What is USDT? and Why Use It?

For a lot of people, one of the challenges they encounter with cryptocurrencies that aren’t stable coins is its volatility which is the rate at which the price changes. So, using cryptocurrencies that aren’t stable coins as a store of value or means of exchange is risky. Notwithstanding, volatility proves an advantage for traders and investors.

The United States Dollar Tether is often referred to as USDT or Tether. USDT belongs to a group of cryptocurrencies known as stable coins. A stable coin is a type of cryptocurrency whose value is directly equal to an existing fiat currency  (US Dollars, Naira or Pounds or Euro).

Stable coins are for people who are trying to protect themselves from volatility or the inflation that comes with preserving wealth with fiat currencies that are prone to inflation. With Tether, you can preserve wealth in a much stronger currency’s equivalent.

In this post, we’ll define USDT, provide a few practical use cases.

Let’s begin by understanding what a stable coin is. 

What’s a Stable Coin?

A stable coin is a type of cryptocurrency that’s pegged to other stores of value like fiat currency, other cryptocurrencies or even commodity money like gold. The idea is that the value of these other assets would support the value of the stable coin and reduce volatility.

The value of cryptocurrencies that aren’t stable coins such as Bitcoin is determined by the forces of demand and supply. This means that if more people believe it’s valuable, then it is. On the other hand, if fewer people believe in its value, then, its value drops. Factors like the opinion of the media, a government’s opinion and even how the average person feels about the coin could influence its value in the market.

The volatility quality makes a cryptocurrency like Bitcoin a perfect fit as an investment asset but not as a medium of exchange for day to day transactions.

On the other hand, stable coins enjoy stability because they are pegged to assets that have relatively strong stability. This makes them better suited for day to day transactions and as a store of value.

The most popular stable coins are backed by strong fiat currencies like USD, GBP and Euro. But there are a few others that are backed by other asset types. An example is MakerDAI that’s backed by a mix of decentralized crypto assets.

Like USDT, other US Dollar backed stable coins include Gemini Dollar, TrueUSD and USDCoin. 

What is USDT (Tether)?

USDT is a stable coin that’s pegged to a fiat currency, the United States Dollar (USD). It’s intended to be on a 1:1 ratio with USD. This means that USDT’s value is directly hitched to the value of the US Dollar.

This also means that if the value of 1 dollar is 362 Naira, ideally, the value of 1 USDT would be 362 Naira as well.

USDT doesn’t run on its own blockchain. It was initially built on the omnichannel of the Bitcoin blockchain. Then later moved to the Ethereum blockchain.

Now, let’s get it to the technical stuff and move on to practical uses of USDT.

How does USDT work?

USDT is a type of cryptocurrency that aims to be a bridge between fiat currency and cryptocurrency. Every time a Tether investor puts in $1 into the tether dollar reserve, the USDT equivalent is created.

To get a better picture of this, let’s say Jane wants to have some cryptocurrency instead of her local fiat money which is Kenyan shillings but is looking for something stable where she does not have to worry about price fluctuations.

Let’s assume she wants it because she wants to buy some products from an African merchant in South Africa or that she wants to send some money to her niece who’s spending a few weeks in Japan in as little as 30 minutes. She hears of USDT and decides it’s a great way to send value to her niece in a shorter time frame and without the danger of value fluctuations.

She buys USDT in exchange for Kenyan Shillings. When she pays, Tether (the company that issues USDT) only mints more tokens to match the dollar equivalent of what she has paid. And that’s how new USDT is produced.

USDT is issued by a company called Tether. In addition to USDT, Tether issues another stable coin that’s pegged to the Euro called EURT. Reports also have it that Tether will soon begin to issue a stable coin that’s pegged to the Japanese Yen which would be called JPYT. 

But why use USDT instead of USD?

Just like cryptocurrency, USDT was created to be decentralised. So, it’s not meant to be controlled by a single individual or organisation.

One of the advantages that USDT has over USD is that it cuts the access time and reduces the access period. Depending on the country you are in, getting USD might require going to your bank and spending valuable time filling forms. But with USDT, in as little as 5 minutes, you can exchange your local currency for it and execute the transaction you have in mind.

Another advantage that USDT has over USD is the fact that it cuts across barriers. Because it is a digital currency, USDT is widely accepted around the globe by organisations and individuals that support cryptocurrency. While USD is limited to countries like the USA where it’s a legal tender, USDT has a much wider borderless reach.

Why is USDT Important?

A hedge against volatility

Because USDT is a stable coin, it is way less volatile. Traders and investors can hold USDT and not have to worry about significant gaps in price fluctuation which is common with most cryptocurrencies. This makes USDT more practical for mainstream use cases. Anyone can hold USDT without the fear of losing value to volatility.

A hedge against inflation

People who reside in countries with weak currencies or currencies with high inflation rates can mitigate the losses from inflation by simply converting and saving some of their money in USDT. This way, they have the advantage of a stronger currency and are protected from inflation. 

A hedge against weak fiat currencies

People who reside in countries with weak currencies or currencies with high inflation rates can mitigate the losses from inflation by simply converting and saving some of their money in USDT. This way, they have the advantage of a stronger currency and are protected from inflation. 

A fiat currency alternative

Because USDT is intended to be pegged on a 1:1 ratio to the USD, the value of USDT is expected to be directly equivalent to the value of the USD. Even though there’s a tiny difference at the moment between the value of USDT and the USD, both currencies practically pull the same weight in terms of value.
People who’re looking for an alternative to fiat money buy USDT.

How to Buy, Sell and Store USDT

You can buy and sell USDT on Quidax. As well as send and receive USDT to and from anyone or anywhere in the world who has a USDT wallet.

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Quidax is an African focused cryptocurrency exchange that provides a simple platform for you to send, receive, store, buy and sell digital currencies. Our aim is to educate you about cryptocurrency. It should not be considered as financial advice. We recommend conducting your own research before deciding to buy, sell or hold any cryptocurrency.