What is USDT? - The Stablecoin Everyone Uses But Nobody Fully Trusts

I'll be honest with you - USDT makes me uncomfortable. Not because it doesn't work, but because it works so well despite having what should be fatal flaws. It's like discovering that a critical bridge you cross every day was built by a company with a history of changing their engineering standards mid-construction, refusing independent inspections, and settling lawsuits for misrepresenting the bridge's structural integrity. And yet here we are, with 80% of crypto trading volume crossing that bridge daily.

USDT is Tether, the largest stablecoin in crypto with about $95 billion in circulation as of early 2025. It's a centralized cryptocurrency designed to maintain a 1-to-1 peg with the US dollar. When you buy USDT, you're supposed to be getting a digital dollar backed by real reserves held by Tether Limited, a Hong Kong-based company. The key word is "supposed to."

Why USDT Dominates Despite the Controversy

Here's what makes USDT fascinating from an engineering perspective: it's simultaneously essential infrastructure and a potential systemic risk. Every crypto trader uses it because the liquidity is unmatched. The BTC/USDT pair on Binance alone processes tens of billions in volume daily. Try trading any altcoin without touching USDT and you'll quickly understand why network effects matter more than philosophical purity. The spreads are tighter, the order books are deeper, and the execution is faster on USDT pairs. It's not even close.

The Reserve Question That Won't Go Away

But the thing that keeps people up at night is the reserve question. When Tether launched in 2014, the promise was simple: every USDT backed by one dollar in a bank account. Clean, auditable, trustworthy. That's not what we have. In 2019, Tether's own lawyer admitted in court that USDT was only 74% backed by cash and cash equivalents. Let that sink in - the company claiming to be a dollar-pegged stablecoin admitted they didn't have the dollars. The New York Attorney General's investigation revealed that Tether had misrepresented their reserves, commingled funds with Bitfinex (a crypto exchange run by overlapping management), and used reserve money to cover up $900 million in losses.

The settlement in 2021 cost Tether $18.5 million and required improved transparency. They now publish quarterly attestations showing reserves consisting mostly of US Treasury bills (60-70%), cash (5-10%), money market funds, secured loans, corporate bonds, and some Bitcoin. Notice I said attestations, not audits. An attestation confirms that at one moment, reserves exceeded liabilities. An audit would verify internal controls and asset quality continuously. Tether has promised audits for years but never delivered them.

Why does this matter? Because if you hold USDT, you're holding a claim on a portfolio managed by a company with a documented history of opacity. The portfolio might be fine - Treasury bills are safe and liquid. But we don't know what's in the secured loans category or whether Tether could handle massive simultaneous redemptions. And here's the kicker: most USDT holders can't redeem directly. Only institutional clients can send USDT back to Tether and get dollars. If you hold 10,000 USDT, you have to sell it on an exchange to someone else who believes it's worth $10,000. The peg depends on collective belief more than redemption rights.

This should be fatal. In traditional finance, this would be fatal. But crypto has different rules, and USDT has survived multiple stress tests. When Terra's UST collapsed in May 2022, triggering panic across stablecoins, USDT briefly dipped to $0.995 before recovering. Tether processed billions in redemptions without breaking the peg. The cynical take is that Tether is probably solvent enough to survive normal conditions but might struggle in a systemic crisis. The optimistic take is that ten years of maintaining the peg proves the reserves are real.

Why USDT Beats USDC Despite Being Less Transparent

What I find pragmatically interesting is why USDT dominates despite USDC existing as a cleaner alternative. Circle's USDC is US-regulated with better transparency and reserves held entirely in cash and Treasury bills. And yet USDT has nearly three times the market cap and processes 10x the trading volume. Why? First-mover advantage and network effects. USDT launched in 2014 when moving fiat in and out of crypto was painful. It became the standard everywhere. By the time USDC arrived in 2018, USDT was already entrenched.

