Fiat-backed stablecoins are cryptocurrencies designed to maintain a stable value by being pegged to a fiat currency, such as the US Dollar (USD), Euro, or others. They achieve this stability by holding reserves of the corresponding fiat currency or equivalent assets. Each unit of a fiat-backed stablecoin is typically backed by an equivalent amount of fiat currency held in reserve, ensuring a 1:1 ratio.

The issuer of the stablecoin, often a centralized entity, manages these reserves. For example, a USD-backed stablecoin like Tether (USDT) or USD Coin (USDC) requires the issuer to hold an equivalent amount of USD in bank accounts or other liquid, low-risk assets. Regular audits or attestations are conducted to verify these reserves, enhancing transparency and trust.

When users purchase fiat-backed stablecoins, they exchange fiat currency for digital tokens. These tokens can then be used for trading, remittance, or other blockchain-based activities. Conversely, users can redeem the stablecoins for the equivalent fiat currency.

Fiat-backed stablecoins provide a bridge between traditional finance and the cryptocurrency market, offering a stable medium of exchange and store of value. However, their centralized nature and reliance on reserve integrity pose risks, including regulatory scrutiny and the need for trust in the issuer.