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As far as I understand, in order to make cryptocurrency pegged to USD we need somebody to take the risks of exchange rates. So, if ratio CRYPTO to USD is at a given time 1CRYPTO:1,1 USD, then we increase cryptocurrency supply by 10% and it will return to 1:1 parity? And conversely, if at a given moment ratio is 1.1 CRYPTO: 1 USD, we decrease money supply by 10% and ratio will return to 1:1, is that right?? Increasing and decreasing amounts of cryptocurrency in existence in response to price fluctuations can effectively peg 1 crypto: 1 USD or not??

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  • $\begingroup$ You should specify how the supply is changed. Is it a pro-rata base change, or is there a central body removing units from supply? The implications are very different. $\endgroup$ – Brian Romanchuk Jun 28 '18 at 12:20
  • $\begingroup$ So, the central body would be, let's say, a code or a protocol. It will periodically check what is the price of 1 unit of cryptoccurency and accordingly put some units of crypo out of existence or "produce" new ones (depending on price to dollar). $\endgroup$ – user84415 Jun 28 '18 at 14:39
  • $\begingroup$ That doesn’t help, as we need to know where the units come from, or who gets them, and why. In a real world currency, central banks buy and sell bonds (or gold, or foreign currency) to add/subtract money. You need to specify what the central body in your scheme is buying or selling. $\endgroup$ – Brian Romanchuk Jun 28 '18 at 15:17
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No, it's by no means a guarantee of a peg.

The cryptocurrency's actual exchange rate will be determined by people's collective expectations of the present and future value of the cryptocurrency relative to the dollar.

Most importantly, the exchange rate will be driven by how much people trust that they will actually be able to get a real dollar in exchange for a unit of the cryptocurrency.

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  • $\begingroup$ But if it will increase or decrease total supply periodically, after checking exchange rate, wouldn't it stabilise the price? I mean, basically it works like that with normal currencies - they increase supply by printing money (buying bonds) or shrink it by putting money out of system (selling bonds, increasing interest rates) no? $\endgroup$ – user84415 Jun 28 '18 at 14:42
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    $\begingroup$ No, it wouldn't stabilise the price at the desired peg rate, for the reason described above. Yes, that is how central banks do it. And with central banks, it's only as effective as their credibility. The thing is, the worst central banks have more credibility than the best crypto currencies. $\endgroup$ – EnergyNumbers Jun 28 '18 at 14:50
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The only way to guarantee a stable price in USD terms, the instrument has to be convertible on demand to USD assets that are worth par value (for example, a bank deposit). A central body can achieve this by:

  1. exchanging the crypto-currency for USD monetary assets at a fixed price via direct transactions (something like a redemption); or
  2. intervening on crypto-exchanges to defend a fixed parity price.

By implication, a central body has to be able to buy or sell USD monetary assets to exchange them for the crypto-currency. In the real world, only a legal entity can own assets, and transfer them.

The individuals who control the legal entity will have full control of the USD assets, no matter what your software protocol says. If they walk off with the assets, your only recourse would be to real world courts, and you would only have recourse if you signed a legal contract with the instrument issuer.

It would be extremely difficult to get such a scheme to not end up under securities regulations, and it would be hard to classify it as a “crypto-currency,” as it would just be another financial entity issuing securities.

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  • $\begingroup$ Such central bodies that convert to USD on demand are exchanges. They exchange to crypto to USD on demand. It is not a job of cryptocurrency to exchange itself somehow - it's job is to check the current price in exchanges and modify supply and demand accordingly. $\endgroup$ – user84415 Jun 28 '18 at 17:28
  • $\begingroup$ I updated my answer. The central body needs to buy or sell the crypto currency - versus USD monetary assets - to adjust supply and demand. If you are referring to pro rata changes in units held across all wallets, that is a cosmetic change that will not affect the value of holdings. $\endgroup$ – Brian Romanchuk Jun 28 '18 at 21:48
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As long as it the creates and destroys the correct amount of tokens it should be able to maintain the peg. The cryptocurrency Steem Dollars is a stable cryptocurrency. The system buys and sells the unstable cryptocurrency steem, to manage its money supply.

The only purpose of steam is to manage the money supply, so it has no fundamental value. So if everybody panic sold steem dollars, steem would hyperinflate. It would then be irrational to hold steem and there would be no more buyers.

If it were backed in actual assets such as bonds, stock, gold, silver, currencies, or maybe even other cryptocurrencies, it would be better defended against panic sells.

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