The second reason is geographic arbitrage. USDT is popular in emerging markets where accessing actual US dollars is difficult. A trader in Nigeria or Venezuela can hold USDT and get dollar stability without a US bank account. Tether operates offshore with minimal oversight, making it accessible where USDC faces restrictions.

How USDT Works Technically

The technical implementation is straightforward. USDT exists across multiple blockchains: Ethereum (ERC-20) with about $30 billion, Tron (TRC-20) with around $45 billion, and Binance Smart Chain with $5 billion. Each version is separate - you can't send Ethereum USDT to a Tron address directly. Tron has become especially popular because transfers cost about $1 and settle in seconds. For remittances, Tron USDT is ridiculously efficient.

The Centralization Problem

The centralization is complete. Tether Limited controls everything. They can freeze addresses, which they've done at law enforcement request in cases of theft or hacks. If your address gets blacklisted, your USDT is worthless - you can't move it or spend it. They can change reserve policies without your approval. They can refuse redemptions. This is exactly what Bitcoin was designed to avoid, yet here we are using centralized dollar tokens because they solve real problems.

The Practical Risk Assessment

Here's my practical take: USDT is probably fine for what most people use it for. If you're a trader holding USDT for hours or days between positions, the counterparty risk is minimal. The peg has held through worse. If you're using USDT on Tron for international transfers because it's cheaper and faster than traditional remittances, the utility outweighs the risk. But holding USDT as a long-term store of value? That's what USDC or traditional banking is for.

The real risk isn't USDT trading at $0.98 occasionally. It's regulatory action forcing liquidation, bank runs exceeding redemption capacity, or discovering secured loans are worth far less than claimed. In those scenarios, USDT could break its peg permanently. Would that kill crypto? No. The ecosystem would shift to USDC, DAI, or other alternatives. Painful and chaotic, but not apocalyptic.

The Honest Assessment

The honest assessment is that USDT is duct tape infrastructure. It's not what you'd design from first principles - you'd want full audits, transparent reserves, regulatory compliance. But USDT exists because crypto needed a dollar bridge before anyone built a proper one, and network effects are powerful. Now we're stuck with it until something better can overcome the liquidity moat.

I use USDT when I need to, usually on exchanges where it has the best pairs. I don't hold it longer than necessary. I diversify across USDT, USDC, and DAI rather than going all-in on any single issuer. And I watch Tether's quarterly attestations because this is infrastructure I depend on, even if I don't fully trust it.

The weird part is that Tether's opacity might be why it can operate so freely. If they were fully transparent, regulators might find reasons to shut them down or impose restrictions. The lack of regulatory clarity cuts both ways - it allows Tether to serve markets that USDC can't reach, but means we're trusting a company operating in gray areas.

Look, I'm not saying USDT is going to collapse. Ten years of maintaining the peg despite constant predictions of doom suggests there's substance behind the controversy. But USDT represents everything pragmatic engineers hate: technical debt at scale, acceptable risk far higher than ideal, and choosing "works right now" over "works correctly." And yet here we are, crossing that bridge every day because everyone else does.

What's Next for USDT

Regulatory pressure is increasing globally. The EU's MiCA regulations and US stablecoin legislation could force changes. More transparent alternatives like USDC are gaining ground in DeFi where protocols choose compliance over liquidity. Tether may eventually deliver actual audits, or regulatory enforcement might force gradual unwinding.

Until then, we have what we have: a stablecoin that dominates through network effects despite transparency issues that would sink any traditional financial product. It works because enough people believe it works, creating a self-fulfilling prophecy until it doesn't. That's not engineering - that's faith-based infrastructure.

Use USDT where it makes sense. Don't hold more than you can afford to lose. Diversify. And never forget that "it's worked so far" is not the same as "it's guaranteed to keep working." The difference between those two statements is everything in risk management.

Further Reading:

• Tether Transparency Page - Official reserve attestations
• NYAG Settlement Details - 2021 settlement documents
• What is a stablecoin - Understanding stablecoin fundamentals