This is a very hot topic lately. Especially now Tether’s market cap is wandering around 10 billion US dollars.
Before we move on to the main topic though, let’s understand what Tether is first.
What is Tether?
Tether (USDT, https://tether.to/) is a stable coin which works on various blockchains for example; Omni, Ethereum, EOS, Tron, Liquid and BCH.
“What makes Tether a stable you coin?” You might want to ask. Here is the catch: When Tether made its debut, it was promised that Tethers would have 1:1 value against the US dollar. That means 1 USDT is (or was) backed by 1 actual USD and Tether Corp. guaranteed this value.
Later on, Tether Corp removed this peg and they instead claimed that USDT is not only backed by the real Dollars but also by other assets including real estate, stocks and others.
Now we know for sure, Tether is not backed by only dollars and the rate is damn sure not 1:1. It may be 1:1.2 or 0.8:1… We cannot know it. I can see it in your eyes right now… The alarm bells are ringing.
What is the Danger?
If Tethers are not 1:1 backed by the USD and we cannot know its rate for sure, then that pretty much means Tether is running on a fractional reserve. The exact same system our current banking system runs on. If you want to know what “Fractional Reserve Banking” means, you’ll find a short description below. If you want to understand it better, visit investopedia.
“Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending.” –Investopedia: Fractional Reserve Banking
Tether was not audited by an external finance firm. Never. They were once auited by FSS which is a Washington based law firm. (Link to the PDF of that audit) They still list this audit as their proof of funds on their front page.
This audit means pretty much nothing. It doesn’t prove anything at all. It is a joke. However, as I understood from reading other articles, it is also impossible to audit tether properly so I am going to cut them some slack here.
It is impossible to know whether Tethers are backed by the real assets or not. What we do know is however, this:
Tether printed ~6 billion US Dollars this year as of August 2020. At the beginning of this year, Tether’s market cap was merely around 4 billion USD. These numbers are pretty crazy. It tells us two things:
1- There are serious demand for USDT so Tether/Bitfinex has no choice but print more.
2- This whole thing is a lie.
I don’t know which one is the truth here but if you wonder my personal opinion, I’d say “Be cautious”.