Dan Walton
2 min readNov 22, 2017

Tether is a critical point of failure for all cryptocurrencies

Tether is a token (usdt) that is implemented on the Omni layer that runs on top of Bitcoin. That means a Bitcoin transaction is used to transfer them.The folks at tether.to issue this token and say they keep $1 in a vault for each one. So far they have exchanged these usdt tokens for actual dollars.

However they are explicit that this is not guaranteed.

Still for the last year these tokens have been valued very close to $1. There are over $500 million of these tokens in existence. They are primarily used for traders to exit cryptocurrencies and take a dollar position when they feel bearish on their crypto holdings.

Recently 30 million tether were transferred or hacked out of tether.to holdings. They quickly implemented a hard fork and have essentially black listed the stolen funds.

Many exchanges use this token to allow traders to take a cash position before buying back in. These exchanges depend on this token even though I can’t see a way to trust it long term. As the market cap grows it causes concern.

The resulting system is weak. Exchanges like Poloniex, Coinbase and Bitfinex convert your secure traditional transparent crypto currencies like Bitcoin and Ethereum into private sql balances requiring your full trust. There is massive incentive for fraud on the part of the exchanges. They can print whatever balances they want, meanwhile its difficult to secure their crypto holdings. They can easily be stolen or seized. History is filled with failures of these types of exchanges.

Tether represents a new weakness. Not only can a centralized sql exchange fail in many ways, Tether can too which will affect many exchanges even if they are run perfectly. We have not learned from out past mistakes and in fact embraced the weaknesses of centralization and lack of transparency.

Centralized, opaque exchanges like Coinbase, Poloniex and Bitfinex often fail due to data loss, hacks, seizure and fraud. When they fail customers can and do immediately loose all their funds with no recourse. Now a new point of failure has crept into the system and it’s Tether.

We believe in more transparency and decentralization. Hundreds of millions should not be held by someone based on trust if not required. This transparency and operation without trust is the strength and innovation of Blockchains. Follow our work on a transparent decentralized exchange at ethex.market.