In cryptocurrency, especially in the decentralised finance or DEFI sub-sector, pegged crypto or pegging crypto assets are increasingly popular as a way to deal with cryptocurrency’s long-standing problem of volatility.

In this article, Learn Crypto examines several topics for discussion related to pegging in crypto. You will learn:

What pegging refers to in a financial context, how the term was first used in traditional finance and why it was important.
What pegging means in crypto and how it works
Some examples of pegged crypto
What are the risks of pegged crypto?
Introduction
Before taking a look at what pegged crypto is and learning about how pegging works in the crypto context, it’s worth going back to basics to understand the main features of traditional pegging in economics. The expression “pegging” refers to the act of linking the value of a currency or an asset to the value of another currency or asset. thereby establishing a fixed rate of exchange. In other words, the economic expression of pegging is the practice of tying a state’s currency exchange rate to another state’s currency.

Many nations throughout history have used pegging to overcome problems of unpredictability in determining the value of a currency, particularly in times of high volatility. This is because, for trade and commerce to take place, a currency that keeps changing value makes it difficult to establish a stable price. Most countries that peg their currencies do so to promote trade and foreign investment – which is why goods and services are often priced against a pegged currency, usually one that is most accepted or recognised regionally or globally.

Currency pegging can be traced way back to the 18th century Gold Standard and the Bretton Woods agreement after the Second World War. Under the mentioned agreement, many Western states pegged their currencies to the United States dollar, and the United States pegged their national currency to gold.

To learn more about the Gold Standard and its significance, read this Learn Crypto article: “What was Executive Order 6102 & why is it relevant to crypto?”.

The practice is used by states’ central banks to provide stability to the state’s national currency by linking it to a currency with a higher degree of stability. For example, the United States dollar has been frequently used as a currency peg by many other nations, taking into account it is the world’s reserve currency. Hence, currencies such as the United Arab Emirates dirham (AED) and the Hong Kong dollar (HKD) are pegged to the US dollar (USD).