Fiat-backed stablecoins: what is actually in the reserve?
Reserve composition, who is allowed to redeem, and who keeps the interest the reserve earns are the three facts that define a fiat-backed token.
A fiat-backed stablecoin is a token whose issuer holds financial assets against every token outstanding and promises to exchange tokens for dollars on demand. The reserve is not a vault of banknotes; it is a portfolio, and the composition of that portfolio determines how quickly the issuer can meet redemptions when many arrive at once. Understanding a fiat-backed stablecoin means understanding three things: what is in the reserve, who is entitled to redeem, and who keeps the income the reserve produces.
The reserve is a maturity and liquidity ladder
Issuers publish a breakdown of reserve assets, and the categories recur across the industry. Each one behaves differently on a day when redemption requests spike, which is the only scenario in which the composition matters.
| Reserve asset | What it is | Behavior under a redemption surge |
|---|---|---|
| Bank deposits | Cash at commercial banks, sometimes across several institutions | Instantly available during banking hours, but exposed to the failure of a specific bank and to weekend closures |
| Short-dated government bills | Treasury obligations maturing in weeks or a few months | Deep secondary market, small price movement, sells same day in normal conditions |
| Reverse repurchase agreements | Overnight secured lending against government collateral | Matures daily, so cash returns quickly; depends on the counterparty and the collateral held |
| Money market fund shares | Units in a regulated cash fund, sometimes a tokenized money market fund | Redeemable on the fund's own schedule, which may be slower than the stablecoin's own promise |
| Longer bonds, corporate paper, secured loans, other assets | Instruments with credit or duration risk | Must be sold at whatever price the market offers, which is the point at which a reserve can fall short of par |
The distinction that matters is between assets that convert to cash at face value on demand and assets that convert at a market price. A reserve made of the first kind can meet redemptions without realizing losses. A reserve holding the second kind can be fully backed on paper and still be unable to pay par on a bad day, which is the same maturity mismatch that produces bank runs in traditional finance.
Backing is not the same as bankruptcy-remoteness
A reserve report showing assets equal to or greater than tokens outstanding answers one question: are there enough assets. It does not answer whether those assets are legally separated from the issuer's own money, whether they are pledged to someone else, or where a token holder ranks if the issuer fails. Segregation into trust structures or accounts held by a qualified custodian is what keeps reserve assets out of the general estate. Its absence creates the possibility of commingling of client funds, and reserve assets that have been lent out or pledged introduce rehypothecation into a product that most holders assume is a simple deposit.
Holding a fiat-backed token is therefore an exposure to counterparty risk in a way that holding a native blockchain asset is not. The chain guarantees that the token moved; it guarantees nothing about the dollar behind it.
Who can redeem, and why that determines the price floor
Most issuers redeem only for onboarded institutional clients who have passed know your customer checks, above a minimum size, during business hours, in a specified banking jurisdiction. Ordinary holders sell into the market instead. This two-tier structure is the reason the price is defended rather than fixed: a professional counterparty buying below par and redeeming at par earns the difference, and that arbitrage pulls the market price back toward the target.
Everything that constrains the arbitrageur widens the band the price can wander in. Redemption fees, minimum sizes, settlement delays, a queue, a suspension clause, or simply a weekend when banks are closed all leave the market price free to drift while the redemption route is unavailable. This is why a small depeg in thin hours is unremarkable and a persistent one during business hours is informative. The mechanism is the same in both cases; only the friction differs.
The reserve earns income, and that income is the issuer's
Short-dated government debt pays interest, so a large reserve produces a substantial revenue stream. This is where borrowed vocabulary causes real confusion. The income is the issuer's operating revenue, not a return distributed to token holders, and it is not comparable to protocol revenue that accrues to a token through a fee mechanism. A payment stablecoin pays its holder nothing. Buying one and holding it means forgoing the interest that the same dollars would earn elsewhere, and that forgone interest is the issuer's business model.
Instruments that do pass income through to holders exist, but they are usually structured as fund shares or notes rather than payment tokens, and they typically sit inside a different regulatory category with different eligibility rules. When a token pays a yield, the correct first question is what the holder legally owns, because the answer is rarely the same as for a payment stablecoin. A yield also means the token has an issuer taking risk to generate that yield, which is a fundamentally different product from a claim on Treasury bills.
Reading a fiat-backed token on this site
Supply is the primary series. Stablecoin circulating supply rises when the issuer mints against new dollars received and falls when tokens are redeemed and destroyed, so supply change over thirty days is closer to a net deposit flow than to a price signal. Supply hosted per chain shows where the tokens live, which matters because moving a balance between chains means trusting whatever mechanism performs the move. Peg deviation shows the current gap to par in basis points; it measures the market's price, not the reserve's adequacy, and the two can disagree for a while in either direction.
What supply does not measure is worth stating plainly. It is not revenue, not adoption, and not a claim about the issuer's solvency. A token can grow because one trading venue moved its inventory onto a chain, and it can shrink because a single institution redeemed. Attributing a narrative to a supply move without knowing which addresses changed is guesswork.
The next article covers the crypto-collateralized family, where the reserve sits on-chain and can be verified directly but carries price risk instead of credit risk. The article after that examines what a reserve attestation does and does not prove, which is the natural follow-up to everything above. Current supply and peg figures are on the stablecoins page, and the definitions used here are in the glossary.