What Is A Fiat-Pegged Cryptocurrency?
Fiat-Pegged Cryptocurrency, also known as “pegged cryptocurrency,” is a coin, token, or asset issued on a blockchain linked to a government or bank-issued currency. Each pegged cryptocurrency is designed to have a specific cash value in reserves.
Fiat-pegged cryptocurrencies are considered to be examples of stablecoins. They were created to tackle extreme levels of volatility. Cryptocurrencies can typically be very volatile, and huge upward and downward swings are common.
Essentially, a currency should act as a medium of monetary exchange and a mode of storage of monetary value, and its value should remain relatively stable over longer time horizons. This kind of short-term volatility makes Bitcoin and other popular cryptocurrencies unsuitable for everyday use by the public. Users will refrain from adopting it if they are unsure of tomorrow’s purchasing power.
Stablecoins have gained traction as they try to provide the best of both worlds, the instant processing, security, or privacy of payments of cryptocurrencies and the volatility-free stable valuations of fiat currencies. A stablecoin class of cryptocurrencies attempts to offer price stability and is backed by a reserve asset. Tether (USDT) and TrueUSD are popular cryptocurrency coins with an equivalent value worth a single US dollar and are backed by dollar deposits.
As of October 2021, USDT is the fifth-largest cryptocurrency by market capitalization, worth more than $68 billion. In March 2019, Tether’s cryptocurrency expanded its backing to include loans to affiliate companies, considered less stable than fiat-backed currencies.
Cryptocurrency exchanges are considered the biggest holders of fiat-backed cryptocurrencies. The best cryptocurrency exchanges are often required to protect positions from price volatility by holding some reserves in the fiat-backed asset.
Fiat-Pegged Cryptocurrency Example
Assume Peter, a young man fed up with his local bank deducting charges from his account, decided to research ways to save money with little or no loss. He chose to buy USDT and retain it in his crypto wallet, which has the same value as the US dollar and has no deductions.« Back to Glossary Index