A "peg" is the set price of the exchange rate between two assets. This is in direct contrast to "floating" currencies, which have no fixed price target and follow a looser monetary policy. In this article, we will explain "What is peg in currency?" and "What is peg in crypto?"
What is peg in currency?
In the normal global context of currencies, you can trade foreign currencies against your chosen base currency at a fixed exchange rate. Some of the most common benefits of establishing bonds are to facilitate trade between nations, reduce the risks associated with expansion into broader markets, and stabilize macroeconomic activity.
What is peg in crypto?
In the context of cryptocurrencies, a peg refers to a specific price at which a token is held. Most cases where pegs are used are stablecoins.
Stablecoins are cryptocurrency assets that maintain their value over time. Notable examples include USDT, DAI, and FRAX, all pegged to $1.
The dollar itself is "loosely" pegged to the consumer price index (CPI), a basket of commodities. Stablecoins maintain their pegs by shrinking or diluting the overall supply.
Changes in token supply will cause the relative price of each token to change until the desired binding is reached. Collateralized stablecoins such as USDT and DAI are issued and burned as needed, with newly issued tokens receiving collateral in the form of other digital assets.
Algorithmic stablecoins maintain their pegs through a combination of collateralization and the use of complex smart contract algorithms that shrink and expand supply based on various market factors.
I hope now you have a clear vision of the cases "what is peg in crypto and currency?".
