Learn Cryptocurrency
24 May 2022

What Is Pegging and Depegging?

Deepan Datta

You’ve probably been hearing the terms “pegging” and “de-pegging” a lot after the recent crash. But what exactly do they mean?

What is Pegging?

The term “pegging” refers to the act of attaching the value of an asset or currency to another currency, usually in a 1:1 ratio. It is done so that the pegged asset mimics the price movements of the other asset/currency.

In the crypto market, the word pegging is associated with stablecoins. That’s because the value of stablecoins is attached to a particular currency or asset. For example, the value of USDT (Tether) is pegged to USD, meaning, the value of USDT is always $1.

The US Dollar is used as a currency peg for most stablecoins, but some of them are pegged to assets. For example, PAX Gold (PAXG) is pegged to one troy ounce of a 400-ounce London Gold Delivery (gold bar).

How is pegging achieved in a stablecoin?

There are two mechanisms through which a stablecoin is pegged.

  • Reserving: In this, pegging is achieved by maintaining the exact reserve of the attached fiat currency for the circulating stablecoin. When a stablecoin is backed by currency or asset, it is called a fiat-backed or an asset-backed stablecoin.
  • Algorithmically: An algorithmic stablecoin is not backed by any asset or cryptocurrency. Instead, it uses smart contracts to maintain the intended peg (fiat currency it tracks) of the token. It does this primarily by managing the supply of the stablecoin in circulation.

What is De-pegging?

De-pegging refers to the phenomenon of a stablecoin deviating from its intended peg. In the case of a stablecoin pegged to USD, for instance, if its value reduces below $1, the coin is said to be “de-pegged.”

When dep-pegging happens, it calls into question the effectiveness of the coin and its ability to maintain the intended peg. So for any stablecoin, it usually is a catastrophe.

Hope this has helped you understand what happened with Terra better?

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Deepan Datta

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