What Does Pegged Crypto Means?

Pegged cryptocurrency is also known as a digital currency whose value is tied to some other medium of exchange. What is crypto pegged to? Today, we’ll try to clarify this issue.

If we go a little deeper into the terminology, pegged cryptocurrency is in direct contrast to floating currencies (i.e., one that has no fixed price or value tied to other asset). A pegged cryptocurrency is an encryption-secured currency whose value is directly linked to any other asset (e.g., gold, or a country’s national currency). 

Most pegged cryptocurrencies are tied to the U.S. dollar as it is the world’s dominant currency. All pegged cryptocurrencies are called stablecoins. For example, Tether’s USDT is always worth $1. At times of high crypto market volatility, users can sell their floating tokens (BTC, ETH, WBT) for pegged tokens (USDT, DAI, USTC), which are hardly affected by volatility since their price is linked to the value of the underlying asset. 

Stablecoins also allow market participants to invest in off-chain assets (assets that do not run on a blockchain, such as gold) within the DeFi protocol. Stablecoins also allow traders to use assets from one blockchain in another. Wrapped Bitcoin (WBTC), for example, is a stablecoin representative of Bitcoin that allows using a synthetic bitcoin  on the Ethereum blockchain.

It is a cryptocurrency that is backed by fiat reserves. Fiat currencies are national currencies issued by central banks, such as the U.S. dollar, the British pound, and the euro. As of 2022, the top three fiat-backed stablecoins by market capitalization are Tether, Binance USD Coin (BUSD) and USD Coin (USDC).

 The most popular token is Wrapped Bitcoin (WBTC), a token designed to represent bitcoin (BTC) on the Ethereum blockchain. Wrapped Bitcoin reserves are held in vaults operated by custodians (depository banks that hold securities and other financial assets). Other cryptocurrency-backed stablecoins, such as renBTC, are stored in vaults managed by smart contracts. 

 Fiat currencies are not the only off-chain assets that can collateralize cryptocurrency. Other assets include gold (e.g., Tether Gold and Paxos Gold) or tokenized stocks (tokens tied to stocks) 

They are backed by other crypto assets, but not linked to their reserves. Simply put, the peg is determined by the software code linked to another cryptocurrency rather than holding the cryptocurrency in a vault. For example, the DAI stablecoin maintains its peg to the U.S. dollar through collateralized loans in coins such as Ether, Bitcoin, and fiat-backed stablecoins (USDC, USDT, etc.).

Stablecoins are a very useful tool in the cryptocurrency market, but they do come with their own risks. Algorithmic tokens may fail to maintain their peg when a market crash occurs, and unaudited stablecoins might not be backed by the reserves declared by their issuers. A minimal project analysis can keep you safe from losses, especially during periods of high volatility in 2022.