Understanding a Peg
A “peg” refers to a specified price set for the exchange rate between two assets.
In the context of currencies, a peg establishes a fixed exchange rate between a foreign currency and a chosen base currency.
This is in contrast to floating currencies, which do not have a set target price and instead follow looser monetary policies.
Exploring the Role of Pegs in Global Trade
The establishment of a peg offers several benefits in the global currency context.
It encourages trade between nations, reduces risks associated with expanding into broader markets, and stabilizes macroeconomic activity.
In the realm of cryptocurrencies, a peg refers to the specific price that a token aims to maintain.
This concept is commonly associated with stablecoins, which are cryptocurrency assets designed to maintain a consistent value over time.
Stablecoins maintain their peg by adjusting the total supply of tokens through contraction or dilution.
Changes in the token supply affect the relative price of each token until it aligns with the desired peg.
collateralized stablecoins like USDT and DAI are created and burned as needed, with newly minted tokens backed by collateral in the form of other digital assets.
Algorithmic stablecoins rely on a combination of collateralization and complex smart contract algorithms to maintain their peg.
The supply of algorithmic stablecoins expands or contracts based on various market factors, ensuring the stability of the token’s value.