How Do Arbitrage Opportunities Help Maintain the Price Peg of a Synthetic Asset?

Arbitrage opportunities are the primary mechanism for maintaining a synthetic asset's price peg to its real-world counterpart. If the synthetic asset trades above its peg, an arbitrageur can mint the synthetic asset cheaply (by collateralizing) and sell it on the open market for a profit, increasing supply and pushing the price down.

If it trades below the peg, the arbitrageur can buy the cheap synthetic asset and burn it to reclaim the more valuable collateral, decreasing supply and pushing the price up.