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fiat-pegged cryptocurrency

A cryptocurrency linked to fiat currency is a type of digital currency that is closely tied to traditional government-backed currencies such as the US dollar, euro, or Japanese yen. In contrast to independent cryptocurrencies that function autonomously as a means of payment, cryptocurrencies linked to fiat currency are closely integrated with the existing monetary system and government regulations.

How do cryptocurrencies linked to fiat currency work?

Cryptocurrencies tied to fiat currency often rely on the technology of so-called tokenization, which involves assigning a digital token to a physical fiat currency held in a bank or financial institution. This token has the equivalent value of a specified amount of fiat currency and can be used for transactions on the blockchain network.

Advantages and disadvantages of cryptocurrencies linked to fiat currency

Advantages:

  • Value stability: Due to their connection to traditional currencies, these types of cryptocurrencies are less susceptible to sudden price fluctuations.
  • Regulatory acceptance: Because cryptocurrencies tied to fiat currency operate in compliance with legal regulations, they are usually more easily accepted by financial institutions and countries.

Disadvantages:

  • Lack of full decentralization: Cryptocurrencies linked to fiat currency often remain under the control of financial institutions, which can introduce certain limitations.
  • Dependency on the banking system: Due to the need to store physical fiat currency, these types of cryptocurrencies may be exposed to risks associated with the traditional banking system.

Examples of cryptocurrencies linked to fiat currency

One of the most popular examples of a cryptocurrency linked to fiat currency is Tether (USDT), whose value is closely tied to the US dollar. Other examples include TrueUSD (TUSD) and USD Coin (USDC), which also maintain a stable value relative to the dollar.

It is worth noting that cryptocurrencies linked to fiat currency play a significant role in the crypto asset ecosystem, facilitating easier exchanges between traditional financial systems and the blockchain environment.


20 December 2024 | 15:01

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