How Tether (USDT) Works - Paolo Ardoino

Tether was born in 2014 as a simple idea: let's take the brilliant innovation that Bitcoin created, called blockchain, and let's put on top of this blockchain the most used currency in the world, the US dollar.

I'm doing great. Thank you very much for having me. It's a big pleasure.

Sure. I've been a software developer all my life. I grew up in a very small town in Italy. I guess you can understand my accent and that I'm Italian. I'm around 40 years old. I grew up in this small town, a farmer's town in Italy. My family produced a very great olive oil. When I was 8 years old, my father brought home a computer because he was working half day at ENEL, the energy company in Italy. I fell in love with computers. I had my 386 and could play all day with that. Being on the farm was far away from all my friends, and that characterized all my life. I kept coding, hacking until university time. I went to study in Genoa, in the northwest of Italy. I applied to math and computer science. I'm a big fan of Linux. I'm a nerd, a geek. There I started working as a researcher. One of my preferred research topics was telecommunications for distress situations like battlefields. It really changed the way I think about technology because I was forced to think about building technology that could survive huge catastrophes, wars, and very dangerous situations. You are forced to think in worst-case scenarios. As many times happened, you are not paid very well in Italy, especially if you are a public researcher. So I decided to go where the money was, which was finance. I started learning about finance, coding financial systems, and I created my startup in 2014. I had the chance of meeting Giancarlo Devasini, the founder of Bitfinex and also the creator of Tether. I was tasked simply to rebuild the matching engine, the core trading system of Bitfinex, that was lagging behind. In 2014, crypto exchanges felt more like shops, like e-commerce for Bitcoin, rather than true platforms. So I started reworking all that part. Then in 2016, Bitfinex was hacked, so I was asked to step up as CTO. In 2017, I became the CTO at Tether. Until 2017, Tether didn't have much traction, but 2017 was the ICO boom and Binance was born. Basically every single cryptocurrency exchange started to use Tether, with USDT as the digital dollar. From 2021, I started focusing not only on the tech but also on strategy, global strategy and technological strategy. I became the face of both Bitfinex and Tether. I'm a technologist, co-founder of Holepunch, which I think is the most brilliant peer-to-peer software stack that humanity ever conceived. I really love the project. I think it's so fundamental for the resiliency of telecommunications and general communication and social media. So yeah, that's me.

Tether was born in 2014 as a simple idea: let's take the brilliant innovation that Bitcoin created, called blockchain, and let's put on top of this blockchain the most used currency in the world, the US dollar. Simple as that. Let's use the blockchain as a new transport layer for dollars. Now you have PayPal, Venmo, 10 or 20 other ways to move money around. In the end, blockchains are just another transport layer for money. USDT is simply a digital dollar that uses blockchain technology. The inner working is also very simple. Imagine you are a customer of Tether. You send us a wire of $100,000 to our bank account. We take those $100,000, invest them in US Treasury bills for example, and we give you back 100,000 USDT, which are digital dollars. You use them, trade with them, pay with them. Right now we have around 400 million users across the globe, with 35 million new USDT wallets created quarterly. If you want your money back in your bank account, you take the USDT tokens you have, send them back to our wallet, and we wire you back your money to your bank account. It's simple as that. It's basically a digital dollar, like PayPal on a blockchain.

2017 was definitely the ICO boom and the first year of mainstream interest. There were so many projects, so many people were added to the crypto space. Every single exchange started to list USDT against every single trading pair. You had Bitcoin versus USDT, Ethereum versus USDT, all the other ICO tokens were listed against USDT. The reason was that crypto exchanges were not super welcome by banking, but people wanted to trade these ICO tokens, Bitcoin, and Ether against a dollar value. The best way was to use USDT. Think about Binance, WazirX, CoinDCX, and all the others. In order to have a dollar value to trade against all the other tokens, they started using USDT. There was nothing else available by then. Sometimes if you are the first in the market, that also determines your success. I wish I could say we are great and that's why everyone used USDT, but part of the reason is that we were there when people needed us the most and when there was no other competitor. The first competitor started actually in 2018.

