Pegging in Cryptocurrency: Stabilizing Digital Assets

Peg is a set price for the exchange rate between two assets.

What is Peg?

“Peg” is a set price for the exchange rate between two assets. It is the direct opposite of “floating” currencies, which have no rigid price benchmark and follow a softer monetary policy.

In the familiar global context of currencies, a peg ensures that foreign currencies are exchanged for a chosen base currency at a fixed exchange rate. Among the most common benefits of pegging are the stimulation of trade between countries, the reduction of risks associated with entering broader markets, and macroeconomic stabilization.

When applied to cryptocurrencies, a peg means a specific price that the token seeks to maintain. Pegging is most often used for stabelcoins; stabelcoins are cryptocurrency assets that retain their value over a long period of time.

Notable examples include USDT, DAI, and FRAX, all of which are pegged to $1, with the dollar itself “soft-linked” to the Consumer Price Index (CPI), which tracks a basket of goods.

Stablecoins maintain their peg by reducing or diluting total supply. Changes in the supply of tokens will change the relative price of each token until the desired peg is achieved.

Secured Stablecoins, such as USDT and DAI, are mined and burned as needed, with newly mined tokens receiving collateral in the form of other digital assets.

Algorithmic Stablecoins are maintained at a given level through a combination of collateral and the use of sophisticated smart contract algorithms that reduce and expand supply depending on various market factors.

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