What keeps tether stable?
In the not-so-stable world of cryptocurrencies, there exists a coin that issuing organizations designed to be safer. The coin’s name itself, exuding stability as a “stablecoin.” One of the most well-known being, Tether. Tether has drawn attention from many, as they question how stable the coin is and if the $69 billion in assets backing their coins exists. To answer this question, let’s look to define this breed of digital asset.
Stablecoins are digital assets, sometimes tokens, that creators have built to maintain a steady value. As a result, they don’t typically experience the type of volatility common to Bitcoin or Ethereum. Tether, in comparison, sells coins for the equivalent of 1 USD and promises to redeem them for the same $1 if the holder wants their fiat money back.
Issuing organizations make this possible in one of two ways. Organizations may either directly or algorithmically collateralize their tokens with a stable asset. In considering the latter, issuers store assets in a safe vault known as a reserve. For Tether, this means if $70 million tokens exist, $70 million worth of US dollars is theoretically backing these assets. Tether is only one example. Another is a cryptocurrency backed by digital gold. Similar to the previous example, a commodity-backed stablecoin may hold the equivalent grams of gold for each token in circulation. The final type of stablecoin that exists is one that algorithms monitor. These algorithms manage the supply and demand of a stablecoin. They guarantee that the number of tokens in circulation is always equivalent to what the organization is holding in reserves.
There are currently dozens of stablecoins in circulation; the combined market value is over $100 billion as of May, with issuing organizations releasing more continuously. That said, Tether Holdings Ltd., the issuer of Tether, remains the largest, issuing 48 billion of these coins last year alone.
How do we know Tether is stable?
The issuing organization assures holders that each Tether token will always be 100% backed by the money in their reserves, which may be a combination of cash, cash equivalents, or assets from loans (such as affiliated entities). Recent investigations have found that these reserves comprise billions in short-term loan funds to companies in China, a type of investment that a money-market fund would typically avoid. In a rebuttal, Tether argues that these loans have high grades according to credit-rating firms, making them low-risk in nature. As a result, Tether shares all reserves back their tokens with complete transparency, with the value of their reserves available for users to view daily.
How it works
The stablecoin, Tether, was created for use on the Bitcoin network as a transport protocol – also known as the Omni Layer. This layer allows the transaction of tokenized assets. The original version of Tether did use the Bitcoin blockchain; however, it inherited the security and instability of the longest established blockchain network. Tether now exists on the Ethereum blockchain, operating as an ERC20 token. ERC20 represents a technical standard used for all smart contracts on Ethereum for token implementation, meaning the coin must also follow a list of rules provided by the blockchain itself. These rules may include anything from how users can transfer the coin, how the blockchain will approve transactions, the token’s total supply, and how users can access data about it.
Since Tether operates on Ethereum, it can also be sent and received by any Ethereum address. However, the coin is available with many different transport protocols, suggesting that senders must exercise some caution to confirm they are sending tokens via the correct transport protocol.
The rise of stablecoins like Tether
Many look to stablecoins as being a bridge between traditional money and cryptocurrency, two worlds that were never supposed to overlap. As a bridge, these currencies then become useful to lock in earnings from trading more speculative cryptocurrency assets or act as a safe harbor in light of a market downturn. Another common use of the design of stablecoins is to move funds onto a crypto exchange. Many exchanges only operate in cryptocurrencies. Therefore, while users can’t deposit fiat currency from their bank account, they may make trades through a stablecoin of their choice. A final benefit, of course, is that stablecoins leverage blockchain like traditional cryptocurrencies to accelerate and reduce costs typically incurred through money transfers.