🔧 Peg Mechanisms: Fiat, Crypto & Algorithmic
Compare three approaches to maintaining stable value
Your Progress
0 / 5 completed⚙️ How Peg Mechanisms Work
Different stablecoin types use distinct mechanisms to maintain their $1.00 peg. Understanding these mechanisms reveals why some stablecoins are more stable than others.
🎮 Interactive: Arbitrage Simulator
Adjust the stablecoin price to see how arbitrage opportunities restore the peg:
Above Peg → Sell Pressure
1. Buy stablecoin at $1.050 from market
2. Redeem for $1.00 from issuer (if fiat-backed)
3. Result: $-500 loss on 10k coins
⚠️ Arbitrage doesn't work above peg for fiat-backed! Price corrects through selling pressure as holders realize overvaluation.
🔄 Interactive: 4 Peg Mechanisms
Click through each mechanism to understand how it works:
1. Fiat-Backed Redemption
Direct 1:1 redemption creates arbitrage bounds
USDC trades at $1.05? Buy $1M USDC for $1.05M → Redeem for $1M USD → Loss!
USDC at $1.05 → Arbitrageurs sell until price = $1.00
Real-World Example: USDC Peg Mechanism
Reserve Backing
Circle holds $1 in reserves for every USDC issued. Reserves audited monthly by Grant Thornton LLP. Stored in regulated US banks + short-term treasuries.
Minting Process
Authorized partners deposit $1M USD → Circle mints 1M USDC → Distributed on blockchain. Process takes minutes during business hours.
Redemption Process
Burn 1M USDC → Receive $1M USD to bank account. Available to authorized partners only. Creates arbitrage floor at $1.00.
Market Arbitrage
USDC drops to $0.998 on exchanges → Partners buy cheap USDC → Redeem for $1.00 → Pocket $0.002/coin profit → Buying pressure restores peg to $1.00.
Speed of Peg Restoration
- Fiat-backed (USDC): Seconds to minutes - direct redemption arbitrage
- Crypto-backed (DAI): Minutes to hours - liquidation mechanisms activate
- Algorithmic: Hours to days (or never) - depends on confidence in mechanism