TETHERED

In 2014, Bitcoin was still highly volatile and instruments for hedging against its major movements were in short supply. If the exchange you were trading on had a fiat on-ramp, you could park your assets in USD and wait for the right time to re-enter the arena, but it wasn’t ideal. Moving money between exchanges, for instance, required transferring volatile crypto. Surely there had to be a better way?

There was, even if it was a long time coming. Credit for the first attempt at a stablecoin goes to Dan Larimer, whose BitShares blockchain pioneered BitUSD. Collateralised by a volatile and unbacked asset – BitShares – its design was suboptimal however. Nevertheless, it was clearly an idea whose time had come, and the first workable implementation arrived a few months later in the form of Tether.

Initially launched as Realcoin in October 2014, Tether provided a digital pegged one-to-one to the U.S. dollar and purportedly backed by an equivalent amount of fiat currency held in reserve. Something that’s often overlooked now is just how deeply intertwined Tether was with the Bitcoin ecosystem. Its origins can be traced back to “The Second Bitcoin Whitepaper,” a document published by software engineer J.R. Willett in January 2012. In it, he proposed a “metadata layer” that would leverage the security and network effects of Bitcoin to support the creation of new tokens representing assets such as USD.

The official Tether whitepaper, published in October 2014, explicitly cites Willett's paper as a key inspiration. J.R. Willett’s original concept then manifested in the form of Mastercoin, which later rebranded to Omni Layer, forming a software layer that sits on top of Bitcoin. And this is where Tether launched.

Tethering Up

The concept behind Tether was compelling, with its whitepaper delineating the user flow that would result in the creation of USDT. After depositing fiat currency into Tether Limited's bank account, Tether would generate and credit the user's account with an equivalent amount of Tether tokens. To redeem, the user deposited Tethers back with the company, which destroyed the tokens and sent the corresponding fiat currency to the user's bank account.

This was all well and good in theory, but for the project to succeed, it needed a market and liquidity to spur adoption. This was achieved through an integration with Bitfinex exchange in early 2015. This relationship provided Tether with its “killer app” and set it on the path to becoming an indispensable piece of market infrastructure. The integration was no fortuitous partnership however; the relationship between Bitfinex and Tether was later discovered to run right back to its inception.

But Bitcoin traders didn’t care about any of this stuff – at least not back then. They were just happy to have a stablecoin they could access that did its job of sticking to $1 very well. Within a few years, USDT had broken free of Bitfinex and Omni Layer, and was appearing on newer smart contract chains and exchanges. It had also been complemented by a host of other stablecoins, many featuring the same fiat-backed model. While Tether has attracted its share of controversies over the years, with “Tether FUD” a long-running motif, it’s also become the backbone of the cryptoconomy, even spawning the verb “tether” as in to “tether up” during market volatility. Tether was the snowball that started the avalanche.