A Beginner's Guide to Tether (USDT) and its Use Cases
Stablecoins are playing an integral role in today's crypto ecosystem. With a market capitalisation of over $161 billion as of May 29, 2024, they are leveraged by users for various purposes, from simple balance transfers and exchange trading to lending and yield farming strategies. As one of the oldest stablecoins, Tether (USDT) continues to lead the market with a market cap of over $111 billion and a 24-hour trading volume nearing $70 billion. It is available across numerous blockchains, exchanges, and decentralised applications (dApps).
In this article, we will introduce you to Tether (USDT), its use cases, future prospects, and how you can start trading this stablecoin.
What is Tether (USDT)?
Tether (USDT) is currently the top stablecoin in the crypto market. It is a fiat-backed stablecoin that follows the USD's price, achieving price stability through physical reserves.
Its value is pegged to $1 (or very close to it), regardless of current supply-demand metrics, market conditions, or cryptocurrency volatility. This provides tremendous benefits for crypto users, especially considering the high volatility of digital assets.
USDT is managed, issued, and backed by Tether Limited, a British Virgin Islands-based centralised entity owned by the same company that owns the Bitfinex digital asset exchange.
Tether's history dates back to 2012 when J. R. Willett introduced the concept of launching new digital assets on top of the Bitcoin blockchain in the Mastercoin whitepaper. Initially, Mastercoin (now called the Omni Layer) was leveraged as the technological foundation to issue the project's stablecoin in October 2014.
Brock Pierce, Reeve Collins, and Craig Sellars co-founded the stablecoin, initially named Realcoin, before rebranding to Tether in November 2014. Since then, USDT has become the top stablecoin by market cap, maintaining a stable price for nearly a decade.
Tether maintains its peg to the USD through physical reserves. Each USDT is linked to the US Dollar at a 1:1 ratio with matching fiat currency and is backed 100% by reserves held by Tether. Despite some controversies regarding the stablecoin's backing, Tether has a transparency page showcasing the reserves breakdown for USDT. According to a recent report by independent auditor firm BDO Italia, Tether holds over 84% of its reserves in cash, cash equivalents, and other short-term deposits.
What Are the Use Cases of Tether (USDT)?
Trading
One of the primary use cases of Tether is facilitating cryptocurrency trading by offering stability. Before USDT, centralised exchanges (CEXs) could only offer fiat-crypto pairs, which involved increased responsibilities, complexities, fees, and compliance-related tasks for service providers. Decentralised exchanges (DEXs) had to rely exclusively on crypto-crypto pairs, as they couldn't introduce fiat-crypto trades without centralising the whole trading process.
Integrating Tether into their platforms allows both CEXs and DEXs to offer stablecoin-crypto pairs. This enables users to exit volatile positions and trade cryptocurrencies against fiat prices without requiring exchanges to maintain fiat reserves.
Hedging
Tether is also used for hedging against cryptocurrency market fluctuations. It serves as an excellent store of value during volatile market conditions or when users want to minimise the risks of volatility. Investors can exit their positions without relying on fiat infrastructure, holding their funds in Tether until market conditions improve.
Transferring Funds
Stablecoins like USDT retain nearly all the advantages of cryptocurrencies, such as peer-to-peer (P2P) transactions without financial intermediaries. Transfers in USDT can be faster and cheaper than fiat transactions, including international remittances. For example, sending funds from South Africa to another country via traditional methods could cost up to 6.5% of the transfer amount and take several days. In contrast, the same transaction in Tether on Solana would cost less than $0.01 and confirm in less than a second (with multiple confirmations needed for transaction finality).
Additionally, USDT is increasingly used in the decentralised finance (DeFi) space instead of fiat currency. In DeFi, Tether is utilised for lending, borrowing, yield farming, swaps, and margin trading.
Payments
Tether can be used for payments, allowing merchants to integrate cryptocurrencies into their stores without worrying about volatility-related risks. While USDT is not yet widespread as a payment method among consumers, accepting payments in stablecoin enables merchants to offer more flexibility and meet the demands of crypto users.
The Future of Tether (USDT)
Tether has faced challenges and controversies, particularly regarding its reserves and ties to Bitfinex. However, it has maintained its position as the leading stablecoin with excellent price stability. Increased transparency and a higher proportion of reserves held in cash or cash equivalents have improved Tether's reputation significantly. Tether is expected to continue its dominance in the stablecoin market, with a focus on enhancing stability to minimise risks to users and the crypto market.
USDT’s future also includes renewable energy investments and projects like the Tether Gold (XAUt) gold-backed stablecoin. Potential challenges Tether may face include regulatory uncertainty and changes, such as Nigeria's strict rules that make it difficult for crypto providers to manage funds via local bank accounts.
To learn more about USDT's future prospects, watch The VALR Podcast featuring Tether CEO Paolo Ardoino below.
In Summary
Before you decide to trade USDT, here’s some pros and cons to consider.
| Tether (USDT) Pros | Tether (USDT) Cons |
|---|---|
| Fast and instantaneous transfers | Past controversies |
| No intermediaries | USDT is not yet ready to replace fiat as a widespread payment method |
| Powered by the blockchain | Centralised management and issuance |
| The largest stablecoin by market capitalisation | Not all reserves are held in cash and cash equivalents |
| Integrated deeply into the crypto and DeFi ecosystems | |
| Extensive history of price stability | |
| Regular reserve audits by independent firms |
As the leading stablecoin, USDT has played a critical role in the cryptocurrency market. From trading and DeFi transactions to cross-border transfers, payments, and hedging, crypto users benefit from a wide range of Tether's use cases. While the project may face regulatory challenges, USDT is expected to continue dominating the stablecoin market with enhanced stability.
Ready to buy USDT?
On VALR, you can buy USDT as well as trade a variety of cryptocurrencies with USDT across Spot, Futures, and Margin. VALR also supports the deposits and withdrawals of USDT on Ethereum, TRON, as well as the Solana network.
Frequently Asked Questions
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Tether (USDT) can be used for trading to provide stability, hedging against market volatility, transferring funds more efficiently and cost-effectively, making payments to merchants without volatility risks, and participating in DeFi activities like lending, borrowing, yield farming, swaps, and margin trading.
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Tether is popular because it provides price stability by being pegged to the US Dollar, facilitates easier trading on exchanges, reduces the need for fiat reserves, offers faster and cheaper transactions compared to traditional methods, and is deeply integrated into the crypto and DeFi ecosystems. Its large market cap and extensive history of stability also contribute to its popularity.
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The benefits of using Tether include price stability, reduced transaction costs and times, the ability to hedge against market volatility, ease of use in trading and DeFi applications, and faster international fund transfers without the need for intermediaries.
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USDT is used instead of USD to leverage the benefits of blockchain technology, including faster and cheaper transactions, ease of transfer across borders without intermediaries, and the ability to seamlessly integrate with various crypto and DeFi platforms while maintaining the value stability of USD.
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate.
VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
