exchanges don't determine the price, USDT is traded just like any other coin so its actually the traders who determine it's price.
The difference with USDT is its backed by the 'promise' that it can always be redeemed for $1. depending on the confidence level in the promise, the closer the actual price will be to $1.
I suppose in that sense its not really a 'peg'. As you would expect a peg to mean somebody is always actively buying at the pegged value and preventing it going below.
but what is the "promise". Can I sell it back to Tether for a dollar? I assume not. So I don't understand what the point of this "promise" is if it's traded on an exchange like every other coin
In theory you can convert it back into USD at any time. As long as people believe that then it will stay close to US$1 through arbitrage. The price you see now is the market applying a risk factor on whether Tether is 100% backed or that you can actually redeem it for USD.
The reality is that like most things, Tether is trading on confidence and if confidence is lost then the value of Tether will collapse. If Tether.io actually had the US$2.x billion dollars needed then someone could make a lot of money as the price drops but the reality is that they probably have 10% of that (like most banks/ponzi schemes) and even if they did have it, there's no way either them or the bank(s) they're using/conning are going to give it up.
The more interesting thing is to see what the collapse of Tether does to the price of BTC. If there is a somewhat orderly exit from Tether (this is what is happening right now) and the position is unwound then when it does collapse the impact may not be significant. But if Tether lets go in a hurry, and it probably will, then expect to see some carnage. BTC is yet to prove it's worth as anything more than a gambling platform and if people don't think they can win at any odds then they probably won't want to play the game.
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