What Does Pegging Mean In Crypto?

Pegging is an important term when it comes to economics and it is very important to get to know the concept in the field rather than jumping right into pegging in crypto. According to different sources, in simple words, Pegging is the process of linking or tying the exchange rate of a State’s currency to another state’s currency.

Pegging has been done by different countries in the world over time and is mainly done in order to avoid the problems associated with the unpredictability in determining the value of a currency, especially during times of high volatility. Foreign trade and foreign investment are a few of the different reasons why countries peg their countries. 

This is not a new concept and it can be traced back to even the 18th century too. One of the best examples of the case is the United States dollar, to which the majority of the countries have pegged their currencies and the United States has pegged its currency to gold. The concept is also applicable in the field of cryptocurrencies and that is what we will be looking into through this article. 

What does Pegging mean in Crypto?

Pegging in crypto can be seen as an extension of the traditional economic expression of the term. A pegged cryptocurrency refers to an encryption-secured digital medium of exchange whose values are linked to another medicine of exchange. This can be any, as per the choice, and gold and national currencies are two of the major choices.

In simple words, it can be a token, coin, or an asset, that is linked to a fiat currency that is issued by any bank. In the majority of cases, cryptocurrencies also follow the traditional trend in economics where most currencies are pegged to the United States dollar to ensure their stability.

The popularity and acceptance of the American dollar in international transactions is another reason for this.  One of the major reasons for tying a digital currency with another stable asset or currency is to avoid the issues or problems of fluctuations of the values which could seriously affect the person who is holding these currencies or is using them to trade.        

Different Types of Pegged Cryptocurrencies

There are different types of pegged cryptocurrencies and they are different from each other in terms of the mechanism that they use to maintain the peg. Here are some of the major types of pegged cryptocurrencies. 

Are Pegged Cryptocurrency Safe?

Cryptocurrencies are usually preggo to take away the normal issues and risks that are associated with them. But even so, there are different cases where pegged cryptocurrencies are often blamed for different risks, where the major one is being left largely unregulated.

This issue of being left unregulated was only taken seriously since the emergence of different pegged crypto scandals. Another issue that should be kept while pegging crypto is the extent of its dependence on external factors. 

The stability of the pegged asset or the effectiveness of the pegging mechanism to affect the currency. Along with these mentioned issues, the different changes that take place in the market affect pegged cryptocurrencies. Maintaining the peg can be quite challenging when the market is under extreme stress.    

Conclusion

Cryptocurrencies have been in circulation for quite a long and during the initial days, many people were not quite sold on the idea and they seemed to avoid it too. People were often concerned about the downside of these currencies which were the uncertainty and market volatility and crypto pegging can be seen as a solution to these issues without having the regulations that are present in traditional finance.

Even though pegging keeps away different risks, there are also a few risks associated with pegging. But from expert opinions and available data more and more pegged cryptocurrencies are expected to emerge in the future.