Peg
Basic Information
A ‘peg’ refers to the linking of a cryptocurrency's market value to an external reference point, such as a fiat currency, other crypto asset or commodity. The goal is to minimize volatility and ensure that the pegged price closely tracks the market price at which trades are actually being executed. Cryptocurrencies are most commonly pegged to the US dollar because it is a dominant and stable fiat currency, but they can also be pegged to other currencies or commodities. Pegging a cryptocurrency helps to stabilize its value and ensure that it is suitable for real-world transactions, such as purchases or payments.
Pegged Crypto Assets
How Pegged Crypto Assets Maintain Their Value
Unlike BTC, ETH, and other common cryptocurrencies, a pegged cryptocurrency is designed to maintain a stable and less volatile value.
It maintains its peg in one of three ways:
- maintaining a reserve of cash (fiat) or assets of the same value - the value of these assets roughly corresponds to the total value of the stablecoin in circulation
- maintaining a reserve of cryptocurrencies with a larger total value than the stablecoin, in order to offset the volatility of the reserve cryptocurrency
- a pegged cryptocurrency can function as an algorithmic stablecoin
- a pegged cryptocurrency can function as a seigniorage token (one that is maintained by algorithms that increase or decrease the total supply in order to maintain stable value)
Examples of Pegged Assets
- USDT (Tether) - Tether is the most widely used stablecoin, and is pegged to the USD
- DGX (Dixi gold) - the Dixi Gold token is pegged to 1 gram of gold and backed by gold
PROs
- Value transfer
- Digitization
CONs
- Government regulation
- Market risks
Analyst opinion
Pegged tokens are an excellent option if you don't want to leave the crypto world but want access to other assets, such as gold. One very good example is the DGX token, which tracks the price of 1 gram of gold. This means you don't have to buy physical gold or gold ETFs, but can still have a "hedge" in the precious metal. However, always be careful that pegged tokens are backed before investing in them. It is important to Do Your Own Research (DYOR) on the company that manages the token to ensure that adequate resources and mechanisms are in place to cover the token's value.
The same applies to algorithmic stablecoins and seigniorage protocols, which have suffered a hit in terms of user trust since the UST crash in 2022. Typically, these tokens have a fixed supply and demand flow, and use algorithms to regulate their supply in order to stabilize the price. However, this approach has its risks and can be prone to rapid and significant price fluctuations. Therefore, it is important to perform careful risk and predictability analysis before investing.
Analyst
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