What is USDT and how does it work?

In the world of cryptocurrencies, markets are often very volatile in nature with yearly highs and yearly lows breaking very quickly. Although this might be an opportunity for traders to make some money, it gives an investor a negative influence who is a believer of the technology and is looking for long-term investing. Developers in the decentralized world realized this very early and this led to the creation of stablecoins. 

Stablecoins are a form of cryptocurrencies that possess the same characteristics of an ordinary cryptocurrency but which are backed by real assets/commodities or algorithms. As they are backed, they are stable in nature. This stability gives an investor a chance to invest and hence stay committed to the technology. The two of the most famous stablecoins are USDC and USDT. Here we’ll be covering all about USDT. 

About USDT 

Launched in 2014, Tether or USDT is a US Dollars backed cryptocurrency. Tether is the issuer company and USDT is the token issued by them. Tether first issued a stablecoin called Realcoin in 2014 after which it was rebranded to USDT and since then, it has grown to become the third largest cryptocurrency by market capitalization. Other Tether-issued stablecoins are - Tether gold (AUXT): pegged to gold’s price, Tether euro (EURT): pegged to the common currency of the European Union, Tether peso (MXNT): pegged to the Mexican peso, Tether yuan (CNHT): pegged to the offshore Chinese yuan.

How does USDT work?

Similarly to USDC, for every 1 Tether, there is 1 USD in the reserves, hence making the pegging ratio 1:1. USDT is also compatible with many blockchains including Ethereum, Solana, etc. Tether is owned and managed by iFinex which also owns the crypto exchange BitFinex. USDT as a coin is audited and inspected by Freeh Sporkin & Sullivan. 

If when a user deposits $50 into Tether reserves, the corresponding amount of tokens i.e 50 USDT is issued to the user. Similarly, in the case of selling, USDT is burnt and removed from circulation for a similar amount of fiat currency. USDT as a coin uses a Proof of Reserves system through which an equal amount of fiat currency is confirmed to back up the number of tokens that are in circulation. It also uses a  Proof of Research consensus mechanism which enables transparency involved in showing the available reserves.

Pros and Cons of USDT 

Pros of USDT

1. Just as USDC, the USDT coin is also highly stable and hence provides an option for investors to stay invested despite market fluctuations. 
2. As USDT was launched in 2014, the coin has established itself to be secured and trusted and has been tested enough to validate its existence. 
3. Being the third-largest cryptocurrency by market capitalization, it is widely and easily available on almost every crypto exchange. 

Cons of USDT

1. Historically, there have been controversy and doubts regarding the real assets with which USDT has been backed up. Still, there is no transparency on the same. 
2. USDT as a coin is not divisible, which limits its use cases. 
3. It’s seen that it is really difficult for a user to buy and sell large amounts of USDT coins on crypto exchanges.

Conclusion 

USDT as a coin has been in the market for a very long. It has very well tried to address and solve the problem of market volatility and hence become the third-largest cryptocurrency by market capitalization. Being said, USDT as a coin has faced a lot of questions around the assets and collateral being there with the company, some of which are still unanswered.

If you hold USDT, you can generate passive returns on your coins by investing them on Flint. Flint allows you to earn high returns on your crypto in a safe and secured manner passively.