Have you ever wondered what does pegging mean in crypto or how pegged tokens hold their value? Maybe you’ve heard this term before, but you’re wondering which pegged cryptocurrencies are most popular.

If you want to find out the answers to these questions, take a look at our beginner-centric guide. In it, we’ll explain what pegging is and how pegged cryptocurrencies hold their value. We’ll also discuss the main risks associated with pegged cryptocurrencies.

What Does Pegging Mean?

The pegging definition can be described as the process of tying the market value of a cryptocurrency to the value of a real-world asset. This process aims to stabilize the price of the pegged cryptocurrency by tying it to an asset with a consistent value.

The pegging process can be soft and hard. Hard pegging refers to stabilizing the value of cryptocurrencies through fixed rates. On the other hand, soft pegging permits minor variations in the value of a pegged cryptocurrency or its pegged asset.

Cryptocurrencies can be pegged to fiat currencies, like the US dollar, and commodities, like gold. They can also use AI technology and smart contract-based algorithms to respond to market fluctuations. This is called AI pegging.

What Is a Pegged Cryptocurrency?

A pegged cryptocurrency is a token that’s pegged to the dollar, gold, or other real-world assets. This makes it an encryption-secured medium of exchange. A pegged cryptocurrency will mimic its underlying asset, meaning its value will always be equal to its pegged asset.

The main advantages of pegged cryptocurrencies include:

  • Maintaining price stability
  • Providing a reliable store of value
  • Increased crypto adoption
  • Providing access to traditional assets, such as real estate and gold

Pegged cryptocurrencies are less volatile than traditional cryptocurrencies. This stability makes them suitable for merchants that accept crypto payments. This mechanism is also used by stablecoins.

What Is a Pegged Exchange Rate?

A pegged exchange rate or a fixed exchange rate is a term used for cryptocurrencies whose value is tied to a commodity, fiat currency, or another cryptocurrency. The exchange rates for pegged assets usually stand at 1:1.

For example, if a cryptocurrency pegs its value to the US dollar at a 1:1 ratio, its price will equal $1.The same rule applies if a crypto is pegged to gold. In other words, the price of cryptocurrency pegged to gold will be equivalent to the cost of one gram of gold.

Best-Known Pegged Cryptocurrencies

Tether (USDT) is the most stable cryptocurrency that uses the pegging mechanism. USDT is tied to the US dollar at a 1:1 ratio. This means that 1 USDT will be worth $1. Other popular cryptocurrencies that are pegged to the US dollar include USD Coin, Binance USD, and TrueUSD.

You’ll also find cryptocurrencies pegged to the Euro, such as Euro Coin, Stasis Euro, and Ageur, and the British pound sterling, like the Pound token. On the other hand, the most popular cryptocurrencies pegged to commodities include PAX Gold, Digix Gold, and Palladium coin. The first two coins are pegged to gold, while the Palladium coin is pegged to the value of palladium.

Finally, the most notable cryptocurrencies pegged to other currencies, including sUSD and sEUR.

How Do Pegged Cryptocurrencies Hold Their Value?

Now that you know what pegging means in crypto, here’s how pegged cryptocurrencies hold their value:

  • Collateralization — To maintain their value, the reserves of the pegged token are kept safe. For example, USDT is backed by reserves of US dollars that are kept in the treasury.
  • Reserve management — This includes holding and deploying assets and conducting regular audits to confirm that reserves are adequately maintained.
  • Algorithmic adjustments — These algorithms automatically adjust the token supply based on the demand to maintain their value. Tokens that use these algorithms are called algorithmic stablecoins.
  • Arbitrage trading — Arbitrage trading can help pegged tokens maintain their value. Namely, if the price of the pegged token deviates from its target value, traders will buy/sell assets until their price returns to the intended pegged value.

Different Types of Pegged Cryptocurrencies

Pegged cryptocurrencies can be divided into different types based on their pegging mechanism:

  • Collateralized stablecoins. These coins are backed by collateral. Examples of collateralized stablecoins are USDT, USDC, and DAI.
  • Algorithmic stablecoins. These coins use algorithmic adjustments and smart contracts to maintain value and control their token supply. Examples of algorithmic stablecoins include LUNA and AMPL.
  • Fiat-backed stablecoins. These coins are backed by fiat currencies, such as the US dollar, whose reserves are kept in banks. Examples of these stablecoins include USDT, USDC, and BUSD.
  • Crypto-backed stablecoins. These types of tokens are backed by another cryptocurrency. Examples of crypto-backed stablecoins include Synthetix.

Pegged vs. Backed Crypto

These two terms have almost identical meanings. Pegged cryptocurrencies are tied to another asset at a 1:1 ratio. Their goal is to maintain the stability of their pegged value. On the other hand, asset-backed cryptocurrencies are coins backed by a tangible asset, such as traditional financial instruments or real-world commodities. The goal of these coins is to digitize real-world assets, that is, to enable them to be stored on the blockchain.

Asset-backed tokens are also a new generation of digital assets. They are characterized by security, stability, and liquidity. Moreover, if their price falls below their real value, traders will still be able to cash out their tangible assets.

Pegged Crypto Risks

The main disadvantages of pegged cryptocurrencies include:

  • The risk of de-pegging. Depegging occurs when the value of a digital asset deviates from its pegged value. Cryptocurrencies can become unpegged due to regulatory and liquidity issues. De-pegging can also occur during unfavorable market conditions.
  • Lack of transparency. Pegged cryptocurrencies must conduct regular audits to prove that their reserves adequately maintain the peg. Moreover, developers have to hold large collateral to back their pegged cryptocurrencies, which can be challenging. Some companies even invest their reserves in corporate debt without notifying their customers.
  • Dependency on external factors: The value of pegged cryptocurrencies will depend on many external factors, such as the value of their pegged assets and crypto regulation laws.

Conclusion

So, what does pegging mean in crypto? Pegging is a process of linking the value of cryptocurrencies with the value of real-world assets, such as fiat currencies and commodities. Pegged tokens can also be tied to another cryptocurrency, as with Synthetix.

Pegging aims to maintain price stability, provide a reliable store of value, and increase crypto adoption. Pegged tokens use a 1:1 ratio, meaning their price will be equal to the price of their pegged asset. The most notable pegged cryptocurrencies include USDT, USDC, and PAX Gold.