Fiat stablecoin is a cryptocurrency that corresponds to a fiat currency unit that is held by a third party (for example, in a depositary bank). However, not only fiat currency can act as collateral. Stablecoins can also be collateralized with gold, oil and other assets that have been established for a long time in the traditional economy.
Here’s an example. The user makes a deposit in USD to a bank account and receives stablecoins in a 1:1 ratio. When they want to return their USD, the issuer will liquidate the appropriate amount of their stablecoins and refund the required amount in the fiat currency.
- easy to understand;
- absolute stability (subject to full collateral);
- low exposure to vulnerabilities and risks of hacker attacks on the network (since the deposit is not contained in the blockchain).
- the need to trust a third party (a custodian that stores fiat currency);
- the participation of another third party is required (an auditor who would verify the compliance of the volume of collateral with the offer of tokens released to the market);
- costly and slow withdrawal to fiat currency;
- high degree of regulation.
Examples of fiat stablecoins: Tether (USDT), TrueUSD (TUSD), PetroDollar (XPD), Digix (DGX)