Definitely. This is probably one of my preferred points because I think it's almost counterintuitive. You would imagine a digital dollar is yet another payment method compared to PayPal, Venmo, Cash App, the FedNow, wires, credit cards, debit cards. You name it. So you expect to always talk to the audience in the US, from where the US dollar comes. But the reality is that if you exclude Europe and the US and go anywhere else in the world, stop 100 people in the streets and ask them if they would prefer to hold the US dollar or local national currency, 99 of them will say they want the US dollar. The reality is that there are 3 billion people in the world called unbanked. That's almost half the population. It's not because they are bad people. Their fault is just to be too poor to be of interest to the banking system. That is insane. It's very sad to say, but it's the reality. Half the population of the world cannot have access to financial services because they are too poor, because they don't generate enough fees and commissions for the banking system. Plus, you have 5 billion people in the world, so 2 billion more people, that live in high-inflation countries. Think about Turkey, where the Turkish lira lost 80% of its value against the US dollar in the last 5 years. Think about Argentina, where the Argentine peso lost 98% of its value against the US dollar. All these people, who also represent very young generations, are sick and tired of seeing their life savings, the result of their work, become useless after just a few days or weeks because their local economy is going down. That situation even worsened after the start of the pandemic, which created additional issues with weaker economies. So if you are everywhere else in the world, in Africa, Nigeria, Vietnam, basically almost everywhere else, you want the US dollar. Not because the US dollar is the most perfect currency in the world, just because it's much better than the currency you have in your own country. Imagine being a father, a family. You work from January to December, and at the end of the year, after 12 months of hard work, your purchasing power is half of what it was at the beginning of the year just because inflation is so high. In Turkey, inflation this year will be 50%. We complain about inflation in Europe and the US, but it's much, much better than everywhere else in the world. That's why a US dollar stablecoin like USDT is a lifeline for hundreds of millions of people. Those 400 million people I mentioned are not in the US, not in Europe. They are all in those emerging markets because it's the first time in their lives that these people have access to a checking account. Most of them had cash dollars or cash local currencies, and if they could have some banknotes of cash dollars, they would keep it under the pillow. Leapfrogging them to a digital life with a checking account that would protect them and their savings is something that was unthinkable until a few years ago. I think it's our biggest achievement. The 21st century has been all about financial inclusion, but financial inclusion shouldn't be financial inclusion washing. If you are familiar with the concept of greenwashing, where companies go around and say they buy carbon credits, the reality is that no one did much about financial inclusion in the 21st century. You have all these companies and NGOs and big corporates in rich countries that meet in expensive dinners and talk about how they can help Africa or Central South America. Nothing ever happens. Then you have a small company like Tether that actually created a product. I wish I could say in 2014 we saw everything, we saw the light, we understood everything from the beginning. But the reality is that our product is so simple that it can be used by everyone. It's so inclusive, and I think it should be supported by regulators and by other companies just because it's proving that it's helpful to people that really need something for the first time in their lives.

I think that I'm not very positive about the microeconomy and the geopolitical situation. I think that more and more people, through having access to digital means, can opt out from the system they live in. They could use Bitcoin. I'm a big Bitcoin fan myself. I would call myself a maxi. But I also realized that it's kind of difficult in a certain sense. I truly love Bitcoin. When we go around and do events in Nigeria and many other places in different parts of Asia, Africa, and Central South America, we try to teach Bitcoin. But the answer is that most people are not ready for that. Most people want to have access to the dollar because that is something they know. They are not geeks like myself, so they cannot spend so much time going into the details of Bitcoin. It will take time. It took 20 years for debit cards to be trusted even by countries like Switzerland. When I talk to some journalists that look at the case of El Salvador, we do a lot of Bitcoin education there. Some journalists ask me, 'Isn't Bitcoin a failed experiment in El Salvador?' It's just two years. It took 20 years for credit cards to be supported again in Europe. We should give time to Bitcoin. In the meantime, while people get comfortable, they will resort to the thing that they know in a different form: cash. In the last decades, if you live in Turkey, access to the US dollar in cash form was always through the black markets. Same thing in Buenos Aires, Argentina. By the way, it's also dangerous to meet a person and exchange money in person, and the spreads are very high. With USDT, people are getting a fiat currency that is not necessarily great. I think that the fiat currency world might come to an end eventually. It's part of history. In 1920, there was the Weimar Republic where with a wheelbarrow of German marks you could buy a loaf of bread. In some economies, it's already like that. In Buenos Aires, if you change $500, you get a pile of cash like this in Argentine pesos. I think this unfortunately will not stop. I think USDT will grow very big in the next 10 years. We are also seeing USDT being used now for trade finance and commodity trading. If you want to purchase oil, it takes ages to move money with a wire from Europe to Asia or the Middle East. With USDT, it's instant. Imagine you have a ship that is waiting for a wire to start loading the barrels of oil. All those things can be optimized and made more efficient through the usage of a stablecoin like USDT. The reason to exist of Tether for the next 10 years is this disintermediation. We learn a lot about USDT. What USDT is doing is being this intermediate money as much as possible. We are still a centralized issuer, but we realize that through programmable money we can remove all the intermediaries that are taking advantage and taking a bite from every single transaction. Think about the case of remittances. The Philippines has $33 billion per year in dollar remittances. In order to send money, imagine you are a person like a father or mother or family that lives in the Philippines and has to work abroad, maybe in Europe, far from your family for the entire month or the entire year. You have to send money back home, and you are charged 10% to 25% depending on the country. How unfair is that? Humanity is trying to go to Mars, but in order to move some money on a ledger, we charge 25% to poor people. All those things will be crushed by stablecoins, not necessarily all Tether, but the digital industry. Hopefully Bitcoin will start becoming more and more popular and will remove all the unnecessary intermediaries from the world. That is what excites me. With Tether, we are also building additional technologies like a peer-to-peer communication stack in order to disintermediate communication. Right now, every time you send a message on WhatsApp, imagine my family is in Rome. Most people live 10 kilometers from their family in general. If you use WhatsApp, Telegram, or any other messaging protocol, the message you send to your family would travel to Frankfurt and then back to Rome. That's an insane amount of waste, latency, and cost of creating bigger internet lines just to route all these messages and video calls. Every single bit of information is routed across intermediaries so that everyone can milk a little bit of information out of it. That is exactly the same thing that is happening with USDT. We remove the intermediaries from the payment systems. We remove the intermediaries with the peer-to-peer telecommunication technology that we are building. We can remove the intermediaries that are already omnipresent from the artificial intelligence industry. The more intermediaries, the more humanity will be under control and will be controlled by people and companies that might not have good intentions. We need to give back the dependence to the people. That is what excites me. When I studied the problem of creating super resilient communication systems for distress scenarios, it led me to think that we cannot be in a situation where we try to go to Mars but pretend that for me and my mom to talk, we have to go through a data center that is 10,000 kilometers away. That doesn't make any sense. The internet was built for being point-to-point and peer-to-peer. It almost feels like a magic word saying peer-to-peer is a technology that is unrealistic, but actually we are proving that we can do it. Tether can invest a lot of money in that type of technology because we are very lucky. We are making more profit than anything you could imagine in my own life and for the next 100 lives. We are not a classic VC. Not everything that we're doing has to be for return. We can build the most independent and resilient technology that is open source. We publish more than 500 open source repositories of code all ourselves and through our investments. That is Tether in the next 10 years: proving that there is too much intermediation and we are going to fight that with our own forces.

