New Tethers are not supposed to be issued if the price reaches $1.1, I believe the article got that part wrong.

Tether should only be issued based on the amount of USD that Tether has in its bank account / vaults (they have released a 'audit' by a law firm but not by an official auditor). Since each Tether represents exactly $1, market forces should handle the pegging. Assuming people trust that Tether does have the USD, then any price < or > $1 represents an arbitrage opportunity.

The demand for Tether comes from the fact that many exchanges are not licensed to operate in USD. Tether is used in place of USD on those exchanges, and the counterparty risk you mention is likely balanced by arbitrage opportunity.

The USD/USDT price has no impact on if Tethers are issued. A USD/USDT trade occurs on only a few markets, one of which is Kraken, and it requires one party to already have USDT, which they are then selling for "real" USD.

Dollars have to be sent through a bank, and too many of the exchanges have been cut off from the banking system. They exist to let money circulate between those exchanges and the few real USD exit points of the system.

It's not clear if tether can really be "redeemed".

Exchanges with actual USD pairings generally have low volume (Kraken, on account of its terrible engine) or few coins listed (gdax, gemini). So if you want to hedge in fiat on a higher volume exchange like bitfinex or binance and also want to trade alts, you will need tether.

The price of tether will likely never reach 1.1 unless there are solvency concerns. Any price disparity between BtC/usdt and BTC/USD has historically disappeared, so you can pseudo-arbitrage these pairs across exchanges even though they are technically not the same. Kraken's USD/USDT pair also makes this bridge easier.

Tether is more convenient (faster) than exchanging for USD. And many exchanges don't support USD/Fiat so the only way to sell tokens for a stable currency is to exchange for Tether.

There are many reasons why they are not converted. For one, the business with Tether started when Bitfinex was hacked.

Secondly, AFAIK many exchanges including Bitfinex had trouble letting people withdraw USD. I am not entirely sure if that has changed recently.

So, in both cases Tether acts as a counterparty to BTC trades. In most cases, the BTC/USD pair is not actual USD but TUSD.

Tether, in theory, actually has a real use case. It can be used as a stable intermediary between exchanges that do not support USD and exchanges that do.

But in practice I don’t know enough to be confident that a tether is always going to be $1.

There may be demand for tether to use on exchanges that don't have real $ trading but otherwise have good liquidity on lots of tokens.