Understanding fiat currencies

What is fiat?

What is a fiat currency?

Fiat is a type of currency that is not backed by a commodity. Its value is derived from the trust that it will be accepted by merchants and other people as a means of payment for goods, services and liabilities. All major currencies are fiat currencies including Euros, USD and GBP. They were issued by various governments to be used as legal tender and are regulated by their respective governments.

What is a stablecoin?

A stablecoin is a type of cryptocurrency where the value of the token is pegged to a reference asset.

For example, the Bitstamp exchange has issued a EUR stablecoin on the XRP Ledger. Its value is equal to Euro fiat currency since Bitstamp will accept and redeem the stablecoin and exchange it for Euro fiat upon request.

Another example of a stablecoin would be the BTC to ETH tokens issue on the XRPL by the Gatehub exchange. Their values are pegged to BTC and ETH coins issued on their blockchains. Either coin can be redeemed at the Gatehub exchange for BTC/ETH issued on their networks or they can be convert into various fiat currencies.

The role of Trust

The value of a stablecoin (or any other token issued on the XRPL) is based on the trust of the issuer and the use case of the token.

For example, a company such as Gatehub is a government regulated financial business entity required to obtain and maintain licenses, legal compliance, auditing and business infrastructure in order to stay in business. They have a proven track record of trust and reliability. Any token issued by them needs to be weighed against the probability that it will be honored and redeemed by them in the future.

For a government issued currency, its value is based on how stable the issuing government is, how much currency is in circulation, how much currency is being created and the strength of their economies. (Among many other factors.) Unstable governments or poorly run governments can cause a fiat currency to collapse in value.

When deciding on which tokens to purchase, it is a good idea to investigate who issued them and see what information is publicly available. Companies who are transparent, have a good history and who are actively participating in the XRPL community is a good starting point.

Other considerations

One of the strengths of the XRP Ledger protocol is its efficiency as a payment network. Transferring value across the globe on a blockchain, that is fast, reliable, decentralized, inexpensive and is carbon neutral, is a valuable service. Stablecoins issued by trusted entities help enhance the value of the network as a whole. When considering how you want to participate in the XRPL ecosystem, please keep this in mind.