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Tether (USDT) Deep Dive I Notum

By Notum

Aug 21, 202313 min read



Since its introduction in 2014, Tether became a prominent coin in the crypto market by offering a digital asset backed by the US Dollar. Designed to overcome the gap between crypto volatility and the stability of traditional money, Tether has become widespread as a means of facilitating trading and providing a stable store of value within the crypto space. However, its uprise has also attracted accusations, skepticism, and regulatory authorities’ control surrounding its claimed reserves and transparency.

As the first and most widely adopted stablecoin, USDT became a pioneer who combined such industries as technology, finance, and regulation. Its concept of maintaining value with fiat currency, while enabling seamless cross-border transactions and trading activities, appeared to offer a solution to one of the crypto industry's biggest challenges. This article from Notum delves into the Tether world, key features, and use cases of the asset, as well as examines its significant role in shaping the crypto ecosystem.

Stablecoins Explained

Stablecoins are a category of cryptocurrencies specifically designed to maintain a stable value, minimizing the price volatility that's common in other digital assets like Bitcoin or Ethereum. They achieve this stability by being pegged to a reserve asset, often a traditional currency like the US Dollar. This pegging is typically achieved through collateralization, where for every stablecoin issued, an equivalent amount of the reserve asset is held in custody. This ensures that the value of a stablecoin remains close to the value of the underlying asset it's tied to. Stablecoins serve as valuable tools for traders, investors, and those seeking less volatile means of transacting and storing value within the crypto ecosystem, bridging the gap between digital and traditional finances.

The most famous stablecoins are Tether (USDT), which is pegged to the US Dollar and is widely used in cryptocurrency trading; USD Coin (USDC); True USD (TUSD); Binance USD (BUSD); and DAI. These stablecoins play a crucial role in providing stability and liquidity within the volatile cryptocurrency market, enabling users to seamlessly trade, hedge against price fluctuations, and engage in DeFi activities. Moreover, stablecoins like USDT connect the rapidly changing world of cryptos and the stability of traditional finance, acting as a store of value with price fluctuations associated with other crypto assets like Bitcoin.

What Is Tether (USDT)?

Tether (USDT) is a widely recognized stablecoin in the crypto space. It was launched in 2014 by Brock Pierce, Reeve Collins, and Craig Sellars, where Pierce was one of the key figures involved in its early development. USDT is designed to maintain a 1:1 peg with the US Dollar, and some of the coins are backed by an equivalent amount of dollar held in reserve by its issuer, Tether Limited, while the rest of the USDT is backed by various bonds. USDT operates on various blockchain platforms, including Bitcoin (Omni Layer), Ethereum (ERC-20), Tron (TRC-20), and others, allowing users to transact across different networks.

While USDT's popularity comes from its stability and ease of trading, it has also been met with controversy and scrutiny. There were several concerns over the transparency and adequacy of Tether Limited's reserves, as well as its legal and regulatory compliance. Moreover, there have been statements that not all USDT tokens are fully backed by USD reserves and that the company may use fractional reserve practices.

Despite this, USDT remains widely used in the crypto trading ecosystem due to its established presence and integration across multiple platforms. It provides traders and investors a way to navigate the volatile cryptocurrency market with no need to constantly convert to and from traditional fiat money, while its potential risks underline the importance of transparency and oversight within the stablecoin space.

What Is USDT Used For?

Tether (USDT) is primarily used for the following purposes within the crypto ecosystem:

  1. Trading. USDT is commonly used by traders as a stable trading pair. Crypto exchanges often list trading pairs involving USDT, enabling users to quickly switch between different cryptocurrencies with no need to convert back to traditional fiat money during market fluctuations.
  2. Volatility Protection. Having a stable value pegged to the US Dollar, USDT is used by investors and traders as a way to hedge against the price changes of other cryptos. When the market is uncertain or experiencing significant volatility, users can convert their holdings into USDT to preserve their value.
  3. Storing Value. One of the main USDT use cases is the store of value within the crypto ecosystem. By holding USDT, users can keep their funds in a relatively stable asset, reducing the risk of value loss during market downturns.
  4. Access to Altcoins. Many cryptocurrencies are primarily traded against Bitcoin or Ethereum, making USDT a convenient alternative for those who want to avoid converting to and from these base currencies. This is particularly helpful when accessing less known or smaller market-cap altcoins.
  5. Transferring Funds. USDT can be used to move funds across different crypto exchanges quickly and with minimal fees. It's often faster and cheaper to send USDT between platforms than to transfer traditional fiat currencies.
  6. Participation in DeFi and DApps. USDT is used within various decentralized finance protocols and decentralized applications as a means of collateral, lending, borrowing, and other financial activities.

