Tether Issuance Primer

Tether Operations Limited (Tether), operating tether.to, is the oldest and largest stablecoin provider, with over 60 billion dollars of Tether tokens in circulation as of May 2021. Due to the importance of Tether Tokens to the entire crypto ecosystem, the issuance of USDt is a careful and strategically planned process that spans four distinct stages: Authorized, Issued, Redeemed, and Destroyed.

This article will explain each of these stages in detail and shed light over why Tether uses this process to maximize the security and usability of Tether tokens (USDt).

Authorized

Authorized tokens can be thought of as pre-issued tokens. Authorized tokens are created in large batches for two key reasons: to meet customer demand and to minimize how frequently Tether signer’s need to interact with the private keys.

Authorized transactions can be generated ahead of time and then signed by multiple signers involved in the Tether tokens issuance process. Authorized transactions are always prepared for a fixed amount of USDt. This amount is determined by conversations Tether has had with clients and represents the anticipated demand for USDt by these parties.

Tether’s private keys control the ability to issue USDt, so private key security is a top priority for Tether. By issuing tokens in batches, Tether is able to greatly reduce how often private keys need to be used. Additionally, maintaining an inventory of authorized USDt allows Tether to meet customer demand in a timely manner.
The authorization process ensures that USDt don’t need to be issued every time a request is made. Otherwise, Tether’s private keys would need to be interacted with and potentially exposed everytime a client submits a request for USDt.

Authorized USDt are not counted as part of the market cap of Tether tokens. These tokens are not in circulation and as such are not backed by collateral. All USDt that are issued into circulation are fully backed by collateral. All authorized USDt are held within Tether’s treasury.

Issued

Issued Tether tokens are tokens which have been issued to a client and are currently in circulation.

All issued USDt are always 100% backed by Tether reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties.

The market cap of USDt is made up entirely of issued tokens. Issued tokens may be held by an exchange, an individual, or an institution that is using USDt to transact with or to store funds in a secure digital form.

All issued USDt are initially taken from the current supply of authorized USDt in Tether’s treasury. In order to leave Tether’s treasury, newly issued USDt must be backed by collateral. The supply of authorized tokens decreases every time USDt is issued until it is replenished by future authorizations.

Redeemed

Every USDt can be redeemed for US Dollars on a 1:1 basis. Redeemed tokens are USDt that have been sent back to Tether to be processed for redemption into USD. Redeemed tokens that are no longer backed by collateral are held back from circulation and stored in Tether’s inventory or treasury. Redeemed USDt tokens are not released back into circulation unless new collateral has been provided to back these tokens. Redeemed USDt tokens may be issued to new clients in response to demand or they may be destroyed.

Redeemed USDt are not counted in the market cap of USDt.

Destroyed

Destroyed USDt are USDt that have been permanently destroyed. Destroyed USDt  are neither in circulation nor in the Tether treasury/inventory.

USDt may be destroyed in the event that Tether has more USDt tokens in it’s treasury/inventory than are required for estimated client demand after a redemption has taken place.

USDt may also be destroyed if after a chain swap there were excess tokens which were deemed unnecessary. 

Chain Swaps

The Tether token is not only the largest stablecoin, but USDt is issued on more blockchains than any other stablecoin on the market.

USDt are currently issued on Algorand, Bitcoin Cash’s Simple Ledger Protocol (SLP), Ethereum, EOS, Liquid Network, Omni, Tron, and Solana.

In order to manage user demand in each of these different ecosystems, it is sometimes necessary to move USDt from one blockchain to another. 

For the average USDt user, the best way to swap USDt from one blockchain to another is via a cryptocurrency exchange that supports both versions of USDt, such as Bitfinex. However, when a cryptocurrency exchange needs to balance out a surplus of one type of USDt it may require a chain swap.

In order to perform the chain swap, the exchange will send USDt to Tether and a corresponding number of USDt will be sent back to the exchange on the corresponding chain.

If the client’s request is for more USDt (of a specific chain) than Tether currently has in it’s treasury, then new USDt will be first authorized and then issued on the corresponding chain and Tether may destroy the excess USDt on the previous chain if necessary.

Chain swaps are a net neutral process in terms of USDt issuance. The net balance of total USDt remains the same, as tokens are simply moved from one blockchain to another. All USDt remain backed by the same collateral. 

While users may see USDt  being issued due to chain swaps, it can be helpful to understand that this issuance of tokens does not constitute the creation of additional USDt.

The Lifecycle of USDt

At any given time a Tether token can be identified as being in one of these four stages of the issuance cycle: authorized, issued, redeemed, or destroyed.

By conducting issuance using this system, Tether is able to safeguard some of the most important private keys in the cryptocurrency industry and provide in demand services to Tether clients.
By better outlining the Tether issuance cycle, Tether hopes to create more transparency and provide a clearer picture of the various issuance alerts that become circulated via block explorer monitoring.