Tether, the company behind the widely-used stablecoin USDT, employs several methods to generate revenue.
In this article we seek to give a detailed explanation on how does Tether make money?
History of Tether
The history of Tether, a prominent player in the cryptocurrency world, is both intriguing and complex. Here’s a comprehensive look at its evolution:
Origins and Launch:
Tether’s journey began in 2012 with a whitepaper by J.R. Willett, proposing new cryptocurrencies on the Bitcoin blockchain. This led to the creation of the Mastercoin protocol, which became the foundation for Tether.
The precursor to Tether, named “Realcoin,” was announced in July 2014 by Brock Pierce, Reeve Collins, and Craig Sellars.
The first tokens were issued in October 2014, using the Omni Layer Protocol on the Bitcoin blockchain. In November 2014, the project was renamed “Tether”.
Bitfinex Integration and Expansion:
In 2015, the cryptocurrency exchange Bitfinex enabled trading of Tether, marking a significant milestone.
Despite claims of being separate entities, the Paradise Papers leaks in 2017 identified Bitfinex officials as responsible for setting up Tether Holdings Limited. This period was critical in establishing Tether as a key player in the cryptocurrency exchange landscape.
Rapid Growth and Market Impact:
Between 2017 and 2018, Tether saw exponential growth, with its outstanding amount increasing from about $10 million to approximately $2.8 billion.
In this period, Tether sometimes accounted for up to 80% of Bitcoin’s trading volume. However, 2018 also witnessed a temporary dip in Tether’s price, highlighting the risks and volatility in the crypto market.
Leadership and Recent Developments:
In 2019, Tether surpassed Bitcoin in trading volume, becoming the most traded cryptocurrency. As of 2023, Paolo Ardoino, formerly the chief technology officer, has been appointed CEO, indicating a new phase of leadership and direction for the company.
Tether’s history is marked by innovation, growth, and challenges, reflecting the dynamic nature of the cryptocurrency industry.
How Tether Makes Money
Here’s an overview of their key income sources:
Stablecoin Issuance Fees
A primary source of Tether’s income comes from the issuance of its stablecoins, particularly USDT. When individuals or institutions buy USDT tokens, they typically pay a transaction fee, contributing significantly to Tether’s revenue.
As the demand for stablecoins increases, these fees provide a consistent stream of income.
Investing in Bitcoin
In 2023, Tether introduced a new strategy where they allocate 15% of their net profit to invest in Bitcoin. This decision aims to diversify their reserves, which are predominantly in U.S. Treasury Bills. For instance, in Q1 2023, Tether invested more than $200 million into Bitcoin, following a net profit of $1.48 billion.
Reserves and Collateralization
The foundation of Tether’s business model is its reserves. To issue USDT tokens, Tether Limited holds a corresponding amount of US dollars (and sometimes other assets) in its reserves.
This collateralization ensures that each USDT token is backed by an equivalent value in U.S. dollars or other assets, maintaining the stability of the coin.
Fees on Fiat Deposits and Redemptions
Tether also generates income by charging transaction fees for new fiat deposits on their platform. As of 2023, this fee is 0.1% with a minimum deposit amount of USD 100,000.
Additionally, Tether charges fees for the redemption of their tokens. They also impose a verification fee for new accounts as part of their Know Your Customer (KYC) process, further contributing to their revenue.
Overall, Tether’s revenue model is multifaceted, combining transaction fees, investment strategies, and the management of reserves and collateralization to maintain profitability and the stability of the USDT token.
How it Works
Tether, often referred to by its token name USDT, operates as a stablecoin within the cryptocurrency market. Its working mechanism is built around maintaining stability and providing a bridge between digital currencies and traditional fiat currencies.
Here’s a detailed look at how Tether functions:
- Pegging to Fiat Currency: Tether stabilizes its value by pegging it to a fiat currency, usually the US dollar, at a 1:1 ratio. This process, known as “tokenization,” ensures that each USDT token is equivalent to one US dollar held in reserve. By maintaining this parity, Tether offers a stable value in contrast to the inherent volatility of other cryptocurrencies.
- Blockchain Technology and Smart Contracts: Tether employs blockchain technology and smart contracts, predominantly operating on the Bitcoin and Ethereum networks. These smart contracts enable the issuance, transfer, and redemption of USDT tokens. This approach ensures a secure and efficient system for managing the flow of tokens across various blockchain platforms. Tether’s existence across multiple blockchains, including Algorand, Avalanche, Ethereum, EOS, Liquid Network, and others, further enhances its accessibility and utility in diverse crypto ecosystems.
- Issuance and Redemption Process: Tether issues new USDT tokens only when they are requested and purchased by customers who have passed strict Know Your Customer (KYC) procedures. Users deposit fiat currency into Tether’s bank account, and in return, Tether issues new USDT tokens on a one-to-one basis to the user’s crypto wallet, minus any fees. This process is reversed when users want to redeem their tokens for traditional cash, at which point Tether removes those tokens from circulation.
- Liquidity and Accessibility: Tether acts as a liquidity provider, allowing users to convert their digital assets into a stable value without relying on traditional banking systems. This feature has made Tether popular among traders and investors who seek stability in the volatile cryptocurrency market. Its widespread acceptance on various cryptocurrency exchanges and platforms enhances its usability for trading, remittance, and as a store of value.
- Reserve Audits and Transparency: To maintain trust and transparency, Tether regularly undergoes audits of its reserves by reputable accounting firms. These audits are intended to verify the existence and adequacy of the corresponding fiat currency reserves, ensuring that each USDT token is backed by an equivalent US dollar. This practice is central to maintaining the credibility and stability of the Tether ecosystem.
In summary, Tether’s operation hinges on its stable value, backed by fiat currency reserves, and its integration into various blockchain technologies, providing a reliable and efficient medium for transactions in the digital currency landscape.
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Tether Financial Footprint
Tether has made significant strides in terms of revenue generation and expanding its business scope. Here’s a summary of the key aspects of Tether’s funding, revenue, and valuation:
In the first quarter of 2023, Tether reported a substantial profit of $1.48 billion. The company’s total assets under management (AUM) grew to around $81.8 billion, a notable increase from the approximately $67 billion reported at the end of 2022.
This growth has been attributed to the rising demand for stablecoins and the burgeoning decentralized finance (DeFi) sector.
Valuation and Reserves
As of the second quarter of 2023, Tether’s reserves reached a record high of $86.5 billion, demonstrating a 5.7% increase from the previous quarter. Tether’s holdings include $55.8 billion in U.S.
Treasury Bills and other assets like corporate bonds, precious metals, Bitcoin, secured loans, and unspecified investments. This diverse portfolio underpins the stablecoin’s value and operational strength.
Tether’s operational profits for the period from April to June 2023 exceeded $1 billion, marking a 30% increase from the previous quarter.
These profits reflect Tether’s ability to maintain a strong position in the market despite the challenges faced by the cryptocurrency industry.
Investment and Expansion into Bitcoin Mining
In a significant move beyond its primary stablecoin business, Tether Holdings Ltd. is investing $500 million over six months to become a major player in Bitcoin mining. This investment targets a 1% share of Bitcoin’s total computing power by the end of 2025.
Tether’s strategy includes investing in existing mining operations and establishing new facilities in countries like Uruguay, Paraguay, and El Salvador.
This diversification marks a strategic shift for Tether, which has traditionally been known for managing the USDT stablecoin.