What Is a Fiat-Pegged Cryptocurrency?
A fiat-pegged cryptocurrency, also known as a pegged cryptocurrency, is a digital coin, token, or asset issued on a blockchain that is linked to a government-issued currency or a bank-issued currency.
Each fiat-pegged cryptocurrency is designed to maintain a specific cash value by backing reserves.
These cryptocurrencies are classified as stablecoins and were created to address the high levels of volatility associated with traditional cryptocurrencies.
Seeking Stability
Unlike typical cryptocurrencies, which can experience significant price fluctuations, stablecoins aim to provide stability by pegged to established currencies such as the euro, the British pound, or the U.S. dollar.
While fiat currencies can still experience fluctuations in value, they generally exhibit less extreme swings than other cryptocurrencies.
Fiat-pegged cryptocurrencies can have different structures. Some require a strict process where the issuance of the cryptocurrency is contingent upon the deposit of an equivalent amount of fiat money.
Boosting Stability and Liquidity
Cryptocurrency exchanges are often the largest holders of fiat-backed cryptocurrencies.
Major cryptocurrency exchanges hold reserves of these assets to protect their positions from price volatility.
Additionally, holding fiat-pegged cryptocurrencies helps to enhance the liquidity base of exchanges, which is another significant factor driving their accumulation.