What Is USDT, and How Does It Work?

dYdX
What Is USDT, and How Does It Work?What Is USDT, and How Does It Work?

Traders often feel overwhelmed by the crypto market's wild volatility, which can lead to extreme profit or loss situations. However, one category of cryptocurrencies aims to bring stability to the crypto world: stablecoins. In this arena, Tether's USDT stands out as a key player. As a stablecoin, USDT is designed to offer the best of both worlds––the quick and digital nature of cryptocurrencies, coupled with the stable value of traditional fiat money

In this guide, we’ll review what USDT is, including its operational mechanism, its role in mitigating the crypto market’s inherent volatility, and the risks and challenges associated with it.

Understanding stablecoins

Exploring the fundamentals of stablecoins is essential before diving into what the USDT coin is.

Stablecoins offer a low-volatility haven in the dynamic crypto market. These digital tokens are pegged to stable assets like fiat currencies, ensuring a steadier value than cryptocurrencies like Bitcoin (BTC). Tether, in particular, commands a significant portion of the stablecoin market, pegged predominantly to the U.S. dollar. Other stablecoin examples include USD Coin (USDC), Dai (DAI), and TruUSD (TUSD).

USDT's strength lies in its blend of cryptocurrency flexibility and the reliability of traditional currency. Its operation hinges on a reserve system, with assets like the U.S. treasury and cash underpinning its value. This structure provides traders with a predictable and secure option amid the volatile crypto market, making stablecoins a popular choice for managing liquidity and mitigating risk.

What is the Tether (USDT) crypto?

Tether is a pioneering stablecoin and offers traders a hedge against the inherent volatility of cryptocurrencies while keeping value within the crypto market. It’s a fiat-collateralized stablecoin backed by USD. Tether aims to bridge the gap between traditional finance and blockchain technology by maintaining a 1:1 peg against the U.S. dollar (although it's important to note that Tether Ltd. doesn't guarantee direct USD redemption).

Tether's parent company is iFinex Inc., which also owns crypto exchange BitFinex, adding to the cryptocurrency’s credibility and market presence.

Additionally, Tether diversifies its offerings with variants like Tether Gold (AUXT) and Tether Euro (EURT), each pegged to different stable assets, broadening its appeal and utility in the digital currency landscape.

How does Tether work?

Tether's USDT operates by balancing stability and flexibility in the cryptocurrency market. It achieves this through a reserve system that includes the U.S. treasury, cash, and other assets. This blend of reserves has established USDT as a reliable stablecoin with a significant presence on blockchains like Tron (TRX) and Ethereum (ETH).

USDT tokens are minted or burned to match demand, ensuring their peg to the U.S. dollar. This process, combined with custodial and non-custodial storage options, offers traders flexibility and security in the volatile crypto market. Tether's ability to maintain a stable value in economic uncertainties makes it a solid choice for traders.

What is the USDT payment?

USDT payment refers to the use of Tether as a medium of exchange for goods and services, similar to how one would use fiat currencies like the U.S. dollar.

To use USDT, traders should first purchase the tokens on an exchange or through Tether Limited. They can then use these tokens for various purposes within the crypto ecosystem, such as trading, investing, or as a stable store of value. When a user decides to cash out their USDT, they can sell the tokens on an exchange for fiat currency or other cryptocurrencies. 

Are there any risks associated with USDT crypto?

Despite its utility, the USDT stablecoin—an essential aspect of Tether crypto—encounters several significant risks and challenges. Here are a few:

Transparency and auditing concerns

Tether has faced criticism over the transparency of its reserve system. While it claims to back each USDT with equivalent fiat currency, the company has not conducted a full audit but provides periodic attestations. This raises questions about the exact composition of its reserves, which are crucial for USDT's stability.

Market influence and speculation

There have been instances where Tether's operations seemingly influenced the broader crypto market. For example, iFinex was once accused of issuing more USDT tokens than it had in fiat reserves, potentially impacting Bitcoin's exchange rate. 

Security concerns

Tether's platform hasn’t been immune to security breaches. The most notable incident occurred in 2017 when hackers stole more than $30 million worth of USDT. Such events raise concerns about the security measures to protect traders' funds.

Regulatory decision impact

The relationship of USDT with fiat currencies means it’s subject to financial regulations. Any adverse regulatory developments could significantly impact USDT's acceptance and use. 

For example, the 2021 settlement with the New York Attorney General, where Tether paid $18.5 million in fines and admitted that its tokens weren’t always backed 1-to-1 by USD, exemplifies the impact of regulatory actions on the cryptocurrency.

Dependence on blockchain infrastructure

USDT's operation across multiple blockchains like Ethereum, Tron, and others means its stability partly depends on these platforms' security and efficiency.

Potential for price deviation

Despite being pegged to the USD, USDT can sometimes deviate from its 1:1 ratio, especially during high market volatility or operational issues within Tether or its associated platforms.

Tether versus Bitcoin: Key differences

The Tether coin and Bitcoin are two prominent cryptocurrencies, but they serve different purposes and operate under different principles within the digital currency landscape. Here’s a comparison of the key differences between Tether and Bitcoin:

Asset ties

USDT's value is directly linked to the U.S. dollar, which offers predictable stability. This peg to a non-crypto asset, the USD, shields it from the crypto market's volatility. Bitcoin, on the other hand, isn't tied to any external asset, making its value subject to the unpredictable supply and demand dynamics of the crypto market.

