How Stablecoins Use Pegging to Maintain Their Value
Pegging is the mechanism that keeps stablecoins tied to their benchmark, such as the US dollar. Most pegged assets are built to hold a one-to-one ratio with their benchmark, but some track a basket of assets or a fraction of one.
The most common setup is a fiat-backed model, where an issuer holds cash or cash-equivalent reserves matching the number of tokens in circulation. USDT and USDC are examples of this type.
Crypto-collateralized pegs use other digital assets locked into smart contracts as backing, while commodity-backed tokens tie to physical assets like gold held in vaults. Algorithmic models expand or shrink token supply based on demand, but this method is riskier since it relies on market confidence rather than tangible reserves.
Arbritrage plays a key role in keeping pegs honest by correcting price discrepancies when they occur. If a dollar-pegged token slips to $0.99, traders can buy the token at that discounted price and redeem it for $1.00 worth of underlying reserve, pocketing the difference.