Pegged Asset Definition in Crypto

A pegged asset is a cryptocurrency whose value is linked to another asset, helping it keep a steady relationship with that asset. In practice, this means the pegged token usually rises or falls along with whatever it is connected to, such as a fiat currency or a commodity.

How pegging works

Projects set up a peg by offering a way to convert the token back to the asset it tracks, or by using rules that automatically adjust the token supply. Some projects keep reserves of the asset and let users exchange tokens for those reserves. Others use smart contracts and market incentives so supply and demand help keep the token near its target price. If the system fails, the token can lose its link and 'depeg.'

Common types of pegs

• Fiat-pegged: Tokens that aim to match the price of government money, usually at a fixed ratio like one-for-one.
• Crypto-collateralized: Tokens backed by other cryptocurrencies instead of fiat. These often use over-collateralization to absorb price swings.
• Commodity-pegged: Tokens whose value mirrors physical goods such as gold or other commodities.
• Algorithmic: Tokens that use code rules to expand or shrink supply so the market price stays close to the target.

Mechanisms used to keep the peg

Projects use several practical methods to keep a peg. One way is to hold liquid reserves and let users exchange tokens for the reserve asset. Another method is to lock collateral in smart contracts and let traders take advantage of price differences. Algorithmic systems adjust the token supply automatically if the price moves away from the target. Some projects combine these methods for extra safety.

Why projects peg tokens

Pegging helps make a token more useful as a stable store of value, a way to measure prices, or a tool for payments. Pegged tokens are also important in decentralized finance, where having a steady value makes lending, borrowing, and pricing other assets simpler. Pegs can attract users who prefer less price volatility.

Common risks and failure modes

A peg can fail for different reasons. If reserves are less than promised or hard to access, users might rush to redeem tokens and cause a crash. Algorithmic systems can break if markets move quickly and supply changes cannot keep up. Low liquidity, sudden market stress, bugs in smart contracts, and loss of trust all make a peg weaker. Regulation and custody issues add more risk for pegs managed by central parties.

How to check a pegged asset

Check if the project can really provide the backing or system it claims. Good signs include clear rules for redeeming tokens, regular audits of reserves, public proof of collateral on the blockchain when possible, strong liquidity on exchanges, and open governance. It also helps to look at past depegging events and how the team responded.