Peg

A peg establishes a target exchange rate that an asset is designed to hold against a reference value, and the concept predates crypto by decades: central banks have long pegged national currencies to the US dollar or gold to keep trade and prices predictable. Blockchain systems borrow the same idea but replace central bank intervention with smart contracts, reserve custodians, or algorithmic rules.

Most crypto pegs fall into one of three designs. Fiat-backed stablecoins such as USDC and USDT hold cash and short-term Treasury bills equal to the tokens in circulation, and authorized participants can mint or redeem them 1:1 with the issuer, an arbitrage loop that pulls the price back toward the target whenever it drifts. Crypto-collateralized stablecoins like DAI require users to lock more value in ETH or other assets than the amount minted, often 150% or more, so the buffer can absorb price swings before the peg breaks. Algorithmic designs, which try to hold a rate through incentives alone rather than reserves, have proven far less reliable; TerraUSD's 2022 collapse remains the starkest example. Pegs also appear outside stablecoins, such as wrapped tokens built to mirror the price of an asset on another chain.

Not every peg is enforced with the same strictness. A "hard" peg promises exact redemption at all times, while a "soft" peg tolerates small, temporary deviations from the target. When market stress, a rush of redemptions, or a flawed mechanism pushes the price meaningfully away from its anchor, the result is called a depeg, an event that can range from a brief wobble to a permanent loss of value.