New: Wallet recovery made easy with Ledger Recover, provided by Coincover

Get started

Up your Web3 game

Ledger Academy Quests

  • Test your knowledge
  • Earn POK NFTs
Play now See all quests

What is Tether (USDT)?

Read 8 min
Beginner
Coins spiraling in a circle
KEY TAKEAWAYS:
— Stablecoins are a way to use blockchain-powered digital assets for day-to-day and institutional use cases, minus the volatility risks associated with private cryptocurrencies like BTC or ETH.

— Tether’s USD-backed stablecoin, USDT, is currently the leading stablecoin by market capitalization, available across global exchanges and P2P platforms.

— USDT is just one of the many supported assets in the Ledger Ecosystem, most easily managed as the ERC-20 token form with your Ethereum wallet. 

One of the most important, and most tangible use cases of blockchain is as a permissionless p2p transfer of value. Using decentralized networks, it’s possible to transfer huge amounts of value without the need for a middleman. Plus, these transactions are processed much faster than traditional banks— without any additional barriers across borders and with much lower fees. 

That said, crazy market cycles make a lot of cryptocurrency assets impractical for everyday purchases. For example, your Bitcoin may be a great way to store value long-term, but as a short or mid-term medium of exchange, it can be slightly more challenging. The transaction fees can be unpredictable, as can the price of the coin itself due to market volatility.

This is where stablecoins come in: they combine the benefits of blockchain-powered digital assets (including P2P payments and seamless cross-border transactions) with the stability of traditional currencies. Essentially they operate as fiat on-chain.

But stablecoins are not as simple as that either. They are “pegged” to the value of an existing asset.

Not all stablecoins achieve this in the same way. Historically some stablecoins have failed to achieve a stable peg in the first place. Just within the stablecoin category, you have; fiat-backed stablecoins, crypto-backed coins, commodity-backed coins, and even algorithmic coins. Each of these types attempts to retain their token’s peg differently. 

Furthermore, not all stablecoins are pegged to world currencies either. To clarify, some of these assets are also pegged to real-life assets such as gold and silver. So, before you buy any kind of stablecoin, it’s important to look into how it keeps its peg and who is managing the reserves; if there are any.

The most popular of all stablecoins so far is USDT, a stablecoin pegged to and backed by the United States Dollar. 

But what is USDT (Tether) exactly? And why is it so popular? Let’s dive in, starting with the origin of this major stablecoin. 

What is USDT?

USDT is a stablecoin pegged to the value of the United States Dollar. It is offered, issued, and backed by the centralized entity Tether. Since it is a stablecoin, it’s expected to maintain a $1 price, irrespective of market conditions or supply-demand metrics. 

Today, USDT accounts for over 53% of the global stablecoin market with a market cap of $87.3 billion (at the time of writing). It is also the third-largest digital asset after BTC and ETH. Almost every major cryptocurrency exchange will offer USDT, plus you can use it on countless platforms to buy, sell, swap, or use for crypto apps and services. As of November 2023, over 87.3 billion USDT coins are in circulation worldwide.

The Origin of Tether (USDT)

J.R. Willet laid Tether’s foundation in 2012 while exploring ways to build ‘new cryptocurrencies’ on top of Bitcoin. He thus implemented Mastercoin (later, Omni), a Bitcoin Layer-2. 

In 2014, Brock Pierce, Reeve Collins, and Craig Sellars adapted Omni’s tech stack for RealCoin, and later renamed it as Tether. Their Hong Kong-based company, iFinex, also owns the BitFinex crypto exchange.

To follow, BitFinex listed Tether (USDT) in January 2015, making it available for traders and offering users a stable way to access crypto’s liquidity. The protocol routed USD transactions through Taiwanese banks and Wells Fargo, achieving a steady uptake till early-2017.

While USDT transactions were first limited to the Bitcoin blockchain via Omni, Tether built and deployed supportive frameworks across multiple blockchains. Today, Bitcoin, Ethereum, Tron, EOS, Algorand, and OMG support official USDT tokens.

What is Tether?

Although they are often used interchangeably, it’s important to note that Tether and USDT are two different things. Tether is a centralized body issuing stablecoins, one of which is USDT. But besides USDT, Tether also issues a range of other fiat and commodity-backed stablecoins. 

Most have an almost insignificant market cap as compared to USDT, however, Tether offers a range of fiat stablecoins such as the Tether Euro (EURT) and the Tether GBP (GBPT), that are each backed by their respective asset in Tether’s reserves.

But it’s not just tokenized fiat currencies that Tether puts on-chain either. It also offers commodity-backed assets too. For example, Tether Gold (XAUt) is backed by a physical commodity: gold. This physical store of gold is managed as part of Tether’s reserves. That means you can redeem physical gold bars with your XAUt directly via Tether.

