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Fiat currency, or legal tender, refers to currency that is not backed by a physical commodity but is declared legal by a government's law. Legal tender does not represent a tangible commodity, and the issuer is not obligated to redeem the currency for physical goods; it relies solely on the legal order of the government to be recognized as the official currency. The value of legal tender comes from the belief of the holders that the currency will maintain its purchasing power in the future, but the currency itself has no intrinsic value. Examples include the US Dollar, Euro, Japanese Yen, Chinese Yuan, etc.
In the context of trading between fiat and cryptocurrencies:
Apart from miners, blockchain project initiators, and early investors, most people initially acquire cryptocurrencies through fiat currency transactions. This is one of the reasons why the secondary market in domestic cryptocurrency exchanges can explode instantly. However, in foreign markets, there is a preference for crypto-to-crypto trading. One significant reason for this preference is that crypto-to-crypto trading does not involve fiat currencies. This allows breaking the money laundering chain outside of the exchanges, and it avoids regulatory scrutiny based on fiat currencies. Many rumors suggest that eventually, only crypto-to-crypto trading platforms will remain in domestic markets. However, this is not necessarily the intention of the majority of traders who may prefer the option of exchanging for fiat currencies.
This is where USDT comes into play.
So, what is USDT?
Tether (USDT) is a token issued by Tether Ltd., pegged to the value of the United States Dollar (USD). Tether Ltd. claims to strictly adhere to a 1:1 reserve ratio, meaning that for every USDT token issued, there is a corresponding $1 held in reserve. Any user holding USDT can, after completing user verification with Tether Ltd., exchange the token for fiat currency at a 1:1 ratio (excluding remittance fees).
Currently supporting the US Dollar (USDT) and Euro (EURT), each backed by different banks, with plans to support the Japanese Yen in the future. Fiat currency represents the reserve, and the on-chain tokens are newly issued fiat currencies, with Tether acting as a central bank. Currently, in exchanges where USDT is listed, the price of USDT is generally anchored at 1:1 with the US Dollar, with minimal fluctuations.
(Although minor fluctuations have occurred due to liquidity restrictions, or traders' inconvenience or unwillingness to undergo user authentication with Tether, or traders lacking the conditions to receive USDT redeemed in US Dollars.)
To summarize, in simple terms, USDT is equivalent to the same amount of US Dollars, i.e., 1 USDT = 1 USD. It is a stablecoin providing a good store of value in the highly volatile cryptocurrency market.
Advantages and Uses of USDT:
1. Hedge against volatility: USDT can be used as a safe haven to safeguard assets when the cryptocurrency market experiences a downturn. Users can quickly convert their crypto holdings to USDT to ensure asset preservation.
2. Price reference: As USDT is pegged 1:1 to the US Dollar, it provides a stable reference for evaluating the value of other cryptocurrencies.
3. Withdrawal option: USDT can be used to withdraw funds by exchanging it for actual US Dollars. However, the process is complex, and USDT is a focal point of regulatory scrutiny.
Risks of USDT:
The main risk in using USDT is its centralized issuance by Tether, where issuance, acceptance, regulatory risks, and operational risks are all concentrated in the Tether company. Regulatory issues can pose a significant threat. If Tether is shut down, USDT in circulation may face redemption risks and immediate devaluation.
Another risk is the lack of transparency in Tether's operations, with rumors of extremely slow user verification speeds, making it less efficient than perceived by the general public.
Additionally, the credibility of Tether itself is a risk. Unlike the transparency of open blockchains, the existence of the USD held as collateral is not publicly disclosed. If Tether were to misuse funds one day, it could result in a loss for users.
In the financial market, everything comes with risks, and at least for now, USDT can be considered a good haven for risk aversion. |
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Post time 11-1-2024 09:48:10