How Does an LSD Protocol Maintain the 1: 1 Peg between the Derivative Token and the Underlying Staked Asset?

LSD protocols maintain the 1:1 peg through two main mechanisms: collateralization and arbitrage. The derivative token (e.g. stETH) is backed 1:1 by the underlying staked asset (ETH) held by the protocol.

Arbitrageurs step in if the peg breaks. If the LSD trades below 1:1, arbitrageurs buy the discounted LSD and redeem it later for the full underlying asset (via unstaking), profiting and pushing the LSD price back up.