Peg
What Is a Peg
A peg is a system that keeps the value of a digital asset stable by tying it to a more stable asset, usually a fiat currency like the US Dollar. This is important in the volatile crypto market, giving users a predictable and reliable store of value. Examples of pegged cryptocurrencies, or stablecoins, include Tether (USDT), USD Coin (USDC), and Dai (DAI). These stablecoins keep a 1:1 value ratio with the US Dollar, meaning one unit of the stablecoin is always equal to one USD.
To maintain this peg, stablecoin issuers often hold reserves of the reference asset. For example, an issuer might hold USD reserves equal to the number of stablecoins in circulation, providing backing for the stablecoin's value. Some stablecoins use algorithms to adjust their supply based on market demand to keep their value stable. For instance, Dai uses smart contracts and collateralized debt positions (CDPs) to manage its peg to the USD automatically.
The main benefit of a peg is the stability it provides, which is crucial for transactions and protecting against the volatility of other cryptocurrencies. This stability builds trust and confidence among users, ensuring the pegged asset's value stays close to its reference asset. However, maintaining a peg can be challenging, especially during market stress or high volatility. The reserves or collateral must be enough to sustain the peg, and the algorithms must be strong enough to handle changing market conditions.