Anyone who invests in cryptocurrencies is bound to hear about stablecoins. This article is all about stablecoins and their use cases.
What is Tether (USDT)?
Tether (USDT) is a type of cryptocurrency that is classified as stablecoin. It means that it always retains a specified value rather than undergoing price volatility like digital coins that are listed on the spot market. Tether is issued by Hong Kong-based Company called iFinex.
Stablecoins are backed by assets to retain their value. It was first introduced as RealCoin in 2014 and later rebranded as Tether.
How Does Tether Work?
There are many stablecoin issuers in the marketplace. It is important for the investor to learn about the backup reserves to ensure that it is able to retain its stable value. Tether brings transparency regarding its reserves by posting daily updates about its holdings on its official website.
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The firm has disclosed that 82.45% of its backup reserves are in the form of cash, cash equivalents, short-term deposits, commercial paper. Meanwhile, the remaining 4.69% is in the form of corporate bonds, 9.02% secured loans, and 3.85% in other types of investments.
Like all stablecoins, Tether is backed in 1:1 ratio to USD. It means that investors can redeem one Tether coin for 1 USD and so forth. The constant price of this stablecoin is warranted by a pegged cryptocurrency meaning that it is not subjected to prices changes like other virtual currencies.
Top Use Cases of Tether
Tether offers all the important utilities as a stablecoin. Here is some of the important use cases listed:
Medium of Exchange
Stablecoins are used as a medium of exchange. It means that investors can use them to pay for goods or services much like fiat currencies. It benefits companies to get paid in the form of stablecoins as they allow easier and more efficient transactions.
Tether is useful for investors if they intend to preserve their crypto trading profits. Investors usually trade cryptocurrencies on exchanges that have limited options for converting to other currencies such as fiat options.
In such as situation, investors can use stablecoins like Tether to quickly convert their crypto profits into stablecoin and preserving the value of their incremented positions without losing time and risking losing the value of their profits on account of price volatility.
Collateral for Loans
Stablecoins like Tether are a great option for collateral accounts. Collateral reserves are warranted holdings that lenders have to reserve with a borrower as a surety to prevent defaulting on their debt obligations. Crypto lending platforms also accept virtual currencies as collateral but they are riskier on account of their higher price volatility.
Regular cryptocurrencies can trigger a margin call if require collateral value declines on account of unexpected price changes. However, since stablecoins are not subjected to price changes, investors do not have to worry about margin calls when using them as collateral.
Yield and Staking
Tether can be used for staking and earning yield. Automated Market Makers and other protocols may incentivize investors to stake their stablecoin reserves and earn yield interest on them.
USDT provides greater market liquidity for cryptocurrency investors on exchange platforms and decentralized exchanges. Investors can have a difficult time finding the best exchange options for their cryptocurrencies into fiat currencies or other tokens.
However, presence of stablecoin makes dissolving and creating cryptocurrency positions much easier and increase liquidity of a trading platform.
Crypto investors can also apply for loans in various types of cryptocurrencies. However, loans in the form of stablecoins are most suitable as they retain a static value. In contrast, loans in the form of other types of digital currencies are subject to prices changes that can increase the risk exposure for the borrowers.
Tether offers many practical use cases for the cryptocurrency investors. However, the project has dealt with some controversies regarding its backing reserves.
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