Crypto glossary
Fiat-backed stablecoin
A fiat-backed stablecoin is a token pegged to a currency such as the dollar and backed one-to-one by cash and short-term government debt held by its issuer.
A fiat-backed stablecoin is issued by a company that receives traditional money and mints the same amount of tokens on one or more blockchains. The money is kept in bank accounts, Treasury bills, overnight repos or money market funds, and the issuer promises to redeem each token for one unit of the reference currency. When tokens are redeemed, they are burned and the reserves shrink accordingly.
This is the dominant stablecoin model by far: USDT and USDC, the two largest tokens, follow it, as do most euro stablecoins. Their simplicity makes them the default trading pair on exchanges, the base asset of DeFi lending and the tool behind most stablecoin payments.
The design is centralised by nature. Holders depend on the issuer's solvency, on the banks and custodians that hold the reserves and on the issuer's willingness to redeem. Issuers can freeze addresses, reserves are usually verified through periodic attestations rather than full audits, and only approved customers can redeem directly, so ordinary users rely on exchanges and arbitrageurs to keep the price at par.
Example
A company wires 1 million dollars to a stablecoin issuer, receives 1 million tokens in its wallet and, months later, sends them back to get the dollars returned to its bank account.