Why Is This Risk Not Present in Fiat-Backed Stablecoins?
The risk of the collateral value dropping below the stablecoin value is not present in fiat-backed stablecoins because their collateral is fiat currency, typically US Dollars, held in a bank account. Since the stablecoin is pegged 1:1 to the fiat currency, and the collateral is the same fiat currency, the collateral's value cannot fluctuate against the stablecoin's value.
The primary risk is instead the trustworthiness and solvency of the centralized issuer and the quality of their reserves.
Glossar
Fiat-Backed
Collateral ⎊ The concept of fiat-backed cryptocurrency or derivatives fundamentally rests on the provision of collateral, typically held by a custodian or escrow agent, to represent the underlying value.
Fiat
Foundation ⎊ Fiat, within the context of cryptocurrency and derivatives, represents a government-issued currency legally established as a medium of exchange; its value is derived from government regulation or law, not intrinsic worth, and serves as the primary on and off-ramp for capital within digital asset ecosystems.
Fiat-Backed Stablecoins
Peg ⎊ Fiat-backed stablecoins represent a cryptographic attempt to mitigate the inherent volatility associated with digital assets by establishing a stable value relative to a fiat currency, typically the US dollar.
Regulatory Oversight
Stability ⎊ Effective regulatory oversight is essential for imposing capital and margin requirements that promote overall market stability, particularly in the high-leverage environment of crypto derivatives.