What Is the Difference between Hard and Soft Pegs for Stablecoins?
A hard peg means the stablecoin issuer or protocol guarantees a strict 1:1 redemption for the underlying asset, typically fiat currency, maintaining a very tight trading band. A soft peg allows the stablecoin to fluctuate within a small range around the target value, often using algorithmic or decentralized mechanisms to maintain the target, but without a direct, guaranteed redemption.
Most decentralized stablecoins use a soft peg.
Glossar
Soft Peg
Mechanism ⎊ A soft peg, within cryptocurrency and derivatives, describes a managed exchange rate regime where a currency or asset’s value fluctuates within a defined, yet relatively wide, band against another currency, asset, or basket of assets.
Hard Peg
Constraint ⎊ A hard peg, within cryptocurrency and derivatives, denotes a mechanism rigidly fixing an asset’s value to an external reference, typically a fiat currency, through active market intervention and substantial reserve backing.
Stability Module
Architecture ⎊ This refers to the specific algorithmic or reserve-based component within a decentralized protocol designed to actively manage deviations in an asset's peg or overall system solvency.
Decentralized Stablecoins
Collateralization ⎊ Decentralized stablecoins mitigate systemic risk inherent in centralized models through varied collateralization mechanisms, often employing over-collateralization to maintain peg stability.
Decentralized Mechanisms
Architecture ⎊ ⎊ Decentralized mechanisms within cryptocurrency, options trading, and financial derivatives fundamentally alter systemic risk distribution, shifting reliance from centralized intermediaries to distributed ledger technologies and smart contract execution.