Essentially, Tether (the company) issues and distributes these tokenized assets. It’s also responsible for controlling the number of USDT, EURT, GBPT, or MXNT in circulation and maintaining each asset’s peg.     

So how do they achieve that; and how does Tether issue, distribute, and manage USDT exactly?

How does USDT work?

USDT operates with a centralized entity, Tether; holding the reserves, issuing the assets, and maintaining the peg. USDT operates on other blockchains as tokenized assets.

There are 5 main steps in this process

  1. A KYC Tether user deposits fiat currency into Tether’s bank account. This user could be an individual whale, a crypto exchange, a business merchant, or a trading firm.
  2. Tether issues tokens of an equal amount minus fees to the provided blockchain address
  3. The USDT issued can be used to trade, transfer, swap, and more on multiple different platforms.
  4. Any USDT holder can redeem fiat currencies with their USDT using the official Tether website.
  5. Tether will remove the exact number of tokens redeemed by users from circulation; thereby guaranteeing the peg.

To receive newly minted USDT directly from Tether as an individual, you will have to undergo a verification process which requires paying a fee and completing a KYC. The whole process can take anywhere from a few days to a few weeks. Of course, as an individual, you also have the option to buy Tether using an exchange which will supply you with some USDT already in circulation. 

How does USDT remain stable?

Tether keeps track of all of the assets across the chains that support it and stabilizes its value to roughly $1 (between $0.99 to $1.00016, on average) using a pegging mechanism.  

To ensure that USDT is redeemable 1:1 for USD, Tether maintains a currency reserve with cash (USD), cash equivalents, and other assets. The size of this reserve is expected to be equal to or greater than USDT’s total circulating supply at all times. It also publishes these reserves on its official website, so you can keep track of these reserves yourself. Unlike algorithmic stablecoins, USDT’s value and stability depend on real assets in the said reserve, not any market-driven computer program.

That said, in 2022 following lawsuits and the collapse of Terra (Luna), USDT’s price momentarily fell below its $1 mark. But why?

Well, very simply, if a stablecoin is not collateralized, it risks de-pegging. Thus, when USDT did de-peg slightly,  this caused speculation and uncertainty among investors. 

To understand why this happened, it’s important to note that Tether is responsible for managing assets across several different blockchains and platforms and guaranteeing that those assets are backed by reserves. But that’s more challenging than it may seem.

In the moment it de-pegged, there was an imbalance in Curve’s 3pool, a liquidity pool supporting USDT. More specifically, Tether attributed it to a single person borrowing a huge amount from a liquidity pool, opening the door up to arbitrageurs. 

Essentially this meant Tether miscalculated the number of tokens in circulation, and when that single loan was executed, it removed the liquidity from the system and revealed the imbalance. In short, there was a portion of the assets that were uncollateralized which led to the coin depegging slightly. That said, it did recover within 24 hours and has been operating as usual ever since.

Is USDT backed by fiat currency?

In a legal sense, yes: USDT is backed by fiat currency. However, it’s misleading to say that USDT is “fully backed” by the USD. Tether faced legal trouble for such claims in the past and paid $41 million as a fine to the U.S. CFTC. 

It’s more appropriate to say the USDT is backed “100% by Tether’s reserves,” which has the following allocations:

  • 87% in cash, cash equivalents, and other short-term deposits
  • 0.1% in corporate bonds
  • 3.65% in precious metals
  • 1.92% in bitcoin
  • 2.61% in other investments
  • 5.98% in secured loans to unaffiliated entities 

What is USDT for?

So now you know all about what Tether is and how it works, let’s explore some of the main reasons why people use USDT today. To be clear, USDT has a range of use cases, but let’s dive into the top three.

Hedging Against Volatility

Since USDT is a stablecoin, investors mostly use it to hedge against the crypto market’s volatility. This allows them to maintain exposure while minimizing risks. Since the asset is pegged to one USD, traders can essentially cash out their profits without taking them off-chain constantly, which of course, costs transaction fees and possibly taxes too—depending on which country you live in. 

Peer-to-peer transfer of Value

It’s also a cost-effective way of moving value from one asset to another. For example, you can swap BTC for USDT and then use USDT to buy ETH. The cost for this could be potentially lower than a direct BTC-ETH swap. Possibly most importantly, you can also send/receive USDT like any other cryptocurrency and this is also possible across borders—making it very easy for people to send funds directly, instead of having to wait for long international bank processing times. 

This is a particular advantage for remittances. Platforms such as Western Union can facilitate these types of transfers, but they often cost huge fees, involve much more planning, and even require the recipient to turn up in person and show their ID before getting their hands on the cash. With USDT you can skip all of that and send funds directly—which is much more convenient for both the sender and receiver.

