The process involves linking a digital currency to an already established asset such as gold or the US dollar, leading to a fixed exchange rate protected from market fluctuations and volatility. Types of pegged cryptocurrencies include gold-backed crypto, fiat-currency pegged crypto, and collateralized pegging. Although these methods have some risks attached, such as possible major losses if the asset becomes overvalued, they can provide traders and holders with peace of mind and lower risk exposure.
In order to effectively peg a digital currency, project owners must possess a certain amount of the asset in reserve. Doing so ensures that their digital currency will remain connected to the backing asset, thereby limiting any profits that could be made through trades. By understanding the risks and benefits associated with pegging, investors can make an informed decision about whether or not it is the right move for them.
Another form of cryptocurrency is the stablecoin. These are tokens that are pegged to a steady asset – such as the US dollar – and maintain a fixed 1:1 ratio. As such, they bring together the best of both worlds, combining the benefits of cryptocurrency with the inherent stability that regular currencies possess. Asset-backed cryptocurrencies, on the other hand, differ from first-generation cryptocurrencies because of their liquidity, security, and stability. These digital coins are rooted in values connected to tangible objects which have a predetermined economic value, and are recorded in the blockchain ledger to ensure ownership and transparency. Furthermore, if the token drops below its real-world value, investors still have the opportunity to take out the underlying asset.
There are several well-known examples of asset-backed crypto including Tether (USDT), Digix Gold (DGX), Propy (PRO), and Petro. Tether is a highly liquid digital currency backed by dollar funds and assets, while Digix Gold is an Ethereum-based token whose value is tied to gold. Propy is a tokenization service for tangible real estate assets, allowing smaller investors access to real estate quicker, and Petro is a government-backed cryptocurrency launched by Venezuelan President Nicolas Maduro in 2017. Security-backed cryptocurrencies are also beginning to emerge, as blockchain companies offer tokenization services. Examples of these companies are Polymath and Gibraltar.
Although asset-backed digital currency has opened up a world of possibilities, there is still some risk which comes with the lack of regulation. For this reason, it is important for investors to be aware of the potential risks as well as the advantages of pegging when considering cryptocurrency investments. With the necessary awareness, knowledge, and transparency, investors can use the process of pegging to protect the value of their digital assets.
