This article is for those who wonder how Tether, or USDT as it is known, one of the first stablecoins we all know in the Web3 community, always remains at a 1:1 ratio!

How is Tether or USDT Stability Achieved? TL:DR; If you are wondering: Tether's stability is based on the implementation of various financial strategies and mechanisms (such as reserve support, supply-demand and arbitrage balance).

Backed by Reserves: Tether announced that it has reserves behind each USDT at a one-to-one ratio. These reserves consist of valuable assets such as cash, US Treasury bonds, Bitcoin and gold. As of 2024, the latest data I could pull, Tether's reserve distribution is as follows:

• US Treasury Bonds: Approximately $100 billion worth.

• Bitcoin: 82,000 (approximately $5.5 billion worth).

• Gold: 48 tons. (yes, gold!) Supply and Demand Balance:

  Those who frequently follow crypto news channels during the US elections will remember these notifications :) Tether prints or burns tokens according to the demand for USDT in the market. This mechanism works as follows:

  Demand Increase: When users want to buy more USDT, Tether accepts fiat money and prints new tokens and releases them to the market. In other words, we are actually talking about a cash US dollar asset behind it. Sounds a lot like web2, right? Or web1? web0?

When demand decreases, when users return their USDT, these tokens are removed from circulation and fiat money is paid in return. In other words, the second stage of this process provides stability by maintaining the supply-demand balance, which is a very simple mechanism. Arbitrage Opportunities: The value of USDT can sometimes deviate from $1 for a short time. In this case, arbitrageurs come into play:

What is arbitrage? Arbitrage can be described as a financial transaction based on the logic of making a profit by buying and selling foreign exchange, stocks or precious metals by taking advantage of small price differences between markets.

USDT value < 1 US Dollar: Arbitrageurs buy USDT at a low price and return it on the Tether platform to obtain 1 US Dollar.

USDT value > 1 US Dollar: New USDT is printed and sold in the market to balance the price.

>> Example Scenario:

Case 1: Price = 0.98 USD

• Arbitrage Opportunity = 0.02 USD per USDT

• Buy 100,000 USDT at 0.98

• Cost = $98,000

• Redeem for $100,000

• Profit = $2,000 (2.04% ROI)

Case 2: Price = 1.02 USD

• Excess Demand Detected

• Calculate Required Supply Increase

• Mint New USDT

• Sell at Market

• ​​Price Stabilizes to 1 USD

  • //Arbitrage Opportunity = 0.02 USD per USDT

What is Proof of Reserve?

Proof of Reserve is a mechanism used to prove that a stablecoin or exchange has sufficient/insufficient reserves. It works with evidence such as disclosure of reserves, independent audits, transparency reports.

>> Last words, Tether (USDT) has managed to keep its value at $1 with the mechanisms we mentioned. Proof of Reserve is defined as an intermediary mechanism that ensures this stability is transparent and auditable. Proof of Reserve offers investors not only a financial guarantee, but also the potential to create a greater trust environment in the market. Therefore, it is becoming a critical standard for stablecoin projects and decentralized finance solutions.

While writing this article, I had the opportunity to review Tether's transparency reports. You can access the link here.