Tether
From Realcoin to Tether: A New Kind of Crypto Asset
In July 2014, a small team announced a project called Realcoin — a cryptocurrency designed to track the value of the US dollar, one token for one cent. The concept was simple but radical: take the programmability of Bitcoin and combine it with the price stability of a traditional fiat currency. Within months, the project was rebranded as Tether, and a new category of digital asset — the stablecoin — was born.
The founders included Brock Pierce, Reeve Collins, and Craig Sellars. Sellars was a developer on the Omni Layer protocol, a software layer built on top of the Bitcoin blockchain that allowed new tokens to be created and transferred. This technical foundation gave Tether a pragmatic advantage: instead of building an entirely new blockchain, it could piggyback on Bitcoin's proven security while adding its own layer of functionality.
By November 2014, Tether Ltd. had issued the first USDT tokens. Each token was meant to represent one US dollar held in reserve by the company. The promise was straightforward — holders could always redeem their USDT for actual dollars. Whether that promise was kept would become one of the most contested questions in crypto history.
peg-mechanism">The Dollar Peg Mechanism
How Tethering Works
At its core, Tether operates on a model that financial professionals call a "backed stablecoin" or a "fiat-collateralized stablecoin." The theory is that for every USDT in circulation, Tether Ltd. holds an equivalent dollar (or dollar-equivalent asset) in its reserves. This 1:1 backing is what keeps the token's price anchored to the dollar.
When demand for USDT rises — as it often does during crypto market volatility, when traders want a safe haven without exiting to traditional banking — Tether issues new tokens after receiving dollar deposits. When tokens are redeemed, they are burned (destroyed), reducing supply. This elastic supply mechanism is what theoretically maintains the peg.
In practice, arbitrage traders also help maintain the peg. If USDT dips below $1.00 on an exchange, traders can buy cheap USDT and redeem it for full dollars, pocketing the difference and pushing the price back up. If it rises above $1.00, they can deposit dollars with Tether and sell the freshly minted USDT at a premium. These market forces act as a secondary stabilizer.
Expanding Beyond Bitcoin
Tether originally existed only on the Omni Layer atop Bitcoin. But as the broader crypto ecosystem expanded, so did USDT. Tether eventually issued tokens on Ethereum (as an ERC-20 token), Tron, Solana, Avalanche, and dozens of other networks. This multi-chain presence made USDT the most widely deployed stablecoin in existence, accessible wherever smart contracts could run.
The Bitfinex Connection
Shared Ownership and Controversy
The relationship between Tether and the Bitfinex cryptocurrency exchange has been a source of persistent controversy. Both entities share common ownership through iFinex Inc., the parent company. This intertwining raised immediate questions about conflicts of interest: could Bitfinex use Tether to manipulate crypto prices?
A 2019 lawsuit by the New York Attorney General's office accused Bitfinex of using Tether reserves to cover an $850 million loss it had suffered when payment processor Crypto Capital went missing with customer funds. Tether, the NYAG alleged, had secretly loaned Bitfinex $700 million from its reserve fund — meaning USDT was temporarily undercollateralized.
The case ended in 2021 with Bitfinex and Tether paying $18.5 million in penalties and agreeing to provide quarterly reports on Tether's reserves. Crucially, neither company admitted wrongdoing.
The Reserves Controversy
For much of its early history, Tether claimed its reserves were held in simple, safe cash deposits. Independent audits were promised repeatedly but never materialized in the form investors expected. In 2021, under regulatory pressure, Tether finally released a breakdown of its reserves — and the composition surprised many observers.
Rather than holding mostly cash, Tether's reserves were dominated by commercial paper (short-term corporate debt), with smaller portions in cash, money market funds, and other assets. Critics argued this made the reserves far riskier than advertised, particularly because commercial paper can become illiquid during market stress. Supporters countered that commercial paper is a standard institutional treasury tool used widely by money market funds.
Over the following years, Tether gradually shifted its reserve composition toward US Treasury bills, which are considered among the safest financial instruments in the world. By 2024, the company reported holding the vast majority of its reserves in short-term Treasury securities, bringing its profile closer to what a traditional money market fund might hold.
Market Dominance
Becoming the Liquidity Layer of Crypto
Despite — or perhaps because of — the controversy surrounding it, Tether grew to become the dominant stablecoin in global crypto markets. By market capitalization, USDT consistently ranked among the top three cryptocurrencies, surpassing even Ethereum at various points in terms of daily trading volume.
The reason for this dominance is practical. Crypto exchanges, particularly those operating outside major Western regulatory jurisdictions, needed a dollar-denominated asset that traders could use without touching traditional banks. Tether filled this gap better than any alternative. It was fast to transfer, cheap to use on many blockchains, and accepted virtually everywhere.
For traders in countries with volatile local currencies — Venezuela, Turkey, Nigeria, Argentina — USDT also became a practical tool for preserving savings in dollar terms without the friction of opening a US bank account.
Competition and the Stablecoin Landscape
Tether's dominance eventually attracted significant competition. Circle and Coinbase launched USDC, which differentiated itself through more transparent reserve reporting and stronger regulatory compliance. The Maker protocol created DAI, a decentralized stablecoin backed by crypto collateral rather than fiat. Binance introduced BUSD (later discontinued under regulatory pressure). PayPal launched its own stablecoin, PYUSD.
Yet despite this competition, USDT maintained a commanding market share. Its first-mover advantage, deep liquidity, and ubiquitous exchange support proved difficult to dislodge.
Why Tether Matters for Understanding Crypto
Tether's story illuminates several fundamental tensions in the cryptocurrency space. It shows the practical demand for stable-value digital assets — a demand that "pure" cryptocurrencies with volatile prices cannot satisfy. It demonstrates how the boundaries between centralized and decentralized finance are often blurry: USDT runs on decentralized blockchains but is issued by a centralized, opaque company. And it illustrates how regulatory gaps can allow financial innovation to race ahead of oversight.
The whitepaper-era vision of trustless, permissionless money confronts reality in Tether. To achieve stability, you need a central party making promises about reserves. To trust those promises, you need audits, regulation, or both. Tether's ongoing tensions between transparency and opacity, between innovation and accountability, make it a defining artifact of how crypto actually developed — not in the idealized form described in whitepapers, but in the messy, pragmatic form demanded by real markets.