What Is USDT And Why It Lost Its Fixation To USD

The blockchain landscape has come a long way from its humble beginnings in 2009. As of 2023, this young industry has undergone several transformations, reaching unprecedented popularity and a fair share of controversies. Currently, the crypto world is on an upward trend with the assistance of several core factors. From raised security safeguards, transparency regulations and decreased market volatility, the crypto market is making a steady comeback. 

One of the core contributors to the recent crypto success is introducing the Tether (USDT) currency. USDT has tackled arguably the most prevalent concern in the crypto landscape – consistently high market volatility. As a result, USDT managed to bridge the gap between conventional fiat currencies and the crypto market. However, this novel cryptocurrency has experienced its fair share of challenges, adversities and recent controversies. This article will delve into the nature, importance and potential downsides of USDT. 

USDT Defined

USDT is a stablecoin currency with a novel approach to handling price volatility issues. Conceptually, USDT is firmly fixated on the value of the US dollar, which means that USDT’s value is always equal to precisely a single USD. Thus, USDT’s price does not fluctuate independently, increasing and decreasing in value proportionally to the US dollar. 

Cryptocurrencies with this underlying concept are called stablecoins and have become increasingly popular in recent years. While simple, the stablecoin methodology has drastically raised the global popularity of cryptocurrency markets. With stablecoins, investors and traders have a brand-new option combining fiat and cryptocurrencies’ best features. 

USDT is the oldest and most established stablecoin on the cryptocurrency market. Developed and launched in 2014, USDT has managed to steadily increase its market capitalisation and achieve unprecedented feats for the stablecoin market. Much like Bitcoin, USDT has been a trailblazer for the stablecoin niche, leading the way toward market expansion and globalisation. 

To actualise and maintain its US dollar peg, USDT developers have decided to create massive USD reserves, accounting for each USDT currency in circulation with corresponding USD cash equivalents. This equilibrium is essential for USDT to provide its core offerings, enabling traders to seamlessly exchange Tether into USD at any given time. With this structure, USDT bridges the crypto and fiat markets, making crypto investment activities much more accessible and risk-free for individuals and businesses worldwide. 

To control the perfect balance between the USDT currencies in circulation and their corresponding reserves, Tether burns each USDT coin converted back into the US dollar. This way, Tether tokens should never exceed their reserve equivalents. However, achieving this reserve equilibrium in practice has proved more difficult than expected.

Why USDT Matters for the Crypto Market

It is difficult to overstate the contribution of USDT in developing and expanding the crypto industry. Previously, numerous investors, businesses and traders were sceptical about investing in crypto assets due to market volatility and price uncertainty. USDT has dramatically changed this status quo, providing investors with seamless opportunities to acquire crypto assets through Tether tokens. 

With this approach, investors can purchase desired crypto assets with decreased market risks, as they can swiftly exchange purchased cryptos into USDT tokens and subsequently to US dollars. Therefore, investors have an easy and convenient way out of the market if they sell their crypto portfolios. As a result, USDT has facilitated a massive increase in global crypto popularity, introducing new audiences to the industry. 

Thus far, USDT has played a vital role in the crypto emergence of 2023, decreasing the barriers to entry for risk-averse investors. Without USDT, finding additional customer audiences for the crypto sector would become increasingly challenging. Before USDT, the crypto market was losing out on a massive target audience of undecided individuals who appreciated the crypto innovations but were discouraged by potential volatility risks. 

With USDT, the concerns of volatility, liquidity and general control over crypto investments have been massively alleviated, incentivising undecided parties to take a second look at crypto investment opportunities. 

Therefore, the presence of USDT and other stablecoins on the market positively impacts the crypto industry. As with any market worldwide, public opinions and biases directly influence the success of a given product. It is no secret that the crypto landscape has experienced numerous controversies and adversities, gaining an infamous reputation for volatility and unpredictability. 

