Fiat-backed stablecoins are a type of cryptocurrency that maintains a stable value by being pegged to a traditional fiat currency, such as the US dollar, euro, or yen. Each unit of a fiat-backed stablecoin is typically backed by an equivalent reserve of fiat currency held by a trusted institution, like a bank or a custodian. This ensures that for every stablecoin issued, there is an equal amount of fiat currency in reserve.

For example, if a stablecoin is pegged to the US dollar, every stablecoin in circulation is backed by one dollar in a reserve account. This collateralization ensures the stability of the coin’s price, as users can always exchange it for the equivalent amount of fiat currency.

The main advantage of fiat-backed stablecoins is their price stability, making them useful for transactions, remittances, and as a store of value in the volatile cryptocurrency market. Popular examples include Tether (USDT), USD Coin (USDC), and TrueUSD (TUSD).

However, trust in the issuer and transparency are critical for fiat-backed stablecoins. Regular audits and proof of reserves are important to assure users that the stablecoin is fully backed and that they can redeem their coins for fiat currency at any time.