All right. I'm slightly ashamed to say it because it feels very simple in a way. Basically, Tether has a market cap of $134 billion. Most of it, more than $100 billion, is in US Treasury bills. Why is that? Because the most important job of a stablecoin is to give back money to their users. Remember the example I made when I explained how USDT works. You have these USDT tokens, and eventually you want your wire back in your bank account. I need to be able to do that for any amount of money. In 2022, Tether was attacked by short sellers. In 48 hours, we were asked to redeem $7 billion, and we did it without sweating. In 25 days, we redeemed $20 billion, which was 25% of our reserves. How did we do it? Because we need to have the most secure thing that can be converted at any time into US dollars without losing on volatility or slippage. That is short-term US Treasury bills. Having short-term US Treasury bills in the order of more than $100 billion, you make a quick back-of-the-envelope calculation. T-bills are now at around 4.5% to 5% interest rate per year. That's $5 billion with a very simple business model that you make per year, without counting the fact that we invested in Bitcoin. We have around 82,000 Bitcoin bought very early on the Tether side, and we have gold, both very early on. We have 44 tons of gold as well. We are trying to build, I sometimes go around and do this speech called 'Build for the Apocalypse.' We build our company and technology that has to be resilient to any sort of attacks and any sort of change in the world. Everything that we have in our lives is so unpredictable that even our own company's reserves have to be diversified and strong. That's why T-bills, Bitcoin, and gold are basically part of our reserves. To the people that think, 'Oh, but you have Bitcoin, there is risk there,' actually Tether in the last two years made more than $50 billion in profits, and we didn't distribute almost anything. A very tiny portion. Basically, $4.5 billion or more are staying in the company so that we can over-collateralize our stablecoin. Banks do fractional reserve. They can lend out up to 90% of their balance sheet, so they only keep a 10% cushion. Tether has, as part of its reserves, 4% to 5% of reserves. We are over-collateralized. Plus, we have another $5 billion that are part of a Tether investment company that are still part of our global equity. You can believe it or not. Of course, it feels like we are saying that, but we really do care about the mission. Otherwise, we don't care about buying the next big yacht or something crazy. We want to invest in companies that make sense and that actually can make a difference and be positive for the world. I feel like we have this once-in-100-years opportunity because we make so much money on one side that we can invest any sort of capital in things that could disintermediate the world. That is what keeps me up at night, thinking about all the opportunities. It's exciting, and in a certain way, there is no book that tells you how to do it. So yeah, it's an interesting journey.