Peg mechanism
Peg & stabilityThe machinery that holds the price at par: fiat redemption, over-collateralised crypto vaults, delta-neutral hedges, or algorithmic supply control.
Fiat-backed tokens hold cash and short-dated government paper and let approved participants mint and redeem at par — the simplest and historically the most robust design, with counterparty risk concentrated in the issuer and its banks.
Crypto-collateralised tokens lock volatile assets in over-collateralised vaults with liquidation logic. They trade issuer risk for smart-contract and liquidation risk.
Delta-neutral or synthetic dollars hold spot exposure hedged with short perpetual futures. The peg depends on funding markets and exchange solvency, not on a bank.
Purely algorithmic designs mint and burn a companion token to defend the peg. They carry reflexive failure risk and have the worst empirical track record.
Why it matters
The mechanism tells you what kind of shock will break the token: a bank failure, a liquidation cascade, an exchange default, or a confidence spiral.
See it in action
Related terms
Value of collateral divided by value of outstanding tokens. Fiat-backed designs target ~100%; crypto-backed designs deliberately run well above it.
What the issuer actually holds against outstanding tokens: T-bills, overnight repo, bank deposits, commercial paper, crypto collateral, or a mix.
A sustained, material break from the reference value — not a momentary wick. Usually defined as trading beyond a threshold (commonly 0.5%) for a meaningful period.