Cryptocurrencies have been gaining popularity over the years, but their inherent volatility has made them difficult to use as a reliable store of value. This is where fiat-backed tokens come in. Fiat-backed tokens are digital assets that are backed by real-world currencies such as US dollars and Euros, allowing users to enjoy the convenience of cryptocurrencies while avoiding the risks associated with price swings.
These stablecoins offer an easy way for cryptocurrency traders and investors to hedge against market volatility without sacrificing liquidity or security. With more and more fiat-backed tokens being introduced into the crypto space, it’s important to understand what they are and how they work so you can make informed decisions on which ones may be right for you.
What are Fiat-Backed Tokens?
Fiat-backed tokens are different from coins like Bitcoin. They are a type of cryptocurrency that is backed by a reserve of fiat currency, most commonly US dollars. These tokens are digital assets that maintain financial reserves in fiat currency held by a regulated institution such as a bank. Fiat-backed stablecoins offer greater stability and security than other types of cryptocurrencies, making them an attractive option for investors and traders looking for less volatility in their investments.
Fiat-backed tokens have their value tied to their underlying asset, unlike other cryptocurrencies. This means that when the price of the underlying asset fluctuates, so does the value of the token, providing traders with an easy way to hedge against market volatility without sacrificing liquidity or security.
How Do Fiat-Backed Tokens Work?
Fiat-backed tokens work by allowing users to exchange their fiat currency for a token that is backed by this same currency. These tokens are created and stored on the blockchain, which means they are secure and carry similar inherent properties of regular crypto tokens.
They pegged the value of each token to the underlying currency, so if the value of the fiat currency changes, then the value of the token will follow suit. When a user wants to access their funds, they can exchange their stablecoin for its underlying asset (in this case fiat currency) with the issuing institution. This makes it easy for users to move in and out of their investments without having to worry about fluctuating prices.
Low-risk investment vehicles or regulated institutions, such as a bank, usually store a stablecoin reserve. Banks are able to provide secure storage for the reserves, ensuring that the funds are safe from theft or fraud. The issuing entity will also regularly audit the reserves to ensure they remain accurate.
The reserves are then used to back the issuance of stablecoins, which means that for every token issued, there is an equivalent amount of fiat currency held in reserve. This ensures that the value of each token remains consistent with its underlying asset, regardless of market conditions.
Benefits of Using Fiat-Backed Tokens
Fiat-backed tokens offer a variety of benefits that make them an attractive option for traders and investors looking for less volatility in their investments. These benefits include:
1. Stability: By pegging the value of each token to its underlying asset, fiat-backed tokens provide investors with greater stability than other types of cryptocurrencies. This makes them an ideal option for traders who want to hedge against market volatility without sacrificing liquidity or security.
2. The blockchain stores Fiat-backed tokens, providing them with the same security as other cryptocurrencies. Additionally, these tokens are backed by a reserve of fiat currency that is held in a regulated institution, such as a bank, providing additional security against theft or fraud.
3. Accessibility: Fiat-backed tokens make it easy for users to move in and out of their investments without having to worry about fluctuating prices. With the ability to quickly exchange their tokens for fiat currency with the issuing institution, users can easily access their funds when needed.
4. Transparency: The issuing entity will regularly audit the reserves to ensure they remain accurate, providing users with greater transparency into their investments. This makes it easy for investors to track the value of their tokens and make informed decisions about their investments.
5. Low Fees: Fiat-backed tokens also offer users access to low-fee trading, allowing them to save money when making transactions. This makes fiat-backed tokens an ideal option for traders looking to maximize their return on investment or transfer money across countries.
List of Fiat-Backed Tokens
1. USDT (Tether)
USDT (Tether) is the largest fiat-backed token backed one-to-one by physical US Dollars (USD). It is currently based on over a dozen blockchain networks, including Ethereum, Polygon, Tezos, Solana, Avalanche, and others.
According to numerous financial reports, USDT is currently the most traded and widely used cryptocurrency in the world with over $22 billion in daily trading volume. USDT has a market cap of $71 billion, which demonstrates its position as an important asset among crypto enthusiasts.
