Per Tether Whitepaper- “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 real-world 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.”
The Tether Whitepaper also sites Tether as being redeemable for the underlying fiat currency, or for Bitcoin. iFinex Inc. is the parent company of Tether Ltd., USD Tether, and the Bitfinex exchange.
USD tether is a fiat-backed stable coin, which means each coin in circulation is designed to be backed by the equivalent amount of US Dollars. Other stable coins can be crypto-collateralized or un-collateralized. Tether maintains a 1 to 1 ratio of US Dollar reserves, but Tether Ltd. does not guarantee and right to redemption. Per Tether website-
“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 (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USDT is always valued by Tether at 1 USD.”
Please note from their website that the term “reserves” refers to more than a simple USD. Based on this statement, Tether Ltd. can be construed as operating like a fractional reserve bank, which is much more risky than a currency that is 1:1 tied to an exact (unencumbered) US dollar. This can be especially risky, depending on the “cash equivalents” and “receivables from loans” that are being used.
Main objectives of a stablecoins and USDT are to:
Keep valuations more stable so USTD can more readily be used as a medium of exchange.
Keep crypto prices in denominations that are familiar to most consumers.
Reduce operating costs by bypassing financial institutions.
Provide a faster and more stable way to settle fiat balances between exchanges
Build bridges between fiat currencies and cryptocurrencies and offer stability, transparency and minimal transaction charges to users.
Please note that Tether is not fully decentralized because because they require a third party (Tether Ltd.) to be custodian of the underlying reserves that back the stablecoin.
INCEPTION DATE & TIMELINE GRADE = B
September 2013- “Mastecoin” (to be rebranded as “Omni”) was developed as a protocol layer on top of the Bitcoin blockchain that would enable advanced transactional features like decentralized trading, custom currencies, and smart contracts. USD Tether would be built on top of this Omni layer of the Bitcoin network.
July 2014- USD Tether started as “RealCoin”.
November 2014- Rebranded to “Tether”.
February 2015- Trading commenced.
November 2017- Hack occurred where $31m worth of tether coins were stolen, prompting a hard fork.
January 2018- Tether Ltd. announced that it was parting ways with the audit firm that was supposed to audit it; thus Tether Ltd. forewent their annual audit, which was used to determine that they were maintaining the proper amount of USD reserves. This caused Tether Ltd. to be subpoenaed by regulators.
June 2018- Washington-based law firm Freeh, Sporkin & Sullivan LLP conducted an investigation that concluded “Tether’s unencumbered assets exceed the balance of fully-backed USD Tethers in circulation as of June 1st, 2018”. This same document also cited that the investigation was “not conducted in accordance with Generally Accepted Auditing Standards.”
April 2019- New York Attorney General Letitia James accused iFinex Inc. of hiding a loss of $850 million dollars of co-mingled client and corporate funds from investors. Court filings say these funds were given to a Panamanian entity called Crypto Capital Corp. without a contract or agreement, to handle customer withdrawal requests. Bitfinex allegedly took at least $700 million from Tether’s cash reserves to hide the gap after the money went missing. In a statement, the companies said the filings, "were written in bad faith and are riddled with false assertions. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers."
PROCESS & TECH. STACK (Per Tether's Whitepaper) GRADE = B
The first layer of Tether is the Bitcoin blockchain. The Tether transactional ledger is embedded in the Bitcoin blockchain as meta¬data via the embedded consensus system, called Omni.
The second layer is the Omni Layer protocol. Omni is a foundational technology that can:
Create and destroy digital tokens represented as metadata embedded in the Bitcoin blockchain; in this case, fiat pegged digital tokens called tethers.
Track and report the circulation of tethers via Omnichest.info (Omni asset ID #31, for example, represents TetherUSD) and Omnicore API.
Enable users to transact and store tethers and other assets in a(n):
Omni is a protocol layer built on top of the existing Bitcoin blockchain that allows for increased functionality, mainly in the form of smart contracts and/or custom currencies. Thus, projects built using Omni are supported by Bitcoin’s Proof of Work consensus and SHA-256 hashing algorithm.
OMNI coins are tokens of the Bitcoin blockchain. Any wallet or exchange that supports BTC is automatically able to support OMNI coins without major changes. Since Omni is a platform built on top of the Bitcoin blockchain, all OMNI transactions are recorded and confirmed by the Bitcoin network.
Custom assets - The Omni layer acts as an interface between users and the main Bitcoin blockchain. It facilitates the creation and trading of custom cryptocurrencies or tokens that can be bought and sold at will.
Crowdsales - The Omni protocol also supports a crowdsourcing platform where ideas, events, and inventions can fundraise cryptocurrency in a decentralized, peer-to-peer, trustless, and cryptographically secure way.
Decentralized exchange - User created tokens and currencies can be freely traded over the Omni protocol. Sellers can issue a requested transaction to the Omni layer, with the item offered and a sale price, then anyone who wishes to fulfill the transaction request and has the amount required in their wallet, can perform the transaction instantly, without the seller or any third party involvement.
Extending capabilities of existing networks - Unlike most other cryptocurrency platforms, Omni does not actually have its own blockchain. Instead, it uses the hashing power of the Bitcoin blockchain to implement features such as smart contracts or custom currencies. This reduces the amount of energy used for mining, and improves the security for users in the network.
SUPPLY & INFLATIONARY CONTROLS GRADE = A
The supply of USD tether is not pre-determined; it is based on demand for USD tethers. When a user exchanges their US dollars for USD tethers, new tethers are generated, based on the amount deposited. These new tethers generated are added to the total circulating supply of tether.
When a user wants to exchange back into US Dollars, the user places the tethers back into their Tether Ltd. account, upon which the tethers are destroyed and the user’s account is credited with USD; thereby pulling the tethers back out of the circulating supply.
Users can obtain tethers outside of this process by purchasing tethers through an exchange or individual. Once new tethers enter the circulating supply, they can be traded freely, until placed back into a Tether Ltd. account for redemption.
Total supply is often higher than the circulating supply, likely because exchanges maintain custody over reserves of tether for their customers to be able to use, on demand, without having to maintain a Tether Ltd. deposit account.
Due to it's relatively stable and predictable price, as underpinned by the US Dollar, Tether is not an asset designed for speculative investing. Even if demand is strong, the price will still be equal to about 1 USD. That stated, if demand is strong, Tether will increase in market cap, because there will be more of them in total supply; which directly reflects demand.
SECURITY GRADE = B
Tether is built on top of the Bitcoin blockchain, thus shares a similar underlying security profile. The more decentralized and abundant the nodes and mining operations are, the more secure the network is in regards to a 51% or DDoS attack. Although extra protocol layers, like Omni, allow for projects like Tether to exist, these layers may introduce increased vulnerabilities not found in the original Bitcoin network.
Tether website security statement: “Tether’s blockchain-enabled technology delivers world-class security while meeting international compliance standards and regulations.”
REGULATION GRADE = B
Tether is not fully decentralized, thus elusive of regulation, because they require a third party (Tether Ltd.) to be custodian of the underlying reserves that back the stablecoin. Tether Ltd. is based in Hong Kong, which is relatively favorable when it comes to free markets, and regulation towards blockchain and cryptocurrency projects.
As of Q3 2019, Tether is listed on over 70 exchanges, has over 30k Twitter followers , and 4k reddit forum members. Tether is widely used as a medium of exchange among other cryptocurrencies. See "Crypt Keeper by Criteria" sections for more details.
BA in Economics. BS in Finance. Hostess of the Crypt Keepers’ Club. Passionate about research, and processing data. I don’t fold sheets, I spread them.
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