What is USDT?

USDT, also known as Tether, is a digital asset that is directly linked to the value of the US Dollar on a 1:1 basis. For every USDT token in circulation, there is one US Dollar held in reserve. This backing ensures the stability of USDT's value. As a result, USDT has gained popularity among traders and investors looking to reduce the risks associated with common price movements in the cryptocurrency market.

The company behind USDT 

Tether Limited, the company behind USDT, is owned by iFiniex Inc. which also owns the BitFinex crypto exchange. 

Established in 2014, Tether Limited aimed to create a digital asset that bridged the gap between traditional currencies and the emerging world of cryptocurrencies. To do so, the company launched Realcoin which was later renamed to USDT.

What network is USDT on?

USDT was first launched on the Omni Layer Protocol, a platform built on the Bitcoin blockchain. This was the original network that supported and facilitated USDT transactions. However, it’s expanded its reach and operates on multiple networks like Ethereum, TRON, EOS, Liquid Network, Algorand, and Solana.

Each of these networks offers unique advantages, such as faster transaction speeds, lower fees, or enhanced security features. In addition, by operating on multiple networks, USDT can be more accessible to more people.

What is USDT backed by?

The value of each token is pegged to the US Dollar. This means that for every USDT token in circulation, there should be an equivalent amount of USD held in reserve by Tether Limited. 

This backing provides stability to the coin's value and helps maintain its 1:1 peg to the US Dollar.

In the past, Tether Limited didn’t always adhere to a 1:1 backing with the US Dollar. In 2019, the company revealed that 74% of its outstanding tokens were backed by actual cash reserves, with the remaining tokens supported by other assets like loans. Today, however, Tether has reassured its users that 100% of all USDT tokens are backed by USD reserves.

Let’s break down the benefits of using USDT in your financial transactions.  

1. Reduced volatility risk

Political and economic events, as well as other similar factors, can cause sudden price swings that diminish the value of your investments. By converting your profits or holdings into USDT, you can help protect your funds regardless of the cause of market turbulence. 

2. Easier trading

USDT serves as a popular trading pair on many cryptocurrency exchanges, allowing users to easily buy or sell other digital currencies without having to convert them into fiat money first. This saves time and transaction costs for traders.

3. Cross-chain functionality

USDT operates on multiple networks, such as Ethereum, TRON, EOS, Liquid Network, Algorand, and Solana. This cross-chain functionality enables users to transfer USDT across various blockchains relatively quickly, increasing its usefulness within the broader cryptocurrency ecosystem.

4. Efficient fiat on-ramp 

A "fiat on-ramp" mechanism allows the conversion of fiat money into cryptocurrencies, a service USDT can provide. Users can purchase USDT with their local currency and then use it to buy other digital assets, making it easier for newcomers to enter the crypto market.

5. Global remittance convenience

As a digital currency, USDT can be sent and received across borders with minimal fees and processing times compared to traditional banking systems. It leverages blockchain technology to eliminate intermediaries and streamline processes. This benefit is a significant draw for those looking to send money internationally.

6. Increased liquidity

The widespread adoption and usage of USDT increased liquidity in the cryptocurrency market. For this reason, this stablecoin can facilitate smoother and more efficient trading experiences for users.

Today, the value of USDT has remained relatively stable over the years. As such, the token's role in DeFi continues to rise. 

How is USDT different from other value storage options? First, let’s see how it compares to three popular and well-established assets: the US Dollar, the USD Coin (USDC),  and central bank digital currencies (CBDCs). 

What is the difference between USD and USDT? 

The primary distinction between USD and USDT lies in their form and function. While USD is a traditional fiat currency issued by the United States government, USDT is a digital asset pegged to the value of the US Dollar. This means that while USD can be used for everyday transactions in the physical world, USDT primarily serves as a stable store of value within the digital realm of cryptocurrencies. 

How does USDC compare to USDT?

So, what is the difference between USDC and USDT? Both coins are stablecoins pegged to the US Dollar, but they differ in their issuing entities and the networks they operate on. USDC, for instance, is issued by a consortium called Centre, which includes notable companies such as Circle and Coinbase. Also, USDC primarily runs on the Ethereum blockchain.

On the other hand, USDT operates on multiple blockchain networks, providing users with more flexibility and accessibility. This multi-chain approach allows USDT to be used on different platforms and ecosystems beyond just Ethereum. This expands its reach and potential applications. In addition, because it is more widely used, USDT has higher liquidity and compatibility with various blockchain protocols, meaning it’s more accessible.

Ultimately, these distinctions boil down to personal preferences and specific use cases. 

What makes CBDC distinct from USDT? 

While USDT and central bank digital currencies (CBDCs) are both digital assets, they differ in several key ways.

First, unlike USDTs, CBDCs are not stablecoins. Instead, they are like digital versions of a country's standard currency,  such as the US Dollar or the Euro. They are created and controlled by the central bank and carry the backing and trust of the government. They also act as an electronic form of legal tender, just like physical cash, and may come with extra features like programmability and enhanced security.

In contrast, USDTs (and other stablecoins) are digital assets created and governed by private institutions (Tether Limited in the case of USDT). To support and maintain their value, these coins are pegged to underlying assets, such as fiat reserves or other collateral. This ensures that they closely follow the value of the underlying asset they are tied to.

Xapo Bank is the only fully regulated bank in the world that offers a USD account with stablecoin functionality. By growing our payment options, Xapo Bank members can enjoy additional currency choices, including USDT, that enable fast, efficient, and seamless transfers.

At the same time, members can make USDT deposits and USDT withdrawals with instant conversion from USDT to USD (and the reverse) without extra charges (other than the blockchain fee). 

You can also grow your assets with the 4.6% interest on USD deposits while you enjoy peace of mind, knowing that your assets are protected with state-of-the-art security tools and cutting-edge digital intelligence. 

Apply for membership today and discover how much more you can optimize your wealth.

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