How Do Synthetic Asset Protocols Ensure the Stability of Their Price Peg?

Synthetic asset protocols ensure the stability of their price peg primarily through over-collateralization and liquidation mechanisms. Users mint synthetic assets by locking up more value in collateral (often a volatile cryptocurrency) than the value of the synthetic asset.

If the collateral value drops too low, the system automatically liquidates the position to maintain the peg's solvency. Additionally, they use decentralized oracles to feed accurate, real-time pricing data to the smart contracts, and often incorporate arbitrage incentives to quickly correct any minor deviations from the peg.