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.