Peg

Pegs are most commonly used in stablecoins. A pegged asset is designed to mirror the value of another, allowing users to benefit from stability while remaining in the crypto ecosystem.

There are several common types of pegs:

• Fiat-collateralized: The token is backed 1:1 by reserves held in a bank account (e.g. USDT, USDC).
• Crypto-collateralized: Over-collateralized with digital assets like ETH or BTC (e.g. DAI).
• Algorithmic: Uses smart contracts to manage supply and demand without direct collateral (e.g. UST, now defunct).

A stable and well-maintained peg is essential for the usability of stablecoins in DeFi lending, trading, and payments.

🔑 Key Characteristics Include:

• Fixed or target value relative to another asset
• Mechanism may be collateral-based, algorithmic, or hybrid
• Central to stablecoins, synthetic assets, and wrapped tokens
• Requires market confidence and sustainable design to maintain

🏛 Example 1: USDT (Tether)

Backed by cash-equivalent reserves, USDT maintains a 1:1 peg to the US dollar and is widely used across centralized and decentralized exchanges.

🏛 Example 2: DAI

A decentralized, over-collateralized stablecoin pegged to USD. DAI adjusts parameters via governance to sustain its peg during market volatility.

🏛 Example 3: TerraUSD (UST)

An algorithmic stablecoin that attempted to maintain a 1:1 dollar peg using a dual-token system. The model collapsed in 2022, breaking the peg and triggering a systemic failure.

📚 References

1. CoinMarketCap – Peg
2. TechTarget – Pegged Cryptocurrency Definition
3. Binance Academy – Why Do Stablecoins Depeg?
4. Bitpanda Academy – Stablecoins: Definition and Explanation
5. Investopedia – Stablecoin

⚠️ Controversies & Misconceptions

• “All stablecoins are actually stable” — not true; many have lost their peg temporarily or permanently
• “Algorithmic pegs are safer” — they are more fragile without collateral backing
• “Depegging is rare” — it’s increasingly common during liquidity shocks or governance failures

🚀 Conclusion

Pegs are the foundation of most stablecoins and wrapped assets in DeFi. While they enable stability and composability, not all pegs are equal. Understanding what backs a peg — and how it’s maintained — is essential for risk-aware participation in DeFi.

Related Terms

• Stablecoin

  A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging its worth to a reserve of assets, such as fiat currencies like the U.S. dollar, commodities like gold, or a basket of assets. This stability allows stablecoins to be widely used for transactions, trading, and decentralized finance (DeFi) applications.

• DAO (Decentralized Autonomous Organization)

  A Decentralized Autonomous Organization (DAO) is a community-led organization governed by smart contracts and token holders. DAOs operate without centralized leadership, enabling decentralized decision-making and resource allocation.

• DeFi

  DeFi, or Decentralized Finance, refers to a financial ecosystem built on blockchain technology that operates without traditional intermediaries like banks or brokers. Instead, DeFi uses smart contracts on public blockchains—primarily Ethereum—to offer services such as lending, borrowing, trading, and earning interest.