However, the emergence of stablecoins has shifted this public perception positively. Today, customers worldwide finally view crypto as a stable asset to purchase and trade with, which is excellent news for the entire blockchain landscape.  

Advantages of USDT 

While USDT is essential for the crypto market with its well-established reputation and goodwill, this novel currency also provides numerous advantages over traditional crypto offerings. USDT offers potential investors rare levels of stability, transparency and liquidity in the crypto market. USDT is also massively popular beyond the crypto community, featured in countless exchange platforms. As a result, USDT is readily available for purchase globally. Let’s discuss this in detail: 

USDT is Stable and Reliable

USDT has cemented its rock-solid reputation throughout the decade of fulfilling its initial promise – stability and reliability of prices. Tether has firmly pegged its value to the USD equivalent and reliably provided cash reserves to eliminate liquidity concerns. Thus, USDT has conceived and executed a dependable concept to stabilise its market value.

Additionally, since USDT strictly follows the USD price trends, investors can predict future pricing variations reliably. While USD tends to fluctuate occasionally, especially in relation to other fiat currencies, it is far more reliable and predictable than most cryptocurrencies. Thus, numerous investors prefer to own and trade crypto assets through USDT transactions. 

For investors who wish to mitigate crypto risks, USDT is an excellent addition to the portfolio. While USDT might generate fewer returns, it can be a stabilising aspect for the entire crypto portfolio, letting investors mitigate risks in case of worst-case scenarios unravelling on the crypto market. Tether is also an outstanding option for long-term investment strategies, as its perpetual fixation on USD lets investors develop plans years in advance. 

USDT Elevates Liquidity for Crypto Exchanges

As discussed above, USDT has a consistently positive impact on crypto liquidity. With its USD-pegged valuation and reliable cash reserves, USDT has created an accessible way to convert fiat into crypto and vice versa. As a result, USDT has naturally increased liquidity levels across the crypto industry. 

Additionally, the supply of USDT itself inherently increases the liquidity levels, as it is nearly as liquid as fiat currency. Ample supplies of Tether and other stablecoins naturally elevate the crypto trading activity, increasing the number of buyers and sellers on the market. As a result, traders will have less trouble matching trading orders and therefore invest in crypto assets more confidently. 

USDT is Highly Transparent 

It is widely known that many cryptocurrencies and their respective blockchain platforms had issues with transparency throughout recent years. This issue also pertains to high-profile cryptos, discouraging investors from investing or trading with given currencies. From its inception date, USDT has avoided transparency concerns, providing regular disclosures and conducting systematic audits to establish trust-based relationships with its target audience. 

USDT also provides access to details for any transaction in the Tether network, allowing users to examine all relevant information. This enhanced level of transparency is not a luxury, but a necessity for stablecoin currencies, as their entire concept relies on trustworthy relationships with the network users and the general public. 

USDT and other fiat-backed stablecoins must prove the adequacy of their reserves regularly to verify that their liquidity and valuation will not suffer from reserve deficits. Thus, interested individuals and businesses have direct access to various disclosed reports, financial statements and other relevant documents that describe the status of USDT in great detail. As a result, USDT has established itself as one of the most transparent and honest currencies on the crypto market. 

USDT is Broadly Available

Finally, USDT has reached global accessibility, being featured internationally on numerous foreign exchange platforms. Customers worldwide can easily purchase and trade with USDT, as it is one of the most popular currencies on the market. 

This nearly limitless reach has further assisted the USDT popularisation, as businesses and individuals utilise it to make swift cross-border transactions, shop in e-commerce stores and even conduct operational transactions. As a result, USDT has become a multi-functional currency that outgrew its role as simple means to exchange crypto into fiat currency. 

As of 2023, many high-profile businesses started adopting the USDT payment gateways to conduct their business transactions more efficiently, further establishing its pertinence in the global crypto market. 

