How Do Smart Contracts Maintain the Price Peg between a Synthetic Asset and Its Underlying Asset?

Smart contracts use a combination of mechanisms to maintain the price peg. The primary method is through the collateralization ratio; the contract ensures the synthetic asset is always backed by sufficient collateral.

Arbitrage is another key mechanism. If the synthetic asset's price deviates from the underlying asset's price on the open market, arbitrageurs are incentivized to buy the cheaper asset and sell the more expensive one, pushing the price back towards the peg.

Some systems also use built-in stability fees or rewards to encourage actions that support the peg.