What is the principle of Tether currency?

Tether is a stablecoin pegged to the U.S. dollar that maintains stability through custodial reserves, minting/destruction mechanisms, price stabilization mechanisms, transparency audits, and decentralized technology. It offers the advantages of price stability and cross-platform compatibility, but also has disadvantages such as reliance on the U.S. dollar peg, audit transparency questions, and regulatory risks.

How Tether works

Tether is a stablecoin pegged to the U.S. dollar, which means Its value is designed to remain close to one dollar at all times. The working principle of Tether is based on the following core mechanism:

1. Custody Reserve:
Tether is custodian by Tether Limited, an entity company that holds assets of equivalent value in U.S. dollars. These assets include cash, cash equivalents, and traditional financial instruments such as Treasury securities.

2. Minting and Destruction:
When users wish to mint Tether, they must deposit the equivalent amount of USD into Tether Limited. The company will then issue a corresponding number of Tether coins. When a user wishes to redeem their Tether, they must return it to Tether Limited, which will destroy the Tether and return the equivalent value in U.S. dollars.

3. Price stabilization mechanism:
When the price of Tether is lower than one dollar, Tether Limited will purchase Tether, reducing the supply in circulation, thus increasing its price . When the price of Tether rises above one dollar, Tether Limited mints more Tether, increasing the supply in circulation and thereby lowering its price.

4. Transparency and Auditing:
Tether Limited regularly publishes audit reports detailing the U.S. dollar reserves it has in custody. This helps increase public confidence in Tether’s price stability.

5. Decentralization:
Tether is based on blockchain technology and circulates on multiple blockchains such as Ethereum, Tron and EOS. This makes it decentralized and not controlled by any single entity.

Advantages:

• The price is stable and pegged to the US dollar.
• Suitable as a value storage and settlement mechanism for encrypted assets.
• Cross-platform compatible and can be traded on multiple blockchains.

Disadvantages:

• The peg to the U.S. dollar relies on Tether Limited’s reserve management.
• Audit transparency has been called into question, with some critics claiming its reserves may not be fully backed.
• Subject to regulatory risks and may be subject to review by government regulatory agencies.

The above is the detailed content of What is the principle of Tether currency?. For more information, please follow other related articles on the PHP Chinese website!