The core functionality of Tether, like other stablecoins, is its connected fiat value, which is achieved through a fiat collateral peg.
Tether can only function as a stablecoin if investors trust its value corresponds with its worth, in this case 1 ₮ = US$1.
While the trust element required to keep this ledger maintained may expose the cryptocurrency to the same volatility as regular PoW or PoS currencies through supply and demand, Tether nullifies the risk by backing its coins with collateral.
Because the coin’s table price is so important, many other token-based stablecoin cryptocurrencies also employ the same tactic to protect their most valuable asset.
This can also be achieved using other types of fiat currency, gold or even other types of cryptocurrency.
Tether says it holds US$1 for every USDT in circulation, maintaining a 1-for-1 rate.
While the fiat collateral peg achieves its purpose, holding such a large body of fiat currency can also produce some issues.
While the company has access to its collateral, it technically cannot use it, as any withdrawal will diminish the cryptocurrency’s value, and the trust its users have in the asset.
There is also a risk of Tether losing its worth entirely while its value is hinged on this collateral if its accounts are closed because of maladministration of regulatory measures.
Even while the collateral sits safe and untouched, it is always difficult to prove its existence, so there will always remain some doubt from users.