A “peg” is a specified price for the rate of exchange between two assets.
A “peg” is a specified price for the rate of exchange between two assets. This is in direct contrast to “floating” currencies which have no hard price target and follow looser monetary policy.
In the usual global context of currencies, a peg allows foreign currencies to be traded for the chosen base currency at a fixed exchange rate. Some of the most common benefits of establishing a peg are to encourage trade between nations, to reduce the risks associated with expanding into broader markets and to stabilize macro-economic activity.
In the context of cryptocurrency, a peg refers to the specific price that a token is aiming to stay at. The majority-case use of a peg is for stablecoins; stablecoins are cryptocurrency assets that maintain their value over a long period of time. Notable examples include USDT, DAI and FRAX, all of which are pegged to $1. The dollar itself is “soft-pegged” to the consumer price index (CPI) which tracks a basket of goods.
Stablecoins maintain their peg through contraction or dilution of the total supply. The changes in the token supply will change the relative price of each token, until it reaches the desired peg. Collateralized stablecoins such as USDT and DAI are minted and burned as appropriate, with the newly minted tokens receiving collateral backing in the form of other digital assets.
Algorithmic stablecoins maintain their peg through a combination of collateralization and utilising complex smart contract algorithms that contract and expand the supply based on various market factors.
Author: Sam Kazemian, CEO of Frax
Sam Kazemian is the founder of FRAX, a fractional algorithmic stablecoin that is partially backed by collateral and stabilized algorithmically, and the only fractional stablecoin that has maintained its peg since its conception. FRAX is open-source and permissionless, bringing a truly trustless, scalable and stable asset to the future of decentralized finance.
Kazemian brings a wealth of experience as a leading blockchain entrepreneur and crypto enthusiast, as the co-founder of the blockchain based knowledge base, Everipedia. Kazemian’s crypto journey started at UCLA in 2013 where he began mining crypto in his college dorm room and today is a frequent guest lecturer at UCLA covering crypto, computer science and entrepreneurship.