A Beginner's Guide to Pegged Currencies
A pegged currency reduces fluctuations in its value by referencing another currency, a commodity, or a group of currencies. Monetary authorities generally take measures to maintain the target level, and stablecoins also use this principle.
What a pegged currency is
A pegged currency references another currency, a commodity, or a group of currencies instead of allowing its value to fluctuate entirely with the market. A government or monetary authority establishes this mechanism mainly to limit excessive fluctuations in the domestic currency and make exchange-rate movements and cross-border economic activity more predictable.
How a peg is maintained
When the currency's value deviates substantially from the target, a central bank or monetary authority generally intervenes in supply and demand by buying or selling domestic and foreign currency. If the domestic currency weakens, for example, the authority can use foreign exchange to buy it and support its price. Intervention requires suitable resources and institutional support, and a peg does not mean the exchange rate can never deviate.
Common types of pegs
A fixed exchange rate locks a currency's value to a single foreign currency such as the US dollar or EUR. A crawling peg allows the target level to adjust gradually over time in response to changes in the economy or reference currency. A currency-basket peg references several foreign currencies at once to reduce dependence on any single currency.
Uses and risks in stablecoins
Stablecoins apply the pegging concept to crypto assets and seek to track the value of fiat currency or another asset. One category of algorithmic stablecoin discussed in the source mainly relies on smart contracts and algorithms to adjust supply and demand rather than on fully backed reserves. Such mechanisms have suffered severe depegging. Whether a particular project has reserves and how it maintains its peg must be assessed from its specific design.
Original tutorial
https://www.binance.com/zh-CN/academy/glossary/pegged-currency
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