Pegged Token

Publication Date :

11 Jun, 2025

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Table of Contents

What Is A Pegged Token?

A pegged token, in cryptocurrency, is a coin or a token whose value is dependent on a fiat currency, commodity, or asset class. The primary purpose of this token is to balance the fluctuating volatility of the cryptocurrency via pegging.

Investors also refer to this token as pegged cryptocurrency. Most of these tokens are backed by the USD (United States Dollar) or gold. It allows users to neglect the risk of volatility through these coins. However, crypto developers must keep fiat currency holdings as reserves to maintain the volatility of the pegged token price.

Key Takeaways

A pegged token is a crypto coin associated with another fiat currency or an underlying asset. They maintain price balance and monitor volatility.
Crypto developers must maintain reserves of the underlying instrument to mint a pegged cryptocurrency. A decrease or increase can influence the token prices.
Most of these tokens are a part of the Ethereum blockchain. Thus, the validation process is similar to them. However, the miners receive no block reward here.
Most of these tokens are either in USD or gold. For example, Tether, BUSD, USD Coin, and Perth Mint Gold tokens are a few of them.

How Does A Pegged Token Work?

Pegged tokens are similar to stablecoins that use pegging to derive the cryptocurrency's value. In other words, it uses the value of fiat currency, commodity, or asset to decide the token's worth. So, if the underlying asset's price rises, the pegged token price will also rise. However, to maintain the price balance, the crypto developers must hold certain reserves of the underlying asset or commodity. These reserve requirements may differ across various tokenomics.

Examples of these tokens include Tether, BUSD pegged token, Ageur, and others.

The prime features of pegged cryptocurrency include price stability, capital efficiency, and decentralization. These tokens can fulfill either, but all at once is impossible. For instance, the fiat-based token may possess the first two. However, other tokens might focus on decentralization to enhance the privacy and security of transactions. As a result, few tokens focus on establishing stable prices in contrast to the rising volatility. Therefore, investors hold on to these tokens to tackle the extreme market swings. However, these tokens are non-mineable in the blockchain network.

In contrast to the other crypto tokens, pegged tokens do not rely on a block reward system. Instead, the crypto developers keep certain reserves as collateral for minting these tokens. The quantity of reserves will determine the number of pegged cryptos. For example, if the crypto developer has $5000, it will create 5000 BUSD pegged tokens.

The validation mechanism of these coins is akin to the other crypto tokens. Here, miners verify the transactions based on protocol, build a consensus and add blocks to the network. However, no incentives have been provided to them for block verification. These transactions cannot be altered or deleted as they are part of the immutable ledger.

Examples

Let us look at some examples to comprehend the concept in a better way.

Example #1

Suppose Alfred is a software developer who wants to launch a cryptocurrency. However, he fears from the fluctuations in the market prices of the tokens. Thus, after rigorous research and selection, he lands on pegged tokens. Alfred then creates a blueprint for his cryptocurrency (GALF) built on the Ethereum blockchain. According to the whitepaper, every gram of gold represents one coin. He held 1000 gm of gold, which was the minimum requirement. Thus, users can easily buy GALF tokens and redeem them anytime. However, the only criterion is to convert the tokens into dollars or physical gold.

In this case, the gold reserves are vital in token management. If the gold reserves fall below this threshold, the GALF token will see a sudden fluctuation in its value. As a result, Alfred might keep more reserves or burn some tokens to balance the market supply.

Example #2

According to market news, as of August 2023, PayPal plans to issue a pegged token called PayPal USD (PYUSD), which will be based on the U.S. dollar (USD). The token will be issued by Paxos Trust and fully backed by reserves, including USD deposits, cash equivalents, and short-term Treasuries. PYUSD will be available to PayPal users in the U.S., allowing them to transfer the stablecoin between PayPal and supported external digital wallets, use it to pay for goods and services, or convert any of PayPal's supported cryptocurrencies to and from PYUSD.

Users will be able to exchange PYUSD for significant cryptocurrencies such as Bitcoin (BTC), Bitcoin Cash (BCH), Litecoin (LTC), and Ethereum (ETH). The introduction of PYUSD marks a significant move by a major financial company into the stablecoin market, providing a stable digital currency that is redeemable for dollars and can be quickly adopted by crypto exchanges and web3 applications. PayPal has committed to transparency by providing monthly Reserve Reports and third-party attestations of the value of PYUSD reserve assets.

Gold-Pegged Vs. USD-Pegged Tokens

Although gold-pegged and USD-pegged tokens share similar characteristics, they have different underlying assets. So, let us look at the differences between them:

Basis	Gold-Pegged	USD-Pegged Tokens
1. Meaning	A gold-pegged token is a crypto coin whose value depends on gold.	These crypto tokens peg the United States dollar as an underlying asset.
2. Underlying Asset	Here, crypto developers must keep reserves of gold to create tokens.	Equivalent amounts of USD result in the creation of USD-pegged tokens.
3. Redemption	Individuals can redeem these tokens into physical gold.	Investors can convert these tokens into dollars.
4. Risks	Crypto users also face a risk of price volatility and storage issues. A theft in the stores of gold brings equal risk with the associated coin and vice versa.	Due to the high demand for dollars, the demand may exceed supply, causing price instability.
5. Examples	The list includes ‎Perth Mint Gold Token (PMGT), Gold Coin (GLC), ‎AABB Gold Token, and others.	Examples of these tokens include Tether, USD Coin, etc.

Pegged Token vs Wrapped Token

Although pegged and wrapped tokens have similar mechanisms, they have different functionality. Let us look at their differences for a better understanding:

Basis	Pegged Token	Wrapped Token
1. Meaning	It refers to a crypto token attached to a fiat currency or asset class.	A wrapped token is a coin whose value is linked with another cryptocurrency.
2. Purpose	To maintain the price stability and volatility in the token prices.	To use crypto coins across different blockchains and enhance scalability features.
3. Store of Value	These token's values depend on the worth of the pegged instrument.	The value of these tokens is stored in a virtual vault.
4. How to Create?	These tokens are created through the reserves held by developers.	Here, a merchant sends a user's tokens into a vault. Once locked, the custodian creates wrapped tokens.