2. USDC (USD Coin)
USDC (USD Coin) is a stablecoin that is backed one-to-one by actual US dollars. It was created by Circle, a peer-to-peer payments technology company, in partnership with the leading cryptocurrency exchange Coinbase. USDC is regulated by the United States Office of the Comptroller of Currency (OCC) and has a market cap of $43.8 billion.
USDC is one of the most popular fiat-backed tokens currently available, with over $2.7 billion in daily trading volume. It offers users a secure, transparent way to transfer money between different countries without having to worry about fluctuating exchange rates.
3. BUSD (Binance USD):
BUSD (Binance USD) is another popular US dollars backed token, created by Paxos Trust Company in partnership with Binance, one of the world’s largest exchanges. The New York State Department of Financial Services (NYSDFS) regulates BUSD which has a market cap of $8.6 billion.
As of December 2022, BUSD had a market cap of more than $22 billion. However, the value dropped significantly following regulatory scrutiny. As a result, Paxos has also announced it will discontinue support for BUSD, including the minting of new tokens.
4. GUSD (Gemini Dollar)
GUSD (Gemini Dollar) is a fiat-backed token created by Gemini Trust Company, a regulated trust company founded by the Winklevoss twins. It is a stablecoin that is backed one-to-one by US dollars and stored in an FDIC-insured bank account. GUSD was the first stablecoin to become an NYSDFS-regulated digital asset.
GUSD has a market cap of $604 million and $480k in daily trading volume.
5. TUSD (TrustUSD)
TUSD (TrustUSD) is a US dollar-backed stablecoin created by TrustToken, a financial services company. TUSD is fully collateralized one-to-one with US dollars held in an FDIC-insured bank account segregated from the company funds. It has a market cap of $1.2 billion.
TUSD is one of the most popular fiat-backed tokens currently available, with over $30 million in daily trading volume.
6. USDP (Pax Dollar)
USDP is a token created by Paxos Trust Company that is backed one-to-one by actual US dollars. The token is USDP and is subject to strict regulatory oversight by the New York State Department of Financial Services, meeting the highest standards of consumer protection.
USDP has a market cap of over $880 million, with $2.9 million in daily trading volume.
Disadvantages of Using Fiat-Backed Tokens
Traders should consider the drawbacks before using Fiat-backed tokens.
One of the major disadvantages of using fiat-backed tokens is their lack of decentralization. Since a reserve of fiat currency backs a token, it is subject to the same centralization risks as any other currency. This means that if the issuer fails, for whatever reason, the tokens may become worthless.
Fiat-backed tokens are also subject to more stringent regulations and may face greater scrutiny from authorities than other cryptocurrencies. This could cause additional delays in the trading process and potentially limit buyers’ access to certain cryptocurrency markets or exchanges.
Tips for Choosing the Right Token for You
When selecting the right fiat-backed token for your trading needs, there are a few factors to consider.
- Understand the token’s regulation and compliance. Fiat-backed tokens are subject to greater regulatory oversight and must adhere to certain standards of consumer protection. Be sure to check with the issuer or regulator to ensure that the token you are considering is compliant.
- Consider the liquidity of the token. Look at its market capitalization, trading volume, and liquidity ratio to determine how easy it will be to buy and sell the token on exchanges or other platforms.
- Be aware of any fees associated with using a particular fiat-backed token. Different tokens have different levels of fees and charges, so be sure to research those before deciding which one is best for you.
- Make sure the issuer of the token is reputable. Research the issuer’s background and track record before making a decision about which fiat-backed token to use.
Fiat-backed tokens offer many advantages for traders, but there are also some drawbacks that should be taken into consideration before using them. When selecting the right token for your trading needs, it’s important to understand its regulation and compliance, liquidity levels, associated fees, and charges, as well as the issuer’s background and track record. By taking all of these factors into account you can make an informed decision about which fiat-backed token is best suited to meet your trading objectives.