How Is the Peg of a Synthetic Fiat Currency Maintained On-Chain?

The peg is maintained through a combination of over-collateralization and arbitrage. Users lock up a volatile crypto asset to mint the synthetic fiat.

If the synthetic asset trades above the peg, arbitrageurs mint more and sell it. If it trades below, they buy it back cheaply and use it to repay their collateralized debt, profiting from the difference and pulling the price back to the peg.