What is a peg? Introduction of price dependence and its application
To get to know the concept of first peg, you need to know what stablecoin is, which we have discussed in full in a separate article. Peg It is a common term in the digital currency market that you have probably heard about from market participants. By helping the trader in arbitrage, pegs make him earn a good profit and also increase the scalability and security of stablecoins. It is interesting to know that right now, as you are reading this article, a large number of stablecoins for which the term peg is used have been released and you can trade them in the cryptocurrency market. If you want to know what a peg is and learn more about its meaning, read on.
What is price dependence or peg?
Price dependence Or the same Peg can be considered one of the most important terms used in stablecoins. If the price dependency is lost, crypto market players can no longer have much faith in stablecoins. In fact, the way to save stablecoins and the only way to survive in the digital currency market is their price dependence, and if this dependence is lost, stablecoins will reach the brink of destruction.
When Stablecoin has price dependency, cryptocurrency market transactions flow well and traders and market participants use these currencies for their transactions, but a price deviation is enough for traders to distrust them.
Peg gives sufficient and necessary assurance to an investor and trader to safely carry out their transactions using stablecoins in the cryptocurrency market.
The impact and application of pegs in traditional financial affairs
The peg concept has a significant impact on traditional financial affairs as well. Below are some of the events on which Peg had a significant impact and we will review its important points:
The value of the Thai baht during the 1997 financial crisis in Asia
The baht, which is the currency of Thailand, was highly dependent on the US dollar in the 1950s, and because of this, the country experienced many financial crises. Finally, due to the decrease in exports, the increase in the federal interest rate and the crisis of the central bank due to foreign reserves, the central bank of Thailand gradually allowed the baht to go outside the country without any laws and with complete freedom. When the financial crisis covered all of Thailand, the value of the US dollar gradually increased, and in the meantime, foreign investors tried their best to save their capital by leaving Thailand.
Destruction of the dollar
In 2008, there were various short-term loans that defaulted, leaving the net asset value of the main reserve fund below $1. Maybe this event is considered a minor price deviation, but it is interesting to know that this seemingly small event caused the fund to lose 40 billion dollars of its capital. This incident did not only affect the main reserve fund, and other funds were also afraid of this incident, and for this reason, the US Treasury had to buy back the dollars that were sold so that the prices would return to the same one dollar.
Inflation in Germany
The British currency, which is the pound, had a fixed and identical price in 1990. At the same time, this country was added to the group called European exchange rate followers, and with this method, users were able to do their transactions with pounds. In fact, this happened in the form of a law that was applied by the countries that were members of this group. It was in 1992 that the British pound experienced an unfortunate event and reached its lowest level. This event had consequences, one of which was the creation of very high inflation in England, but the fixed rate mechanism at that time saved England from inflation and brought the situation under the control of this country.
But this unpleasant incident was not going to end there, when currency market speculators like George Soros entered the field, setting up contracts based on which they would make a profit from the sale of the pound. This incident caused the Central Bank of England to prepare to defend its price peg and for this reason black wednesday Happened. At that time and after the brokers came to power, the Bank of England had no choice but to buy something more than 2 billion pounds in just 24 hours, which would have dealt a severe blow to the country’s economy. Let’s also talk about the profit that George Soros made in the meantime; With this incident, George Soros made a profit of 1.5 billion dollars, and it can be said that the result of this incident only benefited him and the brokers.
Introducing Peg-based passwords
Before we want to introduce the types of cryptocurrencies where price dependence exists, it is worth saying that long-term prudent monetary policies have no effect on the underlying digital currencies, and the central bank does not support these digital currencies. The only benefit of stablecoins is in the cryptocurrency market, in fact, the base currencies are a way to protect the digital currency market world from extreme price fluctuations. Now we introduce peg-based currencies below:
USDC and BUSD
You can buy USDC and BUSD using the common currency of the United States, i.e. dollars. For this, it is enough to go to one of the reliable exchanges such as the Binance exchange, so that you can buy the required amount of these currencies with a few simple clicks. If the price of USDC and BUSD reaches more than one dollar, this is good news for cryptocurrency market participants because instead of putting their money in banks, they invest it in USDC and BUSD. This will increase the amount of investment in these two cryptocurrencies and eventually the number of transactions that will be done on them will also increase.
