What it means for stablecoins to be ‘pegged’
One of the key features of stablecoins is their ability to be pegged to a specific asset or basket of assets, providing them with stability.
This post will delve into what it means to be pegged to something and why this is such an important feature.
The most common pegs are fiat currencies such as the US dollar, the Euro or GBP Sterling, but other assets, such as commodities like gold or oil, can be used. This is done so that even in the face of market volatility, the value of the stablecoin remains relatively stable. With this stability comes predictability which is key for transactions, savings, and investments.
Their prices are often kept steady by maintaining reserve assets as collateral or through algorithmic formulas designed to control the supply. Historically, algorithmically-oriented stablecoins have been the ones to ‘de-peg’. The most infamous example was that of the UST/USD de-pegging that occurred in May of 2022, which was caused by a massive influx of UST selling.
Furthermore, pegging to a widely-recognized and trusted asset such as fiat currencies gives stablecoins a level of credibility that other cryptocurrencies often lack. This is because fiat currencies are backed by central banks that are widely recognized and trusted. By linking their value to a fiat currency, stablecoins can offer users a level of security and steadiness they may not otherwise have.
There are several types of ways stablecoins can be pegged, including:
- Fiat currency: These are stablecoins linked to a single fiat currency. This type of peg again offers the neutrality associated with such currencies.
- Commodity: These are stablecoins linked to a commodity such as gold, silver or oil. This form of peg provides stability by linking the value of stablecoin to a tangible asset that is in limited supply and, therefore, less likely to experience sudden price swings.
- Baskets: These are stablecoins linked to a basket of assets, such as a combination of fiat currencies and commodities. This combines the benefits of both collateral forms and
Pegging is a critical feature of stablecoins as it provides them with a means to associate their value that is not prone to high volatility. This makes it easier for potential users to know what their money will be worth now and is likely to be worth in the future.
You can find out more about Poundtoken’s own reserves for the GBPT stablecoin here. For more information, visit our complete guide to stablecoins.