What is a Pegged Cryptocurrency? – The Merkle

Cryptocurrency enthusiasts are always at the mercy of price volatility. This is especially true for altcoins right now, although Bitcoin is also going through some violent swings of its own. Some projects have even tried to create a pegged cryptocurrency, although efforts have been mostly unsuccessful as well. There is a good reason as to why that is, though.

As the name somewhat suggests, a pegged cryptocurrency indicates a coin, token, or asset issued on a blockchain that is linked to a specific value of a bank-issued currency. In most cases, these coins would be pegged to the US Dollar, as it is the one currency that dominates the entire financial sector. Tether has made some waves in this regard, as their USDT token is pegged to US$1 at all times.

It is vital to understand one cannot simply claim a coin or token is linked to the value of 1 US Dollar without enforcing this fact, though. To be more specific, the cryptocurrency project owners will need to have the specific amount of US Dollars in reserves at all times to guarantee the pegged value of their cryptocurrency. This becomes even more important when said cryptocurrency can be openly traded across multiple exchanges.

Holding vast amounts of US Dollars in reserve is one of the major challenges for pegged cryptocurrencies, though. There are ways to achieve this goal, either through investors or fundraising. The teams collect x amount of money and issue their number of tokens accordingly. However, this also means there will be no profit to be gained from buying or selling the currency since it will always have the same fiat currency value.

Even if the project would successfully maintain its 1:1 peg to the US Dollar for an extended period of time, they would face a new problem. Regulators do not take kindly to companies looking to link the value of a central bank-issued currency to something created out of thin air. It is safe to say one would need some specific paperwork and potentially even licenses in most countries to provide such a service. Additionally, the company needs to keep a public record of their assets at all times to ensure they have adequate reserves.

More importantly, there needs to be a decent enough demand for the pegged cryptocurrency to make it a worthwhile venture. This has been the downfall for quite a few projects attempting to guarantee such a service. Ziftr, for example, never gained much traction, despite their coins pegged to US$1. If the supply is greater than the demand, one would need very deep pockets to keep offering this service. Unfortunately, the money will dry up sooner or later in that case.

Even successful projects such as Tether run into problems of their own. Due to issues with their partner bank, they are unable to convert the pegged currency back to US Dollars for now. There are exchanges who provide a USDT/USD trading pair, yet the premium to convert back to USD is quite steep. All of this shows creating a pegged cryptocurrency is not evident by any means, and there will always be risks associated with doing so.

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What is a Pegged Cryptocurrency? - The Merkle