GlossaryAdvanced
Peg Stability Module (PSM)
A mechanism that lets users swap a protocol's stablecoin for another reference stablecoin at a near-1:1 rate, helping anchor the protocol's peg.
A Peg Stability Module (PSM) lets users swap a protocol's own stablecoin for a reference stablecoin (or vice versa) at a close to 1:1 rate, functioning as a direct arbitrage mechanism that helps anchor the protocol's stablecoin price to its target peg.
If the protocol's stablecoin trades below its peg, arbitrageurs can buy it cheaply and redeem it through the PSM at close to full value, profiting while pushing demand (and the price) back toward the peg — a direct, mechanical complement to a stablecoin's broader backing mechanism (see Kaavon's "Redemption Mechanism" glossary definition).
Examples
- If a stablecoin trades slightly below its peg, a Peg Stability Module lets arbitrageurs profit by buying it cheaply and redeeming it at close to full value, pushing the price back up.
- A Peg Stability Module typically requires deep reserves of the reference stablecoin to function reliably during periods of heavy redemption demand.