Fiat Collateral & Stablecoins: Why does it matter?


A majority of the cryptocurrencies that make up the multi-trillion-dollar digital asset market are often susceptible to volatile price swings. In contrast, stablecoins allow users to instantly lock in their gains or pare down losses by swapping their volatile cryptocurrencies into stable, non-volatile crypto-assets.

Worth more than $150 billion in market capitalization, stablecoins represent the technological culmination of a fully functioning alternative financial system that bypasses banks and centralized financial institutions. Users can now create, send, and receive economic value from anywhere in the world at any time at a fraction of the total cost it normally takes when using a centralized service. As millions of more users and institutions start using blockchains for multiple use-cases, the value of digital assets transacted with stablecoins will rise proportionately.

So, in this article, we will dive into the types of stablecoins and why fiat collateral-backed stablecoins are important.

Types of Stablecoins

In a sense, stablecoins do not only aim to derive the benefits of cryptocurrencies, such as transparency, low fees, and global reach, but also the trust and stability that comes by using fiat currencies like the U.S. dollar or Euro. They are primarily issued based on the following four stability mechanisms:

  1. Fiat collateralized: stablecoins issued against fiat currencies held in reserve that help the stablecoins’ price remain stable.
  2. Cryptocurrency collateralized: stablecoins issued against one or more cryptocurrency assets held in reserve to maintain a stable price.
  3. Commodity collateralized: stablecoins issued against fiat currency-equivalent physical commodities like gold.
  4. Algorithmic: stablecoins issued without collateral, but based on smart contracts and algorithms that dynamically adjust the coin’s supply based on market demand.

The Fiat-Backed Stablecoin Dominance

Fiat collateralized stablecoins currently dominate the stablecoin market since they can act as a bridge for users who possess fiat currencies to make their first transaction with cryptocurrencies. Users instinctively trust fiat currency-backed stablecoins because of their existing familiarity and widely available liquidity, especially the U.S. dollar and the Euro.

On the same lines, EURST is a stablecoin that represents the first USD-backed cryptocurrency whose unit value is always pegged to the USD equivalent of 1 Euro.

Why are Fiat-Backed Stablecoins Like EURST Dominating?

If we speak of stablecoins, it is now apparent why fiat-backed stablecoins are the most popular in the crypto space. But the bars are being raised by a relatively new but stronger Euro stablecoin called EURST – launched by Wallex Trust.

EURST tokens are U.S. dollar-pegged stablecoins that represent the value of one Euro. The token relies on an on-chain transactions for all token issuances and redemptions, and it also has regular third-party audits and live-attestation verifiability of the reserves maintained with its escrow custodial partners. EURST has a structure like no other stablecoin and has vowed to be the most transparent digital euro token on the market.

The stablecoin has also integrated real-time auditing with the smart contract used by the escrow custodian, providing a second-by-second confirmation of the number of stablecoins in circulation and the corresponding amount of USD deposited. This feature enables users to trust the issuer of the stablecoin to maintain the value of the peg as transparent as possible, and for its users to be truly secure.

On a slightly different note, financial inclusion and providing banking services to the unbanked remains a core goal for the project. EURST will allow users from countries whose financial systems are not developed enough to participate in the global economy after a quick, successful KYC verification. The platform lets users store their stablecoins on custodian Wallex accounts instead of having to deal with intermediaries like banks.

Additionally, developers of decentralized applications will be able to allow users to transact EURST stablecoins across three different blockchains, thus, not restricting users to any one particular network.

Towards a New Financial System

In the current stablecoin market, time and again, issues of trust and verifiability have cropped up with regards to the nature and quantity of the underlying collateral backing the stable asset. As regulators are actively talking about stablecoins regulation, it seems that transparency on the collateral is a top concern to ensure that the stablecoin is really stable. In that regard, stablecoins like EURST with a live-audit system and fiat currency reserves will go a long way in reassuring the trust that investors want to have towards an open, decentralized world.