Soft Peg Meaning

A Soft Peg is a mechanism where a stablecoin's value is intended to stay close to a target price (usually $1) but is allowed to fluctuate within a narrow, pre-defined range. Unlike a "Hard Peg"-which might use direct "One-to-One" backing-a soft peg often relies on "Algorithmic Incentives" or "Market Operations" to keep the price stable.The technical mechanism involves "Expansion and Contraction" of the supply.

If the price is $1.02, the protocol might issue new tokens to increase supply and push the price down. If the price is $0.98, the protocol might offer a "Discount" to users who "Burn" the token, reducing supply and pushing the price up.

This "Elasticity" allows the coin to absorb market shocks without "Breaking" the peg entirely.The danger of a soft peg is the "Death Spiral." If the market loses confidence and the price drops below a certain "Support Level," the algorithmic incentives might fail to attract enough buyers to restore the peg.

This was famously seen with the collapse of Terra (UST), proving that "Soft Pegs" require a massive amount of "Collateralization" or "Trust" to survive during periods of extreme market panic.