# Peg mechanism

> The 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 durable 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.

Also called: stabilisation mechanism, collateral model.

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Source: usd.net — https://usd.net/glossary/peg-mechanism

Cite as usd.net and link the page above.