“Reserve-Backed Cryptocurrency”
The most important thing to appreciate about Tether is that it’s designed to provide a reserve backed cryptocurrency. This is meant to stabilize its price and essentially provide users with as close a one-to-one match against the preferred fiat currency as possible.
In order to fully understand how this works, you need to realize that Bitcoin is not a currency but a payment transaction network.
The point is that whilst most people think Bitcoin is going to create a new global economy, the reality is that it’s going to end up as another Paypal, Visa or Mastercard – allowing you to transact with people around the world.
Whilst this is good, the main issue is that its tokens (decryption files) are almost entirely devoid of value in their own right. Thus, as we’ve seen, the price of these tokens is susceptible to market swings, manipulation and even fraud. Thus, Tether was introduced to provide a more stable way to send money – backed by actual fiat currency holdings.
Founded in November 2015, the company has grown to handle a large amount of transactions across its network. Originally built on top of the Bitcoin protocol, it changed to Ethereum in 2018…
What is Tether?
Tether is essentially a pseudo-cryptocurrency designed to retain its value against fiat currencies such as the USD. The reason this is important is because of how the Bitcoin craze has revealed how volatile the market can be – and thus how precarious a transaction may be on the BTC network.
As explained, BTC’s main value proposition is the ability to transfer money – without the need for a central regulator or clearing-house – to anyone with an Internet connection & corresponding BTC address.
The issue that has beset the BTC system is that because when transferring your money, you’re basically buying a bitcoin for fiat currency, these coins have been played by speculators to the point where they became worth $20,000+. The problem with this is that if you buy BTC on Monday, and the price either goes up or down by 20% the next, you could be out of pocket, defeating the point of the system.
Therefore, Tether was introduced as a means to “calm the waters” – allowing businesses and consumers who wanted to retain the value of their transactions irrespective of market conditions. This was achieved through the backing of each token to an appropriate unit of fiat currency.
The point here is that Tether hasn’t really added a lot (technically) to the Bitcoin infrastructure. Rather, it’s provided users with a more robust system which may – or may not – give them more peace of mind. Whilst this works in principle, issues have arisen as to how / where the funds Tether provides are stored.
With several of its board implicated in tax evasion schemes by the Paradise Papers, it’s important you know who you’re dealing with before trusting it.
Who created it?
The system was created and developed by a small team from the US:
- Jan Ludovicus van der Velde (CEO)
Controversial figure due to the relatively small amount of information available on him from the Internet. Dutch by birth, apparently resides in Hong Kong. An important fact to consider is that it he is also the CEO of the Bitfinex exchange.
- Giancarlo Devansini
Former Milanese plastic surgeon-turned hardware importer from China – his name was linked to Tether in the Paradise Papers leak in 2017.
Why does it exists?
Ultimately, the system has been built to be a more robust Bitcoin – offering a central financial transactions ledger through which transactions can be placed.
However, unlike the majority of other Bitcoin derivatives, its been created with backing which allows it to retain its value even when the price of BTC becomes volatile, or even crashes…
A digital token backed by fiat currency provides individuals and organizations with a robust and decentralized method of exchanging value while using a familiar accounting unit.
The innovation of blockchains is an auditable and cryptographically secured global ledger. Asset-backed token issuers and other market participants can take advantage of blockchain technology, along with embedded consensus systems, to transact in familiar, less volatile currencies and assets.
In order to maintain accountability and to ensure stability in exchange price, we propose a method to maintain a one-to-one reserve ratio between a cryptocurrency token, called tethers, and its associated realworld asset, fiat currency.
This method uses the Bitcoin blockchain, Proof of Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all times.
You can view the whole Whitepaper here.
Trajectory
The Tether currency has grown massively in recent months, partly due to the rise in Bitcoin’s price (and the resulting trickle-down of the cryptocurrency market).
The problem with Tether is several-fold…
- Firstly, their currency has little difference to Bitcoin. And as we’ve pointed out in a number of previous articles – BTC is almost certainly going to be the long term “winner” in the cryptocurrency war.
This means that the majority of Tether’s business is essentially spillover from the main BTC currency. Without bringing anything significantly different / new / better to the market, it’s going to struggle in the long term.
- Secondly, there is a lot of contention about how the coin has been “backed”. One of its core features/benefits has been the idea that each Tether token is backed by 1USD.
Whilst this seems to have been reflected in the market performance of the coin, the contention arises from how the company behind the system (Tether LTD) has worked to provide said backing.
This contention was heightened when the Paradise Papers revealed that the connection between Bitfinex and Tether extended to a company in the British Virgin Islands. It was considered by some that the whole project could essentially be a large money-laundering scheme.
Ultimately, with coins like this, the results are almost always going to be the same – they’ll trail in Bitcoin’s shadow and anything that happens to the main player will eventually affect them (usually negatively).
The big deal about Tether seems to be the idea that it keeps USD reserves to back up its currency. Frankly, this means relatively little as to the standing of the currency – it’s like a credit card saying that your monthly balance is backed by the equivalent fiat money… it doesn’t really matter to the users who want to perform transactions.
This is why we are quite reticent about the system, although some people seem to be in favour of it – its lack of innovation and ultimate hazy nature about its financial prowess have made it a questionable offering in the unregulated crypto space.