Purpose and usage

Tether was created to bridge the gap between fiat currencies and cryptocurrencies, providing stability in transactions and exchanges within the crypto market. Bitcoin, in contrast, was developed as an alternative to traditional currencies and operates as a decentralized digital currency for peer-to-peer (P2P) transactions.

Blockchain technology

While both use blockchain technology, Tether is issued on multiple blockchains, including Bitcoin (via Omni and Liquid Protocol), Ethereum, EOS, and others. Bitcoin, however, has its own blockchain and is the original blockchain that introduced the concept of decentralized digital currencies. 

Role in the crypto market

Tether, due to its stability, is commonly used as a medium for exchange and a safe haven during market volatility in the crypto trading environment. Bitcoin, on the other hand, is often seen as a digital asset for investment, a store of value, or digital gold.

Supply mechanics

Tether’s USDT can be issued as long as there are equivalent reserves in fiat currency and doesn’t have a limited number of tokens. Bitcoin, however, has a capped supply, with a maximum limit of 21 million, which introduces scarcity to its economics. 

Stability and value preservation

USDT's value is designed to be stable and closely tied to the USD, making it a reliable store of value, especially in times of high crypto market volatility. Bitcoin, known for its price fluctuations, serves a different purpose and is often used for investment or decentralized transactions.

Regulatory and transparency issues

Tether has faced scrutiny and controversy regarding the transparency and management of its reserves (the actual backing of USDT by USD). Bitcoin, while subject to regulatory scrutiny, is decentralized and not controlled by any single entity, and its supply mechanics are transparent and predictable.

Learn more about cryptocurrency with dYdX Academy

Terms like Bitcoin, altcoin, and stablecoin may seem confusing at first glance. But dYdX Academy has you covered. Our in-house resource library houses a wealth of easy-to-understand guides on dozens of crypto topics, including algorithmic stablecoins, crypto scaling solutions, and blockchain oracles.

dYdX also offers eligible traders a premier decentralized exchange to trade crypto perpetuals with up to 20x buying power. Learn more about dYdX and our platform and products on our official blog, and start trading on dYdX today.    

Disclosures

The content of this article (the “Article”) is provided for general informational purposes only. Reference to any specific strategy, technique, product, service, or entity does not constitute an endorsement or recommendation by dYdX Trading Inc., or any affiliate, agent, or representative thereof (“dYdX”). Use of strategies, techniques, products or services referenced in this Article may involve material risks, including the risk of financial losses arising from the volatility, operational loss, or nonconsensual liquidation of digital assets.  The content of this Article does not constitute, and should not be considered, construed, or relied upon as, financial advice, legal advice, tax advice, investment advice, or advice of any other nature; and the content of this Article is not an offer, solicitation or call to action to make any investment, or purchase any crypto asset, of any kind.  dYdX makes no representation, assurance or guarantee as to the accuracy, completeness, timeliness, suitability, or validity of any information in this Article or any third-party website that may be linked to it.  You are solely responsible for conducting independent research, performing due diligence, and/or seeking advice from a professional advisor prior to taking any financial, tax, legal, or investment action.

You may only use the dYdX Services in compliance with the dYdX Terms of Use available here, including the geographic restrictions therein.

Any applicable sponsorship in connection with this Article will be disclosed, and any reference to a sponsor in this Article is for disclosure purposes, or informational in nature, and in any event is not a call to action to make an investment, acquire a service or product, or purchase crypto assets.  This Article does not offer the purchase or sale of any financial instruments or related services.

By accessing this Article and taking any action in connection with the information contained in this Article, you agree that dYdX is not responsible, directly or indirectly, for any errors, omissions, or delays related to this Article, or any damage, injury, or loss incurred in connection with use of or reliance on the content of this Article, including any specific strategy, technique, product, service, or entity that may be referenced in the Article.

Legitimacy and Disclaimer

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain’s infrastructure.

The dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.

The dYdX Chain software is open-source software to be used or implemented by any party in accordance with the applicable license. At no time should the dYdX Chain and/or its software or related components be deemed to be a product or service provided or made available in any way by the dYdX Foundation. Interactions with the dYdX Chain software or any implementation thereof are permissionless and disintermediated, subject to the terms of the applicable licenses and code. Users who interact with the dYdX Chain software (or any implementations thereof) will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation does not make any representations, warranties or covenants in connection with the dYdX Chain software (or any implementations and/or components thereof), including (without limitation) with regard to their technical properties or performance, as well as their actual or potential usefulness or suitability for any particular purpose, and users agree to rely on the dYdX Chain software (or any implementations and/or components thereof) “AS IS, WHERE IS”.

Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone.  Users should conduct their own research and due diligence before making any decisions. The dYdX Foundation may alter or update any information in this post in the future at its sole discretion and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it was published and should only be read and taken into consideration at the time it was published and on the basis of the circumstances that surrounded it. The dYdX Foundation makes no guarantees of future performance and is under no obligation to undertake any of the activities contemplated herein.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain's infrastructure.

Nothing in this website should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act in any way by anyone. You should perform your own research and due diligence before engaging in any activity involving crypto-assets due to high volatility and risks of loss.

Depositing into the MegaVault carries risks. Do your own research and make sure to understand the risks before depositing funds. MegaVault returns are not guaranteed and may fluctuate over time depending on multiple factors. MegaVault returns may be negative and you may lose your entire investment.

The dYdX Foundation does not operate or has control over the MegaVault and has not been involved in the development, deployment and operation of  any component of the dYdX Unlimited software (including the MegaVault).

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.