether removes that first tricky hurdle of understanding and provides an easy entry point.

For an individual wanting to make a simple digital payment, the idea that 1 Tether is merely a tokenised USD is very easy to understand. The simplicity of the concept has also led to Tether’s adoption by traders, who may find it easier to use than BTC in trading crypto pairs. Back in April 2019, Tether’s trading volume exceeded BTC’s for the first time and now outstrips that of all other cryptos by some margin. According to CoinMarketCap, trading volume of Tether topped $34.3 billion on May 26, 2020, while that of BTC was $29.8 billion. Tether means big business for crypto exchanges.

Furthermore, due largely to know-your-client (KYC) and anti-money laundering (AML) requirements and policies at bricks-and-mortar banks on Wall St, many crypto exchanges do not have accounts with traditional financial institutions – making it very hard for them to actually hold USD.

The solution? Hold USDT instead.

Well, sort of…

For now, that statement still holds for the majority of cryptocurrency exchanges, but as a sign of the times, and perhaps reflecting the need of traditional financial institutions to broaden their sights (though we won’t go so far as to say shed their blinkers), major headlines were grabbed recently as JPMorgan Chase approved the opening of accounts for two crypto exchanges, Coinbase and Gemini.

And really, it’s not hard to see the diffusion of innovation in play with cryptocurrencies as more and more people become open to the idea of adoption. The fact that BTC futures contracts even exist on the Chicago Mercantile Exchange (CME) is perfectly illustrative of this – and the point is only reinforced by the recent surge in open interest seen in them.

Yet with all this said, we have to remember that the crypto space is still a long way from being mainstream. As an asset class, cryptocurrencies are strictly speculative to anyone beyond – and still to many within – the space.

And why? Volatility. Not solely, but largely.

Cloudbet: Champions of innovation

We need to remember that this universe is still essentially in its infancy. Cutting-edge innovation and tech-driven solutions not only exist in an ever-changing world, but are often the drivers of those very changes. But like any nascent market, there will be growing pains and most likely a feisty, tumultuous adolescence before a mature market can bed itself down comfortably.

While bitcoin remains the granddaddy of all cryptocurrency, necessary innovations have led to the creation of a multitude of altcoins, and a booming concurrent marketplace. Bitcoin’s slow transaction settlement inspired the creation of Ethereum, with its faster and cheaper transaction execution, on a whole new blockchain, in turn spawning an explosion of decentralised apps – all of which, if they stand the test of time, could help raise digital adoption.

At the very least, this illustrates how a nascent cryptocurrency market is able to grow and develop so substantially in such a short period of time – thanks in no small measure to the fact that those operating in the space are also those sitting at the bleeding-edge of technological development.

It shows us that necessity drives not only invention, but innovation.

And that happens to also be a key ethos held by Cloudbet – and why Cloudbet, as the leading cryptocurrency sportsbook and casino, is now proud to offer USDT settlement.

Get betting with USDT at Cloudbet

Start betting in USDT right now.

At its inception in 2013, Cloudbet was one of the first sportsbooks and casinos to offer bitcoin betting. Since then, its pioneering spirit has focussed on improving the user experience and broadening its markets, which in 2018 included providing settlement solutions for bitcoin Cash, and early this year, Ethereum. Cloudbet has now taken one more innovative step forward to offer USDT settlement.

  • With USDT’s underlying fiat ratio, it’s easy to know how much you’re playing with
  • The relative stability of Tether removes the risk of the wild swings in more traditional cryptocurrencies
  • USDT provides the same benefits of privacy as other cryptocurrencies
  • It’s easy to buy.

And what’s more, Cloudbet continues to offer customers a generous first-time deposit bonus, matching your first deposit 100%, up to 5 BTC/BCH/ETH, and now 1,000 USDT.

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