As investors look for certainty and stability in their holdings, Fiat backed stablecoins are the latest fad that has become a huge attraction. It represents valuable tokens associated with the value of a specific fiat currency of a country. These assets will be pegged at a 1:1 ratio. To ensure that the price remains at parity with the underlying asset, a specific amount of fiat will be stored in a bank which acts as a trustee which guarantees safety and proper accounting of the asset. Popular examples of Fiat backed stablecoins are Tether (USDT) and TrueUSD (TUSD).
Advantages offered by Fiat-backed stablecoins
They are a viable alternative to the highly volatile cryptocurrencies. Price fluctuation in Fit-backed stablecoins is very minimal and negligible.
Complexity is not there as investors can easily understand the conceptual structure of a fiat-supported token.
Limitations of Fiat-backed stablecoins
Though it offers a high level of safety for investors, it involves stringent regulations sometimes oversight from certain authorities. Since it is pegged to a fiat currency, it virtually has a nation’s pride at stake.
Since custodian facilities are involved, it requires sharing of data with a third party. Skeptical investors will find it not trustworthy.
A higher level of centralization and rigidity is involved to maintain the vital 1:1 ratio.
The claims of being fully backed by a fiat currency lack transparency. It needs regular audits to be performed by independent authorities to verify its authenticity.
Though concerns remain regarding auditing, transparency and practices like price manipulation, fiat-backed stablecoins have a promising future amidst increasing government control and regulatory interference happening in today’s world.
