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What is a fiat-backed stablecoin?
A fiat-backed stablecoin is a token meant to stay worth one unit of a government currency, such as one US dollar, because a company holds reserves of cash and similar assets and promises to redeem tokens at that rate. Its value rests on those reserves and on the issuer honoring redemptions.
What it means for you
The promise to redeem usually runs only to the issuer's direct customers, often large institutions, so most holders exit by selling on a market, where the price can slip below one dollar. Check who issues the coin, what its reserves hold, and whether independent reports on them are published.
A common mistake: “One stablecoin is always worth exactly one dollar.”
In fact: Its market price can drift from one dollar, especially under stress, and usually only the issuer's direct customers can redeem at par. In March 2023 a major dollar stablecoin traded below one dollar until its issuer's redemptions resumed.
How it works
The issuer mints new tokens when a customer pays in currency and burns them when a customer redeems, keeping the money as reserves. Minting and redeeming, the primary market, is usually open only to institutional customers; everyone else trades on exchanges, the secondary market. When the market price drifts from one dollar, direct customers can buy cheap tokens and redeem them, or mint and sell, and that arbitrage pulls the price back. If confidence in the reserves fails, holders rush to redeem, much like a bank run, and the issuer may have to sell reserve assets quickly.
Sources: Federal Reserve FEDS Notes: The stable in stablecoins, Federal Reserve FEDS Notes: Primary and Secondary Markets for Stablecoins, ethereum.org: Stablecoins · checked 4 October 2026
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Educational content, not financial advice. Written by hand and checked against the source named above. Something wrong? Tell us and we reply within two business days.