A pegged currency promises to trade at a fixed rate against something else. The UAE dirham has been pegged to the US dollar at about 3.67 for decades. Stablecoins make a similar promise: one token, one dollar.
A peg is not a law of nature. It holds because someone stands ready to swap at the promised rate, and because the market believes they can keep doing it. For a stablecoin that means reserves that can be redeemed. When doubts about those reserves appear, holders rush to sell before others do, and the price drifts below the peg. A peg is exactly as strong as the reserves and the redemption standing behind it.
💬 Have you ever watched a stablecoin trade off its peg? What happened next?
Binance Academy covers this in more depth: https://www.binance.com/en/academy/glossary/pegged-currency
Next lesson: Proof of reserves: what it proves, and what it doesn't
Trading crypto from Dubai since 2019.
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