The Role of Tether in the Crypto Market

USDT is a key part of the crypto market as a stablecoin pegged to the US Dollar. Its primary function is to offer a stability among the price volatility of other cryptos. This enables traders to move in and out of positions, effectively hedging against market fluctuations. As one of the most widely accepted stablecoins, USDT acts as a common trading pair for multiple cryptocurrencies on various exchanges, increasing liquidity and facilitating seamless trading.

Beyond trading, USDT plays a critical role in the DeFi ecosystem. It provides a stable asset for collateralization, lending, and yield farming within DeFi protocols, enabling users to participate in complex financial activities without exposing themselves to the wild price swings of other digital assets. Thus, USDT continues to maintain its position as one of the most famous and widely used stablecoins, offering stability and versatility to users across the crypto space.

What Makes USDT Unique?

Tether (USDT) has several unique features:

  • Cross-Blockchain Compatibility. USDT is issued on multiple blockchain platforms, including Ethereum, Tron, and others. This cross-chain compatibility allows users to transact with USDT across different networks, promoting interoperability in the decentralized ecosystem.
  • Liquidity and Trading Pairs. USDT is one of the most widely accepted stablecoins across various crypto exchanges. It serves as a trading pair for numerous other cryptocurrencies, allowing users to easily switch between different assets without converting to fiat money.
  • Market Recognition and Stable Value. USDT was one of the earliest stablecoins and has maintained a strong presence in the market. Its longevity and integration into the crypto ecosystem have contributed to its recognition and adoption. Moreover, USDT's unique feature is its stable value pegged to the US Dollar, which makes coin a preferred choice for traders, investors, and those seeking a stable medium of exchange.
  • Global Access. USDT provides users worldwide with access to a stable digital asset that can be used for transactions, trading, and investment all over the world.

How Tether (USDT) Works

Tether (USDT) is built around stability and utility. Part of USDT token is meant to be backed by a corresponding amount of the US Dollar, maintained in reserve by Tether Limited, while the rest is backed by bonds. This backing aims to provide confidence in the token's value and is intended to ensure that 1 USDT remains equivalent to 1 USD, minimizing price volatility. USDT is issued across various blockchain platforms, allowing for flexibility in its use and ensuring cross-network compatibility.

The supply of USDT is influenced by market demand – new tokens are created when users deposit funds with Tether Limited, and tokens can be burned when users redeem them. This issuance and redemption mechanism aims to manage the circulating supply and maintain the 1:1 peg with the US Dollar. As of August 17, 2023, the circulating supply of USDT is 83.18B USDT, while the total supply is unlimited. The market capitalization of the asset is currently $83.09B making it the 3rd most popular cryptocurrency in the world. At some point “Tether briefly slipped under its $1 peg to trade at as low as $0.95. However, USDT managed to restore its peg a few days after that.” – Bitscreener. Now USDT has a strong place in the crypto space and remains the most popular stablecoin in the world.

Closing Thoughts

USDT has emerged as a key player within the realm of crypto, offering a stable and widely accepted digital asset pegged to the US Dollar. Its ability to provide traders and investors with a secure bridge between crypto volatility and traditional fiat money has significantly impacted the crypto ecosystem. Despite facing some concerns over its backing and transparency, USDT has managed to maintain its position as the most widely used stablecoin. Its ongoing developments, increasing regulatory awareness, and potential integration into main financial systems will likely influence the future of both the crypto market and the broader financial picture. As the market continues to evolve, USDT's role and its underlying technology will undoubtedly attract more attention of users and investors all over the world.

Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.