Tether
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Tether

Tether.to|USDT|July 2014 logo
Written on: May 25th, 2015 | Author: David M
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  • Tether pegs real world assets such as dollars, euro or Yuan into crypto tokens that can be traded on the bitcoin blockchain.  
  • Each token backed up by real world currency in transparent and auditable company bank account.
  • The pegged value of Tether tokens offers important bridge that could have great impact on mainstream adoption of smart contracts.

Summary

Many have been convinced that the blockchain provides a number of advantages over mainstream financial infrastructure, as it offers cheap, fast and borderless transactions without requiring intermediaries. However, the volatility of the underlying currency discourages wider use.

Tether, backed by bitcoin entrepreneur Brock Pierce, connects the bitcoin technology to actual fiat currencies, allowing users to leverage the blockchain advantage whilst trading in currency backed by the US treasury. (Or the European Central bank, as the case may be). Or in the words of CEO Reeve Collins, Tether "digitizes the dollar, and gives that digital dollar access to the blockchain".

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How it works

The Tether platform allows the conversion of dollars, euro or yen into corresponding tether+ tokens, each with a one to one value peg. Tether coins are backed 100% by actual fiat currency held in the company account, which is meant to be transparent and audited to ensure 100% reserves. Tether can be exchanged through the platform to its corresponding currency at any time.

Tether utilizes the mastercoin/omni protocol for the creation of its tokens. Thanks to Omni, Tether transactions are hashed and passed to the bitcoin blockchain, where they are confirmed and secured, alongside all the other bitcoin transactions, by the massive network of bitcoin miners.

Not an altcoin

The executive team has been careful to emphasize that the coin is not a competitor to bitcoin but complements the technology. It means to aid in bitcoin's wider adoption, allowing users intrigued by the blockchain but scared away by the volatility an easy entrance into the market.

Tether rebranded from its previous identity, Realcoin, in order to disassociate itself from the altcoin market: "We are not an altcoin, we're not our own blockchain," wrote Mr Collins. "We're a service, a token that represents dollars. Our speciality at Tether is currencies on the blockchain, so Tether means a digital tie to a real-world asset and the digital assets that we're focused on is currencies."

If Tether is successful, it might become bitcoin's answer to Ripple, a fiat-centric alternative network whose technology is already integrated with a few banks in the US and Europe. Tether technology could easily be used by banks, with issued tokens traded on the blockchain to facilitate cheap and fast transfers to banking customers.

Market adoption

In January 2015, Bitfinex integrated Tether as a method of depositing and withdrawing from the exchange. This was presented by Bitfinex as a method of circumventing many of the problems facing bitcoin traders when interacting with the traditional banking system. Poloniex, a popular crypto-only exchange, integrated Tether as a stand alone market in February 2015, offering Tether holders the ability to trade against a number of different cryptocurrencies. The currency can be held in designated wallets like Omni Wallet or HolyTransaction, and also works with any HD wallet. The integration into these different platforms offers some indication that Tether is resonating within the crypto-marketplace, but it is still early stage, with a market cap hovering around $250,000.

Tether and smart contracts

Tether might play an important role in bolstering the smart contract market represented most notably by ethereum and bitshares, but also likely soon to appear on bitcoin side chains. Smart contracts, called smart because they self-execute according to predetermined criteria, have a number of revolutionary applications. They can be used to establish and execute trusts, pay out bonuses or dividends, or establish smart escrows, to name a few examples. And they do so without the need for any legal or financial intermediation, thus drastically cutting the cost of execution and maintenance. This seems just the sort of application which could appeal to a wider demographic. However, the volatility associated with cryptocurrencies undermine their practicality. Who would put their children's trust fund in volatile digital currencies?

If Tether takes off, it could bolster greatly the utility of cryptographically secured smart contracts by allowing their use with actual fiat-pegged instruments, which could help to expand digital currency usage into new and wider demographics.

The reintroduction of centralized trust

There are some that see in bitcoin a solution to the agent-principal problem, which states that agents will act in their own interest even when contrary to the interests of the principals whom they are meant to be representing. The decentralized nature of bitcoin removes this dynamic. From this perspective, Tether's central reserve model reintroduces an inherent weaknesses that bitcoin meant to replace. And this is not simply an ideological exercise. Tether's reserve account represents a single point of failure which, whether by accident, incompetence, evil design or force majeure, could undermine their entire currency.

From our perspective, FDIC-insured reserve accounts would be sufficient guarantee. It will be interesting to see how or if the above point is addressed in the coming year.

if you re interested in Tether, it is available for purchase directly from Tether.to. As of April 2015, the platform is still in beta so an invitation, which can be requested via the site, is required. Poloniex offers the trading of Tether against a number of different cryptocurrencies, and currently provides almost all of Tether's overall trading volume.

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