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Pegged Meaning

In finance and crypto, being pegged means that the value of one asset is tied or linked to the value of another. A currency peg is a policy where a government or a protocol fixes the exchange rate of its token to a stable benchmark, such as gold or the USD. This provides predictability for international trade and prevents the wild price swings that can ruin an economy or a trading strategy.In the blockchain world, we often talk about wrapped or pegged assets.

For example, WBTC (Wrapped Bitcoin) is an Ethereum token that is pegged 1:1 to the price of real Bitcoin. This allows users to use their Bitcoin-value inside the Ethereum DeFi ecosystem while the actual BTC is held in a vault by a custodian.

For every 1 WBTC on Ethereum, there must be exactly 1 BTC held in the vault; if this ratio breaks, the asset is no longer pegged.Technically, a peg is an economic promise backed by a mechanism. Whether it’s a central bank intervening in the Forex market or a smart contract liquidating collateral, the goal is the same: to ensure that the market price stays within a very narrow band around the target value.

Most pegs are hard pegs aiming for an exact number, while some are crawling pegs that slowly change over time to account for inflation.The risk of any pegged asset is the break of the peg. History is full of examples of broken pegs, such as when the UK was forced out of the European Exchange Rate Mechanism in 1992.

In crypto, wrapped assets carry counterparty risk; if the custodian holding the vault is hacked or goes bankrupt, the pegged token you hold on the other chain becomes worthless. Therefore, the security of the peg is only as strong as the transparency and solvency of the mechanism backing it.

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