Fiat-backed stablecoins are legal money-backed crypto currency tokens. They are the most common type of stablecoin.
For a token to be fiat-backed, a company or central entity must manage fiat currency reserves and issue a corresponding amount of tokens in the crypto market. The company is the custodian of fiat reserves. Therefore, holders of these fiat-backed tokens are choosing to trust the central entity. Holders may seek to verify reliability by examining periodic audits, but ultimately the involvement of the central authority means the holder is involved in a relationship that involves trust.
• Simplicity: The fiat-backed structure is easy to understand.
• Stability: Fiat currencies from countries with a strong and relatively stable economy are perhaps the most stable assets available. For instance, the USD is very stable so international business deals often use it as a “unit of account” — a way to measure and describe value that does not change a lot over time. Several popular stablecoins are backed with fiat USD.
• Centralized: this structure is always highly centralized and therefore subject to various vulnerabilities and risks.
• Requires trust: the central entity must be trusted for the full functioning of the system, which goes against the principle of decentralization of cryptocurrencies. External audits are required to verify the credibility of the accounts.
• Regulatory Risk: Anything involving Fiat in the cryptocurrency market today would require greater supervision and regulation. For example, Tether continues to categorically reject any public audit, and the institutions responsible for issuing the dollar may soon rebel against this lack of transparency.
Most famous Stablecoins
What are the most famous fiat-backed stablecoins?
- USDC (USD Coin) is pegged to the USD
- TUSD (TrueUSD) is pegged to the USD
- BUSD (Binance USD) is pegged to the USD
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