Pegs are held in place by a mechanism, and the mechanism tells you most of what you need to know. Some tokens are backed by cash and short-term instruments held by an issuer who promises to redeem one token for one unit of currency. Some are backed by other crypto locked up in excess, so that falling collateral triggers <a href="/glossary/liquidation/">liquidations</a> that defend the ratio. Some rely purely on an algorithm and market incentives, with no reserve at all.
In calm conditions arbitrage traders do the enforcing: if the token drifts below its target they buy and redeem, and the gap closes. That loop depends entirely on confidence in redemption. Once traders doubt the reserves, or the collateral falls faster than it can be liquidated, the same loop runs in reverse. Depegs are notoriously abrupt — they tend to unfold over hours rather than weeks, often when liquidity is thinnest. Purely algorithmic designs are the most fragile, because belief is the only thing holding the peg up.
So read a peg as a claim to be checked, not a guarantee. Look at what actually backs it, whether ordinary holders can redeem or only a few large partners can, who has the power to freeze or blacklist balances, and how deep the trading pairs are. Note too that a <a href="/glossary/cbdc/">central bank digital currency</a> is not a pegged token at all — it is the currency itself in digital form.
Stablecoins and Their Risks
Key takeaways
- A peg is only ever as strong as the mechanism and the reserves standing behind it.
- Depegs move fast and usually when liquidity is thinnest, so there is rarely time to react calmly.
- Check who can genuinely redeem at par; a redemption right limited to a handful of large partners is weaker protection than it sounds.
Peg — frequently asked questions
Does a small deviation from the peg mean something is wrong?
Not necessarily. Pegged tokens trade in real markets and drift slightly as buying and selling pressure shifts across venues, and arbitrage usually pulls them back within a narrow band. What matters is how large the gap is, how long it lasts, and whether redemption is still functioning normally. A persistent and widening gap is the signal worth taking seriously.
Are all pegged tokens backed by cash?
No, and the differences matter a great deal. Some hold cash and short-term government debt with an issuer that publishes reserve reports. Others are over-collateralised with volatile crypto and defend the peg through automatic liquidations. A few hold no reserves at all and rely on incentives alone. Read the issuer's own documentation to find out which model you are actually holding.
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