As of a few days ago, Tether (USDT) surpassed XRP to become the 3rd overall cryptocurrency in terms of market capitalization, and it now represents about 90% of all BTC traded into stablecoins.
Tether is not just another stablecoin, it is quickly becoming an institution; Tether’s influence on the crypto landscape has also been massive, so it’s worth exploring how we got here.
What we will come to learn is that history of Tether’s ascendance is anything but clear, and actually quite controversial.
The largest stablecoin today by a large margin, Tether (USDT), was also the first. However, it began life under a different name, Realcoin, co-founded by Brock Pierce, Craig Sellars, and Reeve Collin in the summer of 2014.
Below is a graphic created by CoinTelegraph that positions it as an alternative to bitcoin, and some of the functions it goes on to extol seem quite similar to Ethereum’s, whose historic crowd sale had started only 9 days earlier: “Bitcoin 2.0: digitized assets can be traded [ICOs]; deals could be executed [smart contracts]; and commercial contracts could be negotiated [auditability?]”.
Whether Cointelegraph was doing some good-old journalistic sensationalizing for readership, or whether this was a strategic emphasis by the founding team in the early days remains unknown. Brock Pierce eventually did get his Ethereum killer (clone?), launching EOS a few years later in 2017, and in the meantime, Realcoin rebranded to Tether, and shifted its focus exclusively to the idea of pegging their coin to the value of 1 U.S. Dollar.
In other words, that it was actually tethered to the US Dollar. In simple terms, that means that every $1 USDT Tether would have a corresponding reserve amount of real US Dollars backing it up. Time and time again, however, Tether has failed to produce the proof of this reserve amount, even as it prints now billions of USDT.
Unlike almost all other cryptocurrencies and blockchains, there’s no possibility for a stablecoin to dramatically increase (or decrease) in value. One of the major attractions for crypto holders and traders alike from the very beginning and likely far into the future is the speculative promise significant changes in value. The real problem in getting a stablecoin off the ground would be a problem of demand: an ICO would be useless, and traders and holders wouldn’t be rushing to exchange their USD for tether unless it was proven out and there was some liquidity pool involved.
It made a lot of sense, then, that the storied association between Bitfinex, an exchange, and Tether, a budding stablecoin, began soon after. In January 2015, just six months after announcing the development of the coin, Tether launched on Bitfinex. It doesn’t seem entirely clear from any source, but at some point between 2015 and 2017 Brock Pierce and its cofounders sold Tether to Bitfinex, or in the very least attributed leadership and control over to the C-Suite at Bitfinex composed of JL Van Der Veld and Giancarlo Devasini who today maintain official status as heads of both Tether and Bitfinex.
Bitfinex experienced some significant hacks in its history — notably one in August of 2016 that say about 120k bitcoins (worth $78M USD at the time). It attempted to socialize the losses of that hack among its user by reducing accounts by 36% across the board.
In addition to this, it had had some trouble trying to find a banking partner after Wells Fargo dropped them and eventually went (back) to Brock Pierce, who controlled/founded Noble Bank International (Puerto Rico). Around this time, Bitfinex also started to gain the attention of regulators who eventually brought a court order against Ifinex, the parent company to both Bitfinex and Tether:
Ordering them to cease violating New York law and defrauding New York residents.
[Letitia James, lead prosecutor] said that an investigation by her department determined that iFinex ‘engaged in a cover-up to hide the apparent loss of $850 million of co-mingled client and corporate funds’.
The implication is that Bitfinex covered its own losses through the selling of Tether in the bull run of 2017/2018, not only building up Tether as the de facto stablecoin of choice, but causing the market to bubble much higher than it would have otherwise. There are a lot of parts to the story, but ChicoCrypto has an excellent video of the timeline and associations here.
In the last two years, USDT has become go-to way to trade, overtaking BTC by a large margin. In the chart below, the yellow is the percentage of BTC quote pairs and the green is USDT quote pairs. Before 2018, barely 20% of quote pairs were in USDT, and around 80% were BTC. That has turned almost upside down today, with 70% or more quote pairs in USDT and the rest in BTC.
The overtaking of BTC by USDT makes a lot of sense as it’s much more reasonable to trade into an asset that has a stable value than into one that is volatile, like BTC. What the market is experiencing now is the realization of what many in the community had only dreamed of in 2014, which was a really stable, liquid way of trading between assets in the crypto world.
The way that we got here, though, is very murky indeed, and if Ifinex, Bitfinex, and Tether find themselves in hot water from a legal standpoint as more light is shed, the cryptoworld will have a real ecosystem-level issue on its hands. If, on the other hand, whatever dark path was taken to get us to a dominant stablecoin for crypto is not uncovered, the ends may have justified the means — however, those who directly suffered losses through association with bitfinex, ifinex, etc., on our way to get here may say differently.
While Tether’s rise and adoption has been vast and rapid, with the lack of clear 1:1 assets and treasury management, the question remains does this undermine the very ethos of blockchain decentralisation and transparency? Their proof for 1:1 assets and treasury management has never been fully and publicly audited. For something that is quickly becoming a foundational asset, we should be sure the foundations are solid.
For now however, Tether is still advancing the overall crypto ecosystem and we recognize that it’s important as BTW gains greater adoption.
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