Spotlight on: Tether
Tuesday 02 August 2016
Stable value transfer on the blockchain is harder than you’d think. Here’s how Tether do it.
Bitcoin and other cryptocurrencies are great at transferring value peer-to-peer, with no banks or payment processors. Unfortunately, the flipside of having a currency that isn’t managed by a government is volatility. Bitcoin isn’t known for its stability of value.
That’s a clear barrier to adoption, and several initiatives have attempted to overcome this in one way or another. The problem is that it is extremely difficult to peg the value of a decentralised currency to a fiat one. Fully decentralised solutions do exist, but they’re not entirely convincing. I’ve written about BitShares’ SmartCoins before, for example. These use collateral in the form of BitShares to peg the value of each coin. It has received some criticism. My own concern is that BitShares’ apparent solution to crypto’s extreme volatility is vulnerable to extreme volatility.
TetherUSD's value is tied to the immovable object of a large bank account
Tether: centralised storage, decentralised transfer
Tether take a different approach. It’s centralised but simple and effective. They issue tokens, with each one being backed by the equivalent in real fiat money. The funds are kept in an audited and insured bank account. The solution is essentially like a currency board, where a small nation uses the currency of a larger one to back its money supply. Gibraltar and the Falkland Islands use this system, backing their currencies with pounds Sterling.
In essence, this is exactly how the regular money supply used to work. Banks would keep reserves of gold, and issue banknotes that gave the holder a claim to that gold if they wanted it. Although our money is no longer backed by gold, the UK’s banknotes still bear a memory of this system in the words, ‘I promise to pay the bearer on demand the sum of…’
The token is transferred over the bitcoin network, using the Omni protocol. This forms a layer on top of bitcoin, allowing the creation of assets and currencies: 2.0 features embedded in the 1.0 protocol of bitcoin. Whilst many different 2.0 platforms exist - Nxt, BitShares, Counterparty, Qora and others - and these are arguably better suited to creating and trading assets, the security of the bitcoin network brings a high degree of trust.
Tokens can be redeemed for real dollars via SWIFT bank transfers through gateways at tether.to and Bitfinex. They can also be moved around and traded against other cryptocurrencies on exchanges, including Poloniex, where a number of Tether/crypto markets exist. You can also keep Tethers in an independent wallet, available from the site.
Overall it’s a pretty good solution. In most cases it’s simply not possible to decentralise value and architecture completely. Even if a company trades shares on the blockchain, for example, the company itself is centralised - it has a CEO, offices, employees and so on, and is vulnerable to failure due to these. Even The DAO, which decentralised decision-making through smart contracts, required funds being dispensed to contractors, who constitute a centralised point of failure. It’s highly likely that we’ll see far more of this kind of thing on the blockchain
You can find out more by reading the Tether white paper.
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