What does pegging mean in crypto?
Main properties of crypto peg assets. Their features and types. Stablecoins and where they are used.
From English, "peg" is translated as binding/tying; this is where the meaning of "pegged cryptocurrency" comes from - "pegged cryptocurrency." But what is she tied to? We will answer this question today.
What is a peg in crypto? You should go deeper into the terminology. In that case, a "pegged" cryptocurrency is the exact opposite of a "floating" cryptocurrency (i.e., one that does not have a fixed price or binding to any asset). A "pegged" crypto is a cryptographically protected currency, the cost of which is directly correlated with the price of any other asset (for example, gold or the national currency of a country). In this article you know what does pegging mean in crypto.
Introduction to Pegging in Crypto
What is a peg in crypto? Most pegged cryptocurrencies are pegged to the US dollar as it is the dominant global currency. All "pegged" cryptocurrencies have a common name - stablecoins. For example, Tether's USDT stablecoin holds the same value as $1. During periods of high volatility in the crypto market, users can sell their "floating" tokens (BTC, ETH, WBT) for "pegged" tokens (USDT, DAI, USTC), which are almost not affected by volatility since their price is "pegged" to the value of the underlying asset.
Definition and Concept of Pegging in the Crypto Market
Stablecoins also allow market participants to invest in off-chain assets (assets that do not have a blockchain, such as gold) under the decentralized finance (DeFi) protocol. Also, stablecoins allow traders to use assets from one blockchain network to another. For example, wrapped Bitcoin (WBTC) is a Bitcoin stablecoin that allows holders to use "synthesized Bitcoin" already on the Ethereum network.
Understanding Stablecoins: The Most Common Form of Pegged Cryptocurrencies
It is a cryptocurrency that is backed by monetary reserves. Fiat currencies are national currencies issued by central banks, such as the US dollar, British pound, and euro. As of 2022, the top three fiat-backed peg crypto meaning by market capitalization are Tether, Binance USD Coin (BUSD), and USD Coin (USDC).
What does peg mean in crypto? The most popular variant of such a token is Wrapped Bitcoin (WBTC), which represents Bitcoin on the Ethereum blockchain. Wrapped Bitcoin reserves are stored in vaults managed by custodians (depository banks that store securities and other financial assets). Other crypto-backed stablecoins, such as BTC, are stored in vaults managed by smart contracts.
Pegging to Fiat Currencies: Stablecoins Tied to Traditional Money
What does pegged mean in crypto? Stablecoins are a very useful tool in the cryptocurrency market but are not without risks. Algorithmic tokens may not be able to maintain their peg in the event of a market crash, and stablecoins that do not pass the required number of audits may not be backed by the reserves declared by their issuers. A minimal analysis of the project can protect you from losses, especially during periods of high volatility in 2022.
Different Types of Pegged Cryptocurrencies
Algorithmic Stablecoins: Pegging to Mathematical Formulas and Algorithms
The stablecoins are algorithmic stablecoins, which have become a major part of the DeFi 2.0 era. Algorithmic stablecoins rely on an algorithm (or smart contract) to determine the relationship between the stablecoin and the asset they are pegged or pegged to. They are trying to use a set of mechanisms to absorb the price volatility of the stablecoin.
Some algorithmic stablecoins may be under-collateralized. You may have seen Terra stablecoins hit the news in 2022 as their demise was due to the tokens not being fully collateralized, demonstrating the importance of collateral!
Collateralized Stablecoins: Backing by Assets or Reserves
Collateralized stablecoins function similarly to fiat money when linked to the gold standard. Just as cash used to be backed by gold reserves at the central bank, backed stablecoins are one-for-one backed by reserves of the currencies they are peg crypto meaning to. In the case of many highly volatile cryptocurrencies, collateral ensures that the price of stablecoins remains relatively stable despite factors such as a crisis of confidence.
Hybrid Stablecoins: Combination of Algorithmic and Collateralized Approaches
Issuers of tokens such as DAI, one of the most popular fully backed algorithmic stablecoins, "tokenize" dollars by exchanging them for stablecoins and depositing US dollars in a bank at a 1:1 rate. Those dollars then remain untouched until someone buys back the stablecoin.
Mechanisms and Benefits of Pegging in the Crypto Space
What is peg in crypto? The concept of pegging offers some benefits for both users and the cryptocurrency market as a whole:
Stability and Reduced Volatility: Advantages of Pegged Cryptocurrencies
- Price stability: Peg crypto provides stable savings by reducing the risks of sudden price fluctuations. This stability attracts more users and companies to use these assets for day-to-day transactions.
- Reduced volatility: By tying a cryptocurrency to a stable asset, the extreme price fluctuations commonly seen in the cryptocurrency market can be mitigated, making it a more reliable medium of exchange.
Facilitating Trading and Transactions in Crypto-to-Fiat Pairs
Facilitating international trade: Peg crypto facilitates cross-border transactions as users can avoid exposure to currency exchange rate fluctuations and remittance delays.
Summary
In conclusion, the peg crypto plays a critical role in addressing the volatility issues that have long been associated with cryptocurrencies. By linking the value of digital assets to stable external assets, pegging provides a more predictable and trusted environment for users and businesses. However, issues related to centralization and potential attacks need to be addressed as the concept develops further.
