The promise of a stablecoin, in this case Tether, is that you can always change 1 USDT into $1. When people buy Tether, they pay then $1 and believe the promise that they will get $1 when they want to.

Right but how... where does physical money come into play?

How can I or anyone get 1 physical dollar from selling USDT? All I've ever done is exchange some coin => USDT and vice versa.

So if no one is actually asking for a physical dollar, why does it need to be backed by a physical dollar?

There are exchanges (such as FTX) where you can trade USDT/USD. The basic premise is that USDT/USD will always be around 1, because Tether (the organisation) stands ready (always) to give you

a) 1 USDT for a USD, and

b) 1 USD for a USDT.

Any USDT/USD deviation from 1 thus gives rise to arbitrage opportunities. Tether can guarantee

a) because they can issue an unlimited amount of USDT, so when you give them 1 USD, they can definitely give you 1 USDT, and b) because

b1) they do not issue USDT without someone giving them the equivalent amount of USD, and

b2) they keep those USD safe in cash, deposits, or equivalent, without price, credit, and FX risk.

a) is undisputed. b) is the tricky part, both

b1) - they could just issue USDT without having received USD. Who's checking?

b2) - they could just take the USD they've received and buy a yacht, or put it in shares (price risk!) or commercial paper (credit risk!) or Chinese Yuan (FX risk!) or anything else. Who's checking?

90% of the value is allowong people to dump crypto to anltber asset that is crypto-osh but is "pegged" (the truth of which is more like a consensus of biased investors) to USD but doesnt trigger tax problems the dame way axtjally cashing out would.

the backing by a physical dollar is whats supposed to peg it to make the fiction that holding $1m in tether is equivelant to holdong $1m.

Idk, try paying your rent or buying lunch with Tether and see how that goes for you.

The big fear with stable coins is for them to go into a death spiral and become worthless. Stablecoin are only worth $1 if people believe they are worth $1. When fear sets in and people no longer believe they are worth $1 it can cause the price to tank. Having a stablecoin be backed means that you can trust your stablecoins to not become worthless because they can be redeemed at anytime at a $1 price point even if the market says otherwise.

Ah so in theory I should be able to ask the USDT foundation for a dollar and they should be able to give it to me?

USDT is the worst in this regard since you have to deal in massive volume. The minimum withdrawal is $100k and fee on that is the greater of $1000 or 0.1%.

https://tether.to/en/fees/

That seems like a fair policy to avoid getting DDoSed by withdrawals in periods of high demand (i.e. bank runs). Presumably they mainly intend to serve exchanges which are doing withdrawals in the $millions.

Not defending their other practices.

No. See my comment here https://news.ycombinator.com/item?id=31352602

Yes, https://tether.to/en/transparency

Right that's what they say but how do I or anyone else redeem that?

Otherwise there's no need for physical backing right?