A pegged asset is designed to trade at, or very close to, a fixed target value, most commonly a one-to-one match with a fiat currency like the US dollar. This is different from most cryptocurrencies, whose prices are set purely by open market supply and demand and can move significantly in either direction.
There are a few common ways a peg is maintained. Some stablecoins are backed by holding reserves, such as cash or cash-equivalent assets, roughly matching the number of tokens in circulation. Others are backed by other cryptocurrencies held in excess of the value issued, known as over-collateralisation, or rely on algorithmic mechanisms that adjust token supply to try to keep the price near its target, without holding matching reserves at all.
A peg does not hold by default; it depends entirely on its backing mechanism continuing to function as intended. If that mechanism fails, or if holders lose confidence and try to redeem or sell faster than the system can absorb, the asset can trade away from its target for a period, an event generally described as a depeg. Different stablecoin designs carry different degrees of this risk, and the strength of a peg is generally tied to the quality and transparency of what stands behind it.
Key takeaways
- A peg ties an asset's value to a reference asset, most commonly the US dollar, to keep its price stable.
- Common mechanisms include holding matching reserves, over-collateralising with other crypto assets, or algorithmic supply adjustments.
- A depeg happens when a pegged asset trades away from its target, and the risk of this varies by design.
Peg — frequently asked questions
How is a one-to-one dollar peg actually maintained?
It depends on the design. Some issuers hold cash or similar reserves matching the tokens in circulation, while others rely on over-collateralised crypto or automated supply adjustments intended to keep the market price near the target.
Can a peg break permanently?
Yes, in principle. If the backing mechanism fails or confidence collapses faster than the system can respond, a pegged asset can trade persistently away from its target rather than recovering, though the specifics vary by design and by how the issuer responds.
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