How is Tether Used?
As the largest and most widely used stablecoin across multiple blockchains, Tether tokens (USDt) have been used to secure over $60 billion dollars of value. This value has been transformed from a physical, legacy format into a digital one.
By digitizing dollar based liquidity, USDt unlocks the potential of money to perform new functions via emerged blockchain based infrastructure.
While Tether is agnostic in terms of specific use cases, it is valuable to explore how Tether tokens are being used around the world and what specific benefits users gain from choosing a Tether token over either traditional fiat currencies or digital currencies.
Liquidity and Volume
Tether tokens are free from the constraints of legacy financial stacks and as such are able to trade with increased speed and ease. In 2021, USDt traded over 130 billion dollars of volume per day across all exchanges on average.
Traditional fiat systems are held back by the settlement process where dollars must be moved across separate institutions and then settled into a final balance. This adds time and cost to the movement of dollars.
Tether tokens are native to various blockchains and inherit settlement assurances from the underlying network. All blockchain networks inherently provide settlement with every transaction.
This means that Tether tokens can be robustly traded and settled with ease.
Trading in a Crypto World
The ease at which Tether tokens can be moved is of particular value in the robust ecosystem of cryptocurrency exchanges and decentralized financial applications.
Cryptocurrency markets are both international and operate 24/7. Current financial infrastructure has been designed for localized equities markets which trade limited hours on weekdays- the exact opposite of what has emerged in cryptocurrency markets.
As a result, traders experience severe limitations trying to move funds via wire to exchanges. Funds need to move between time zones and potentially currencies only to settle after more than a day at their destination.
This mismatch means that traders are left completely unable to quickly respond to opportunities that emerge in the market if they only have access to traditional financial infrastructure.
Tether tokens solve this problem by providing stable liquidity that can be moved with the same speed and freedom as the rest of the cryptocurrency market.
Without access to liquidity that can be both easily transacted with and is stable in value, traders are forced to either take price risk or time risk. They can use a cryptocurrency to transact but risk price volatility during transfer, or they can use fiat and risk the market changing by the time funds settle.
Tether tokens allow users to circumvent the cumbersome process of sending money internationally.
International transfers are costly, fees include wire fees, currency conversion costs, and service fees. Sending money international is more expensive for smaller transfers while getting cheaper for larger amounts.
International transfers are also slow, easily taking a week to complete the process and settle in the recipients account.
Tether tokens eliminate the need to convert value between different fiat currencies while bringing settlement time down to minutes, not days or weeks.
Tether allows direct payments to be made while empowering anyone with an internet connection with the ability to hold value that is denominated in a given fiat currency. This means that using USDt anyone can hold value denominated in dollars even if they lack banking access that can hold dollars.
Holding Dollar-Based Value Overseas
Many people around the world prefer to hold value in dollars due to weak local currencies. However, this requires them to either hold cash or work with a local bank that can safely and securely hold dollars (or another fiat currency).
Either of these options creates security risks for the user. By holding cash, they open themselves up to the risk of theft and the need for physical security. By working with a bank, they expose themselves to a risk of theft during withdrawals and the movement of money- if they can even find a bank that will offer dollar custody to begin with.
By using USDt, users can hold dollar based value in an accessible way. Use of USDt also plugs them into a global transaction and settlement network they can access from their computer.
Accessing international payments can be very challenging in some countries but Tether tokens open up access to the whole world.
De-Fi is a fastly growing concept that has been born of the ability for decentralized networks to build out financial infrastructure. Many De-Fi products utilize some form of collateralization, borrowing, and yield generation. These applications have been proven to be effective in facilitating lending/borrowing at growing levels of scale.
However, due to the fact that De-Fi can currently only work with on-chain assets it must contend with the natural volatility of current generation crypto assets. Excess volatility can create greater financial risks for those utilizing De-Fi products as a spike of volatility can result in liquidations or losses.
Tether provides a solution in the form of on-chain collateral which maintains a stable value. Users can deposit Tether Tokens as collateral to participate in De-Fi networks without needing to manage volatility.
This ends up not only protecting the user, but stabilizing the entire system as failures can cascade throughout the application if they are large enough.
For De-Fi to mature as a financial stack, it is essential that users have access to the ability to collateralize these applications with non-volatile assets.
Digital Only Exchanges
A notable quality about many cryptocurrency exchanges is that many of them are digital only. They do not have any connection to the legacy banking system and do not utilize fiat currencies in any way. These have been less common as the larger exchanges have eventually integrated fiat currency on-ramps, but they are still an important subset of cryptocurrency exchanges today.
Tether tokens allow digital only exchanges to offer traders and investors the ability to sell their position into a stable asset (many call it Tethering Up). Without the utility that Tether tokens provide, users could only sell their positions into other cryptocurrencies which experience volatility and share correlation to market movements.
Tether tokens also empower investors and traders to have efficient ways to transfer capital into and out of digital exchanges.
While most larger cryptocurrency exchanges will feature fiat integrations soon, the concept of a digital only exchange has found a new iteration in the decentralized exchange (DEX).
DEXs cannot integrate fiat currencies in the traditional sense as they exist purely on-chain and can only work with on-chain assets. Having a tokenized version of dollar based collateral becomes crucial here if the goal of a DEX is to provide traders the same services that a centralized exchange can offer.
By virtue of being an on-chain asset, Tether Tokens provide DEX traders with the ability to cash out into a stable on-chain asset that will maintain its value between trades.
Banking and Non-Banking Innovation
Tether tokens create the ability for corporations to transfer funds independently of the legacy banking system. However, they also create the capacity to build innovation on top of the legacy banking system.
Banking is one of the most heavily regulated and difficult to navigate systems in the world. Most consumers never see what is happening behind the scenes, but the settlement process for fiat transfers is a complex and cumbersome process. Additionally, different corporations may have specific blockers that prevent them from integrating with the legacy system.
One of the key innovations of blockchain based assets is that tokens combine payment and settlement into a single system.
Tether tokens present a utility to businesses that allows them to send, receive, store, and settle funds quickly and efficiently.
This is an empowering tool for businesses which cannot access the legacy banking system or experience significant shortcomings or costs working within the limitations of the legacy system.
However, Tether tokens not only represent an alternative and a stop gap for areas where legacy banking fails to meet business needs but also represent a way for financial services providers to build on top of banking infrastructure.
Different regions are in the process or have passed legislation that allows public blockchains to be used as settlement systems within the banking structures.
This opens a doorway for banks to leverage the powerful benefits of blockchain based assets to better serve their clients. This is not a major use of Tether tokens today, but represents an area where blockchain based assets can support and improve the existing financial system.
Tether tokens aim to provide settlement finality within minutes, unlike the risks that merchants are exposed to via credit card chargebacks and reversal of bank transfers.
For industries that struggle with these issues, accepting Tether tokens is one way they can avoid this common difficulty.
While most cryptocurrencies provide settlement finality, Tether tokens ensure the merchants and businesses don’t need to manage volatility or juggle multiple assets.