Peg

A peg is the fixed target value a stablecoin aims to track, most commonly one US dollar per token, though pegs to the euro, gold, and other assets exist. The peg is not enforced by decree; it is maintained by a mechanism that gives market participants an incentive to trade the token back toward its target whenever the price drifts.

How the peg is defended depends on the design. For a fiat-backed stablecoin like USDC, the anchor is redemption: authorized parties can always exchange one token for one dollar with the issuer, so if USDC trades at 0.998 on an exchange, arbitrageurs buy it and redeem it for 1.000, pocketing the difference and pushing the price back up. Crypto-backed designs like DAI use overcollateralized vaults and interest-rate levers, while algorithmic designs rely on supply adjustments.

A common misconception is that the peg itself is a guarantee; a peg is only as strong as the mechanism and assets behind it, and every stablecoin trades slightly above or below its target from moment to moment. The useful questions are who can redeem at the peg, how quickly, and what assets back that promise. Currency pegs long predate crypto — many countries have pegged their currencies to the dollar — and crypto pegs inherit the same lesson: pegs hold until the defense runs out of resources or credibility.