What Is the Difference between a Soft Peg and a Hard Peg?
A soft peg is a monetary policy where a currency's value is allowed to fluctuate within a small, predetermined range relative to a target asset, such as the US Dollar. The system uses incentives and market operations to keep the price close to the target, but small deviations are tolerated.
A hard peg, conversely, is a commitment to maintain an exact 1:1 ratio with the target asset. Hard pegs typically require 100% collateralization and the ability to instantly redeem the stablecoin for the underlying asset to enforce the parity.
Glossar
Price Peg Mechanism
Mechanism ⎊ The core mechanism is the funding rate, a small payment exchanged between the two sides of the trade at regular intervals, typically every eight hours.
Community Hard Fork
Consensus ⎊ A Community Hard Fork signifies a fundamental, non-backward-compatible change to the blockchain's ruleset, driven by a broad, decentralized agreement among the user base rather than a centralized authority.
Two Way Peg Definition
Mechanism ⎊ A two way peg mechanism describes a cryptographic protocol that facilitates the transfer of a digital asset between two distinct, independent blockchains, such as a main chain and a sidechain.
Peg Mechanism Stability
Mechanism ⎊ Peg mechanism stability refers to the effectiveness of a stablecoin's design in maintaining its value parity with a reference asset, typically a fiat currency.
Peg Maintenance Challenges
Challenge ⎊ Peg maintenance challenges encompass the complex technical, economic, and market-based difficulties inherent in keeping a stablecoin's market price tightly anchored to its target value.
Sustaining Peg Integrity
Mechanism ⎊ This refers to the set of on-chain or off-chain procedures designed to automatically or actively correct deviations from the target parity value.
Collateralization Requirements
Framework ⎊ Collateralization requirements, within cryptocurrency derivatives, options trading, and broader financial derivatives, establish a crucial risk mitigation layer, particularly vital given the inherent volatility and nascent regulatory landscape of digital assets.
Soft Rug
Exploitation ⎊ A soft rug is a subtle form of financial exploitation where project developers or insiders gradually sell off their substantial token holdings over an extended period, slowly draining liquidity and causing a prolonged price decline without an abrupt, single-event "hard" rug pull.
Soft Proposal
Proposal ⎊ A Soft Proposal is a non-binding governance submission, typically executed off-chain, designed primarily to gauge community sentiment and consensus before committing to a formal, costly on-chain transaction.
Peg Mechanism Types
Collateralization ⎊ Peg mechanisms are categorized primarily by their collateralization structure, which determines how the stable value is maintained.