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Some digital currencies, like NuBits, declare that they peg their value to dollar or other fiat currency.
How does this work?
Under what conditions this can work?
Can this be distributed, or does there have to be trusted parties who are always willing to exchange NuBits back to dollar and vice versa?
Are there other such digital currencies? I understand BitGold value comes from real gold bars which match to tokens on blockchain, which is little different I believe.
NuBits is really interesting in how it pegs to the USD, which they explain in the white paper. I'm guessing you don't want to go hunting through there (white papers can be ... daunting), so the short version is....
If the demand for NuBits goes up (ie, lots of people want to buy Nubits, so the price for a NuBit should rise above $1 USD), the custodians of NuShares ("Shareholders") will vote to issue newly minted NuBits to satisfy the demand and therefore drive the price back down to $1 USD.
If the demand for NuBits goes down (ie, nobody wants NuBits, so the price for a NuBit should drop below $1 USD), holders of NuBits are able to "park" their NuBits (aka, keep them off the market) in exchange for dividends paid in PeerCoin, which reduces the supply and drives the price back up to $1 USD.
There's actually lot more going on here than these two things, but these seem to be the main ones. More importantly, they seem to be working as NBT has been transacting around $10,000 USD daily (as of today) and I've only seen the price fluctuate +/- $0.01 USD over the past few months.
If you want the whole story (which includes lots of other mechanisms to stabilize the peg to the USD), take a look at the price stability page on the NuBits website.
The practical conclusion here is: if you ever see NBT selling for more than $1 USD, don't buy it, because the price will be back to $1 USD soon, so you're wasting your money.
holder of Nubits are able to park their nubits, is that a typo? shouldn't it be NuShares?
– knocte
Jan 2 '16 at 5:15
Probably in a similar way as companies hedge against currency fluctuations.
You could sell a basket of fiat currency against the dollar to protect for dollar strength., What they can not do is protecting the crypto currency from decline, so obviously there is a risk as soon as the crypto currency declines in value.
We have seen how well pegs can play out if the hedged assets value goes in a different directions - take the swiss franc euro peg for example.
Lets also not confuse a "backing" and a "peg", if the currency or derivative is backed, then for every unit theres a defined amount of redeemable backing unit. If we have a "peg" theres definitely risk on one side.