The Most Important Downside of USDT 

USDT’s impact on the crypto world was primarily positive in its first decade. However, despite the numerous benefits and values USDT brings to the crypto market, it has a substantial inherent risk that could threaten the entire currency. As discussed, USDT depends on the strict availability of its cash reserves, as each USDT token must be matched with a corresponding US dollar. 

However, as of August 2023, only roughly 3% of the total USDT cash reserves is actual liquid cash. The rest are various financial mechanisms, obligations, treasury bills, or other cryptocurrencies. Thus USDT’s reserves are not necessarily liquid, which could signal massive trouble in certain scenarios. Suppose investors decide to liquidate their USDT holdings en masse. In that case, Tether might not be able to accommodate vast amounts of withdrawals, leaving many investors unable to retrieve fiat equivalents. 

Thus, the success of USDT depends on the overall health of the crypto industry. If markets are growing and flourishing, USDT will function at the peak of its capabilities, steadily increasing liquidity levels and bringing stability to blockchain markets. However, if the market experiences a downturn and investor outflow, Tether might further complicate the issue with its inability to honour massive USDT-to-fiat exchanges. 

It is also important to note that while USDT is pegged to USD, it must not necessarily equal the USD value perfectly. Slight fractional variance can affect the USDT price from time to time, decreasing or increasing its value very slightly compared to the US dollar. While this is not a huge concern for average traders, large-scale trading companies might suffer significant losses even from a minuscule variation. 

Why USDT Has Compromised Its USD Peg

As examined in the above sections, USDT has been a steady and dependable pillar for the crypto market, enhancing stability, reliability and liquidity across the board. However, in June of 2023, USDT temporarily lost its fixation with the US dollar. While unlikely in concept, the de-pegging of USDT came to fruition due to a severe imbalance in the largest stablecoin liquidity pool – the curve 3pool. 

The curve 3pool, commonly named tri-pool, is a massive liquidity container for three principal stablecoins on the market – USDT, USDC and DAI. From its inception, the tri-pool was designed to maintain a perfect balance between the three flagship currencies. However, tectonic shifts in the market distribution can alter this balance. While USDT managed to avoid any significant price fluctuations, June 2023 finally tested the limits of USDT’s stability. 

2023 has witnessed an unprecedented spike in laws and regulations related to crypto. The USA and other sovereign entities have prioritised regulating crypto markets with increasingly strict protocols and limitations. UDST was one of the major targets in this case, being the subject of a concerning lawsuit in the first quarter of 2023. 

The lawsuit was filed against the founders of USDT, with the respective allegations that USDT is not perfectly backed by US dollars and users could suffer heavy losses. While the lawsuit was recently dismissed, the general public perception has shifted toward concern. Numerous investors believed that the best course of action would be selling USDT, therefore skewing the balance of stablecoin liquidity pools. 

Thus, due to a sudden downturn and massive investor exits, USDT fell below the promised $1 valuation. While USDT has currently swiftly regained its fixation to USD, this temporary occurrence is certainly a cause for concern. 

The de-pegging highlights the inherent issues with USDT and its respective reserves. Previously, Tether’s liquidity and pricing problems were highly theoretical as USDT continued to thrive and grow in market capitalisation. However, after receiving this concerning crypto news, the general public has empirical evidence that USDT is susceptible to price volatility and market risks. 

Despite the fact that USDT can most probably maintain a close valuation to the US dollar, the de-pegging precedent itself directly compromises the main attraction of USDT – reliability and dependability.

Final Takeaways

USDT and other fiat-supported stablecoins have brought numerous innovations to the crypto market. USDT itself has facilitated the maturing of the crypto industry, enhancing liquidity and offsetting price volatility trends. However, the recent de-pegging incident caused by investor concerns is a considerable drawback for USDT. 

After this precedent, USDT has lost its hard-earned reputation of stability and reliability for potential crypto investors. It remains to be seen whether USDT’s creators will manage to weather the recent storms and upgrade their stablecoin methodology to eliminate this pressing issue.