Tether is a name that comes up again and again and again in crypto.
Depending on who you believe:
It was almost singlehandedly responsible for 2017’s bitcoin highs.
It is the biggest scam in crypto, and will one day bring down the entire market.
It is fraudulent and needs to be replaced by more reputable offerings (hence why the New York Attorney General is investigating its owner for fraud)
It’s the most useful cryptocurrency in existence, since its price is pegged to the dollar.
As you can tell, the general consensus is that tether is dangerous but needed. If you’re not sure what tether is, I recommend you read my article on it here.
If you’ve already read that article, you’ll know that stablecoins like tether are essential for cryptocurrency trading on a large scale.
Bitcoin-based tether is simply too slow and expensive
What you might now know is that tether is built on top of bitcoin. And so, if you ever want to move it between different exchanges, or into your won wallet, you’ll be waiting a while.
Kraken, a major US exchange, states that to deposit tether into your account takes 60 minutes. And on Binance, every time you want to withdraw tether, you must pay a six tether ($6) fee.
Compare those times and prices to other cryptos and you can see that although tether is the cryptocurrency for trading, it is not very well suited to it.
For example Ethereum takes around six minutes to deposit on Kraken, and Binance charges a 0.01 eth ($2.94) fee on withdrawals.
Other, cryptos such as Ripple, Stellar, Eos and Cosmos deposit “near instantly”. And many cryptos are so cheap to send that their withdrawal fees are negligible. NANO, for example deposits near instantly and has a 0.01 fee (around $0.01) to withdraw.
So the fact tether is based on bitcoin has become a problem. So what did tether do? Last year it started moving off bitcoin and onto Ethereum.
So it’s moving to Ethereum
Here was their 2018 announcement:
Following the widespread success of our Bitcoin-based USD Tether, issued via the Omni Layer Protocol, we have today launched and issued both US Dollars and Euros as Ethereum-based Tether, compatible with the ERC20 standard. The Ethereum-based Tether allows for tokenized USD and EUR to be transferred over the Ethereum network. This enables interoperability with Ethereum-based protocols and Decentralised Applications (DApps) whilst allowing users to transact and exchange fiat pegged currencies across the Ethereum Network.
The contract information and issuance information for these new versions of Tether are viewable at https://wallet.tether.to/transparency.
The ERC20 Tether will have much lower network transaction fees and much faster confirmation times (15-30 seconds) compared with Tether on Omni. This will facilitate more efficient exchange arbitrage, and several partner exchanges are already working to integrate the new tokens.
Since then, an awful lot of tether has been moved onto Ethereum. There are currently $3.7 billion tether in circulation, and Ethereum now makes up $1.1 billion of that total.
Here are the current stats:
None of this was really major news until yesterday, when Binance – the biggest crypto exchange in the world – announced it would soon only be using Ethereum-based tether.
The interesting thing is that up until a few weeks ago there was only $600 million Tether minted on Ethereum, according to cryptovest. Now there are $1.1 billion.
As Anthony Sassano said, with the help of a meme. on twitter, it’s only a matter of time until the entire tether supply switches to Ethereum.
And here’s why crypto investors should take notice
So why is all this important?
The network effect.
The network effect is one of the most important factors in new technological development. Basically, the more network effect something gains, the more valuable it becomes.
From Wikipedia (emphasis mine):
A network effect (also called network externality or demand-side economies of scale) is the effect described in economics and business that an additional user of a good or service has on the value of that product to others. When a network effect is present, the value of a product or service increases according to the number of others using it.
The classic example is the telephone, where a greater number of users increases the value to each. A positive externality is created when a telephone is purchased without its owner intending to create value for other users, but does so regardless. Online social networks work similarly, with sites like Twitter and Facebook increasing in value to each member as more users join.
The network effect can create a bandwagon effect as the network becomes more valuable and more people join, resulting in a positive feedback loop.
Wikipedia illustrates the telephone example with a pretty clear illustration:
The network effect is why crypto investors become “maximalists”. They know that the bigger a crypto’s network effect the more valuable it becomes. If they are the only crypto on the block, they can expect to reap more rewards.
So for many in the Ethereum, tether switching from bitcoin to Ethereum is a massive plus. It shows that Ethereum is not only a “world computer” but a store of value, too.
Now we know how valuable the network effect is, tomorrow I’ll be showing how shady crypto exchanges and “shitcoins” game it to make their product look reputable – and how you can ensure you don’t get taken in by them.
In the meantime, if you want to know how to get started investing in crypto, the best place to start is with this book.
It’s written by my colleague Sam Volkering, a man who knows more about crypto investing than anyone I’ve ever met. He’s been in in from the very beginning, and his book: Crypto Revolution will give you everything you need to know to get started investing in crypto for yourself – and a whole lot more besides.
Editor, Exponential investor