This week, the US Dollar-pegged stablecoin is back in the limelight with a Chinese cybersecurity company reporting an alleged double-spending vulnerability. There are currently conflicting reports on the correctness of this claim. The issue seems to be whether Tether is at fault, the underlying OmniLayer platform, or the exchange on which the double-spending took place.
However, it is not the first time for Tether to be criticized and generate negative news. Let’s first look at Tether and stablecoins in general, before talking about this latest issue.
Tether is a so-called stablecoin, meaning it is meant to maintain its value in the face of volatility. To this end, it is pegged to the US dollar. 1 USDT should always equal 1 USD. The idea behind this is to provide a safe haven for investors on exchanges, allowing them to temporarily convert their cryptocurrencies into something more stable, which is meant to represent the US dollar.
For something to maintain a stable value, it must be backed by something worth the same. Tether’s approach to proving a dollar-pegged coin is having one real dollar stored away for every Tether dollar. At least this is the claim made by the company.
Other approaches to stablecoins involve backing the currency with other crypto assets. MakerDAO, for instance, provides the Dai stablecoin, which is backed up by Ether deposits and other crypto collaterals.
In general, it is extremely hard to provide a stablecoin, mainly because free markets are not predictable, and you cannot stop people from paying whatever they want to pay, especially in a decentralized ecosystem.
Tether has made the news repeatedly over the last few months since doubts have emerged about the trueness of the company’s claim to own one dollar for every Tether. Audits of the relevant accounts have been promised, delayed, canceled and finally executed behind closed doors.
Whether you believe Tether own all the collaterals they claim to hold or not, the truth is you have to trust an auditing firm. This means Tether’s value validation depends on a trusted third party, the very situation cryptocurrencies were meant to free us from.
Let’s not forget that Bitcoin is likely to have been invented to not rely on the “trusted” banks that really messed up and caused the 2007 financial crisis. Trusted third parties controlling cryptocurrencies are worse than banks controlling fiat money. At least banks are meant to operate within a tightly regulated framework.
Double Spending Scare
The latest security alert made by cybersecurity firm SlowMist states that Tether can be successfully double-spent. It now seems that in this case, incorrect usage of transaction flags by an exchange is to blame and not the protocol itself. Nevertheless, this latest case does not help Tether’s already damaged reputation.
The problem with projects like Tether is that they depend on the trust of the community to work. Tether has grown too big to fail. A collapse of this particular stablecoin would have a serious impact on the cryptocurrency market in general. So, let’s hope all is in order for now, and try to move to more decentralized solutions in the future.