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Fiat currencies on the Bitcoin blockchain
Coin Market Cap Rank: 8
Current Market Cap: $2,759,243,451
Many cryptocurrencies refer to themselves as the gold of cryptocurrency or as backed by fiat currencies. These cryptocurrencies are known as ‘stablecoins’.
Stablecoins cryptocurrencies that are tethered to stable assets such as fiat currencies or gold. Many are commonly linked to a decentralised autonomous organisation (DOA) who controls the pricing and issuance of the cryptocurrency. These organisations are represented as rules encoded as computer programs and controlled by shareholders, rather than central governments.
New coins are issued based on the collateral – fiat currencies, gold or cryptocurrency – provided. Should the reserve grow, more coins will be able to enter circulation.
Tether (USDT) is currently one of the largest stablecoins by coin market capitalisation. The idea behind Tether lies in ensuring accountability as well as the stability in exchange price. In doing so, Tether Limited developed a method which uses the Bitcoin blockchain’s Proof of Reserves and audit methods, to maintain a one-to-one reserve ratio between the USDT cryptocurrency and its associated fiat currency asset.
According to the Tether whitepaper, using the Proof of Reserves process is “fundamental to maintaining the price-parity between tethers in circulation and the underlying fiat currency held in reserves”.
Coindirect digs further into what is Tether and what you need to know about the cryptocurrency.
What is Tether USDT?
Tether was originally named ‘Realcoin’, which was launched by Realcoin co-founder Brock Pierce in July 2014. In November 2014, Tether CEO, Reeve Collins, announced Realcoin’s rebrand to what we know today as Tether.
Tether is a unit of a fiat-pegged cryptocurrency issued by Tether Limited. This fiat-pegged cryptocurrency is popularly known as ‘USD₮’. According to Tether Limited, each USDT is backed by one US Dollar (USD) held in reserve and issued on the Bitcoin blockchain through the Omni Layer Protocol.
The main goal of Tether USDT is to facilitate transactions between cryptocurrency exchanges with a price fixed to the US dollar. Hence, allowing cryptocurrency traders the ability to take advantage of arbitrage opportunities without having to deal with bank wires.
How does the Tether cryptocurrency work?
Tether enables all users to send, receive and store cryptocurrency that is backed by the US Dollar, Euro and Japanese Yen.
Tether populates the Bitcoin blockchain through the Omni Protocol. The Omni Protocol is an open-source software that interfaces with blockchains. This authorises the issuance and exchange of cryptocurrency tethers.
Each tether issued into circulation is backed by a 1:1 ratio; meaning that 1USD₮ is equivalent to 1USD. Respectively, the ratio applies to the corresponding fiat currency unit held in deposit by Tether Limited. All currencies of Tether Limited are 100% backed by fiat currency assets in the organisation’s reserve account. When the total amount of tethers in circulation is less than or equal to the balance of fiat currency held in the reserve, the Tether platform is fully reserved.
In line with the Tether Limited terms of service, tethers can be exchanged for the underlying fiat currency or the equivalent spot value in Bitcoin. Once issued, holders of USDT can transact with the cryptocurrency as pleased – spent, stored, transferred and more.
Tether vs. other fiat-pegged cryptocurrencies i.e. stablecoins
Although many cryptocurrencies have been pegged to fiat currencies, very few focus on building applications where fiat values are stored and transmitted through open-source software and uses distributed ledger technology.
Here’s what makes Tether USDT different to other fiat-pegged cryptocurrencies:
- It exists on the Bitcoin (BTC) blockchain rather than the altcoin blockchain with private databases.
- Being on the Omni Layer Protocol, it has integrated advanced blockchain properties – decentralised exchange, open-source, wallet encryption, transparency, browser-based, multi-party security, report functions and accountability.
- Avoid market volatility, as 5 reserves are retained in a one-to-one ratio rather than relying on market forces.
- The one-to-one ratio, rather than derivative strategies, makes it easier for new investors and beginners to understand.
- 0% constraints in liquidity or pricing during the issuing or exchange of Tether USDT.
- Proof of Reserves consensus removes the counterparty risk as the custodian of the reserve assets.
- Tether can also be integrated into a peer-to-peer marketplace, cryptocurrency exchange and cryptocurrency wallet; for example, Coindirect.
Using Tether USDT on cryptocurrency exchanges
There is a lack of banking integration and credit card penetration in many emerging markets around the world. In addition, with the presence of poverty in Africa’s third world continent, the other 1.3-billion cannot rely on remittance due to the instability of fiat currencies and high currency conversion fees.
Not to mention, accepting fiat deposits and withdrawals using traditional financial systems are not only complicated and labour-intensive, but also slow, expensive and come with risky issues such as:
- Irreversible transactions, prohibitive costs for small transactions and high currency conversion fees.
- Communicating with banks to ensure security and compliance.
- International wire transfer clearance takes 37-days.
- Identifying the correct payment providers for your exchange.
- Integration into banks with no APIs.
With Tether being tied to the US Dollar, it a cryptocurrency solution that can be used in remittance to avoid paying exorbitant cross-border charges brought by fiat transfers. Using Tether instead of holding onto fiat currency also exposes users of exchanges to a much lower counterparty risk.
Here’s what makes trading USDT-fiat pairs on cryptocurrency exchanges useful:
- Accepts cryptocurrency and fiat currency deposits, withdrawals and storage without any central authority. In this was, you can eliminate exchange custodial risks and manage your own funds.
- Fiat currency can be moved in and out of cryptocurrency exchanges and wallets fast and at a low transaction cost.
- Trade USDT/fiat pairs to avoid remittance and enhance Bitcoin applications to support Tether. This means you can also use currencies that your customers are familiar with.
- Multisignature security, including cold wallets to store your own private keys.
- Enhance your cross-exchange and currency arbitrage strategy.
The Coindirect cryptocurrency exchange supports 15 trading pairs including 6 USDT fiat and cryptocurrency trading pairs. You already have access to our integrated exchange with 50% off trading fees until the end of October 2018 (0.1% on crypto to crypto trades and 0.4% on fiat to crypto trades).
Buying, selling and securing Tether USDT
With Coindirect, Tether can be easily bought via conversion on our peer-to-peer marketplace. The Coindirect peer-to-peer marketplace includes Bitcoin, USDT and over 40 altcoins, including ERC-20 coins.
Using Coindirect’s P2P marketplace means that you can buy USDT with ZAR, EUR, NGN, GBP, AUD and many more fiat currencies in 25 countries around the world, using your most convenient local payment method; including bank transfers, PayPal, TransferWise, supported fiat deposits, direct deposits and M-Pesa. Credit card payments are coming soon.
Tether can also be sold for BTC or other cryptocurrencies via the Coindirect conversion service. If you are located in one of our 25 supported countries, you can instantly sell your USDT by selecting the best buy offer from vendors in your country or you can set up a sell offer on our peer-to-peer marketplace.
Though, it’s important to secure your Tethers in a safe storage.
The Coindirect cryptocurrency wallet supports Tether and 42 other cryptocurrencies. It also integrates cold storage and two-factor authentication (2FA) for multiprotection against crypto threats. The Coindirect cryptocurrency wallet is supported in 25 countries around the world.
Trade 15 trading pairs on Africa’s biggest and the world’s most emerging cryptocurrency exchange. Create a free account, select your preferred USDT trading pair/s and #OwnTheFuture with Coindirect.
Disclaimer: This article should not be taken as financial advice. Never invest what you can’t afford to lose as the cryptocurrency market is volatile. Always research as much as possible before buying any coin.