Fiat-Backed Stablecoin

A fiat-backed stablecoin is a stablecoin whose value is maintained by reserves of traditional assets — cash, bank deposits, and short-term government debt — held by the issuing company. For every token in circulation, the issuer claims to hold roughly one unit of the underlying currency, and it stands ready to redeem tokens for fiat, which keeps the market price near the peg through arbitrage.

USDC, issued by Circle, is a concrete example: each USDC is intended to be redeemable for one US dollar, with reserves held largely in short-dated US Treasury bills and cash, and reserve reports published regularly. When USDC trades slightly below one dollar, arbitrageurs can buy it cheaply and redeem it with the issuer for a full dollar, pushing the price back up; the reverse happens when it trades above the peg.

The trade-off is trust: holders depend on the issuer actually holding the reserves, on the banks and custodians storing them, and on the issuer honoring redemptions. Fiat-backed stablecoins are also centralized — issuers can freeze addresses and must comply with regulators. A common misconception is that a reserve attestation proves a stablecoin is fully safe; attestations are point-in-time snapshots, not full audits, and reserve quality and redemption terms still matter.