Clear DefinitionsPeg Zone
1 min read
Pronunciation
[peg zohn]
Analogy
Like a currency board that holds reserves to keep a country’s currency pegged to the dollar.
Definition
A blockchain or parachain configured to maintain a fixed exchange rate (peg) of an asset—such as a stablecoin or bridged token—via mechanisms like collateral pools, arbitrage incentives, or algorithmic supply adjustments.
Key Points Intro
Peg zones enforce stable value through on‑chain mechanisms and market incentives.
Key Points
Collateral backing: Reserves held to guarantee peg.
Arbitrage: Incentives for traders to restore peg deviations.
Algorithmic adjustment: Supply minted/burned to maintain rate.
Governance: Parameters set by DAO or designated authority.
Example
A pegged USD parachain issues 1 USD token backed by $1 worth of collateral in a reserve smart contract, maintaining parity.
Technical Deep Dive
Peg zone contract holds collateral in vault. On mint, requires `mint(amount)` with `collateral ≥ amount * ratio`. On redeem, burns tokens and releases collateral. Price oracle drives `ratio` adjustments.
Security Warning
Collateral shortfall or oracle manipulation can break peg; maintain overcollateralization and multi‑oracle checks.
Caveat
Maintaining peg during extreme market stress is challenging; design circuit breakers.
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