In Decentralized and on-chain apps and services

Since it operates on decentralized networks, you can also send USDT without the need for a middleman to process your transaction. It’s also available on the most popular blockchains, meaning USDT is extremely popular across DeFi platforms, NFT marketplaces, and countless other blockchain apps.

In short, USDT provides tangible use cases for both retail and institutional users. 

Risks of Tether    

A notable risk of using Tether is its centralized control over the reserve assets. To explain, all USDT that has ever been issued is backed by reserves controlled by one centralized company.

Tether centralized framework requires USDT users to trust the company for the stablecoin’s efficient and reliable functioning. You must believe that Tether won’t act maliciously, execute some kind of rug pull, or compromise the system’s stability by mishandling its reserves. 

How Tether Tackles Concerns

To answer these concerns, Tether commits itself to transparency, having implemented an accessible Proof-of-Reserves mechanism. It also provides information about locked and on-chain USDT tied to blockchain bridges. 

Of course, besides USDT, Tether also provides a complete and updated record of current balances and holdings for all of its stablecoins including EURT, CNHT, XAUT, and MXNT. You can get a full breakdown of Tether’s reserve holdings on its website. Plus, the information is updated daily and audited regularly by multiple separate entities.  

Beyond that though, Tether also has a very good track record of publishing its reserves and responding to calls for transparency; such as when it dropped its opposition to a New York Freedom of Information Law (FOIL) request by Coindesk in 2023.

How To Get USDT

To get USDT you will need to have a crypto wallet to store it in. Once you have a wallet address ready you will have to get the USDT. For this, you have two main options: buying USDT from fiat currency or swapping some of your existing crypto for it. 

If you’re doing the former, you will first need an on-ramp service. Typically these are offered by centralized exchanges, and essentially all they do is allow you to buy or sell cryptocurrencies for fiat currencies such as euros or dollars.  To do so, you will have to undergo a KYC process to comply with anti-money laundering regulations. 

Using centralized exchanges, you will typically be forced to start by using their custodial wallet too. That means that when you buy USDT this way, you won’t have ownership over the private keys to your assets. The centralized entity you bought your crypto from will handle that instead and you receive access with an email log-in.  

To swap your crypto, you will also need to use an exchange, but this can be either a decentralized or centralized exchange. However, using the former you can guarantee you retain ownership of your assets.

Buy USDT Through Ledger Live

If you already have a Ledger device, you can get the best of both centralized and decentralized exchanges. Firstly, you’re benefiting from the security of a Ledger device protecting your private keys from online threats. But you’re also retaining custody of those keys and therefore ownership over your assets. Furthermore, via Ledger Live, your device’s trusty companion app, you can swap, buy or sell with ease. 

Ledger Live is easy to use: you can access a range of different buy providers, swap providers, and even on-ramp services. In short, it acts as an aggregator of service providers, allowing you to make the best decision for you.

Accessing services via Ledger Live also means that you benefit from the clear signing plugin, allowing you to verify your transactions in human-readable language. And even if you choose to on-ramp via a centralized provider, your USDT will be sent to the blockchain address secured by your Ledger device immediately following your purchase. Yes: that means you don’t forfeit custody of your keys.

Final thoughts on Tether (USDT)

So now you know all about Tether: it’s the largest stablecoin and it’s an integral asset for countless web3 apps and services. Thus, it’s quite likely you will have to get to grips with USDT or another stablecoin at some point. If you were thinking of going without: prepare for volatility!

Of course, USDT still faces key challenges like counterparty and manipulation risks, mainly because of its centralized framework. But this is nothing new. These are challenges faced by all stablecoins; especially those backed by reserves.  And it’s not like stablecoins pegged to assets without reserves are favorable over fiat or commodity-backed stablecoins either. Algorithmic stablecoins have historically had much worse problems maintaining their pegs. 

While stablecoins do require an element of trust, they open the door to innovation and offer new opportunities. 

If you’re aware of the risks, you may be ready to start exploring stablecoins. Specifically, USDT allows you to enjoy all the fun of making everyday purchases, but without any middlemen, across borders and practically instantly (depending on which network you choose). 

So what are you waiting for? Dive into Ledger Live: you can easily buy, swap, or interact with USDT at ease; and without losing custody of your keys.


Stay in touch

Announcements can be found in our blog. Press contact:
[email protected]

Subscribe to our
newsletter

New coins supported, blog updates and exclusive offers directly in your inbox


Your email address will only be used to send you our newsletter, as well as updates and offers. You can unsubscribe at any time using the link included in the newsletter.

Learn more about how we manage your data and your rights.