Fiat-Collateralised Stablecoin

A fiat-collateralised stablecoin is a type of cryptocurrency backed by a reserve of fiat currency (such as the US dollar, euro, or other national currencies) or cash equivalents (e.g., US short-term treasuries), whose primary purpose is to minimise crypto’s price volatility.

The value of the stablecoin is directly pegged to the value of the underlying fiat currency, making it different from other cryptocurrencies like Bitcoin or Ethereum, whose values are driven by market demand and can experience large fluctuations.

Examples include Tether (USDT), one of the most popular fiat-collateralised stablecoins; USD Coin (USDC), another well-known stablecoin, backed by USD; and PayPal USD (PYUSD), a US dollar-pegged stablecoin from PayPal designed for digital payments and Web3 environments.

For every stablecoin issued, there is a corresponding fiat currency (or a highly liquid asset) held by a custodian. Users of fiat-collateralised stablecoins need to trust that the issuing entity has the actual reserves in place to back the tokens in circulation. For example, if someone holds one USD-backed stablecoin, the issuer should have one USD in reserve to back it.

To foster trust and transparency, reputable issuers may provide regular attestations or third-party audits of their reserves, which are often used to ensure that the reserves are legitimate and the system is fully collateralised.

Since these stablecoins are pegged to fiat currencies, they could be easily redeemed for the corresponding fiat currency, making them practical for trading, payments, or as a hedge against cryptocurrency market volatility. Stablecoins are also used for remittances, as well as decentralised finance (DeFi) platforms, where users need a stable store of value.