USDT or Tether
Tether is not backed by dollars inside the bank, but by assets outside the chain. In fact, it can be said that the working mechanism of Tether is different from USDC and BUSD. If we want to give an example for Tether, we can say that Tether is like a fund whose investment location is not known to traders. Peg in Tether depends on the major exchanges that operate in the cryptocurrency market. In fact, those who are among the small investors of cryptocurrencies do not have the ability to convert their Tethers into dollars, but on the exact opposite point, there are large investors who have this possibility. For this reason, even if the price of Tether falls below one dollar, the big investors of the market will come to work and by buying Tether, they will stabilize its price.
Until now, the price of Tether has never exceeded the limit of $1, which means that the price policies on this cryptocurrency have worked and the market players have been able to manage the dependence of the price of this digital currency well. But this mechanism cannot be considered a very good strategy for PEG, because in the cryptocurrency market, there were times when we saw the price of Tether drop below one dollar due to capital outflows, while the prices of digital currencies USDC and BUSD were growing and were in good condition.
For those who are among the big investors of Tether, long-term holding is completely logical and beneficial for them, but on the other hand, this work is of no use to small investors, so if you are among the small traders of the cryptocurrency market, do not buy Tether digital currency at all. Do not buy long term storage.
The performance of the Tether digital currency and the analyzes conducted by cryptocurrency market activists on this cryptocurrency show that Tether has a bright and very good future, and its impact on the cryptocurrency market will definitely increase in the future.
Die and Maker cryptocurrencies can be considered the ancestors of stablecoins because even before stablecoin was created, these two digital currencies were bought and sold in a decentralized manner and as base currency in the cryptocurrency market. Dai digital currency support at the time of the initial foundation of that digital currency Ethereum and at that time, the term price dependence was only used for Dai currency when its loan reached less than 150% compared to the collateral provided. In such a situation, a liquidator could buy Dai digital currency and pay off the loan, but this feature cannot be considered an advantage for users because there was only one tool for the maker, and that was the Dai-based debt rate.
After months passed after Black Thursday, investors and traders of the crypto market were not interested in trading this currency and the reason was that Dai was trading in a price range much higher than $1. Therefore, due to the lack of borrowers, the new die was not minted and there was no arbitrator to defend the peg die. At that time, the stable module of interest price dependence was a trick that Maker used to solve the problems. In this module, by implementing a one-to-one ratio, makers could access the liquidity of the dollar and follow this ratio to create the base cryptocurrency. But unfortunately, this method was not very responsive and showed its flaws after a while.
Crew and easy supply of new cryptocurrency
Just before Black Thursday came around, the platform crow It turned out to be a stable pool and stablecoins managed their peg strategy or price dependency based on that. When Crow came into being, the supply of digital currencies became easier because before the supply of Crow, this was very difficult and difficult. At that time, the price of creating a stablecoin was also high, and Crowe made it possible for users to set up a stablecoin with the lowest cost, and at the same time, receive rewards with various activities within this platform.
Anyway, fortunately, the stable pool of Cru made the path of the peg, or price dependence, smoother, but it is enough for the fundamental economic forces to react negatively to this peg to see that the Cru platform also becomes ineffective. It goes without saying that Crowe is similar to Terra.
In some places, doing nothing might be the best thing to do, and in Dai’s opinion at that time, this was the best reaction that he could do. The reason for the validity of the vote protocol can be considered its incentive scheme, but we must say that there is no active market maker in the vote scheme and therefore no one can defend the peg of this protocol. However, it is expected that the price of Dai will remain unchanged in the future and this protocol will play its role in the cryptocurrency market in a stable manner.
Meanwhile, one cannot ignore the base cryptocurrency USDC, which is trying to improve by improving comparability. For this, he must look for a strong and good price dependence to be on the path of his desires.
According to the definitions we had so far, it can be assumed that the base currencies use different methods and methods in order to benefit from a good price dependence. Therefore, if you want to avoid problems in investing in stablecoins, be sure to get information about their peg in advance.
Price dependence, the continuation of stablecoins
In this article, we introduced you to the use of pegs and told what pegs are and gave various examples of them. According to the points we have mentioned so far, you must have noticed that the peg or price dependence has a great impact on the continuation of the activity of the base currencies because if there is no peg, stablecoins will experience price fluctuations and finally none of the traders will trust stablecoins. The base currencies each have a specific strategy and mechanism to keep their price stable, and this issue increases the need for proper analysis for investment.
What is peg writing? Introduction of price dependence and its application for the first time in Valax blog. appeared.