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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.
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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 – 2016-01-02T05:15:11.663
I don't think so. If you own NuBits, you choose to "park" them and earn interest on them in exchange for keeping them off the market. If you crack open the NuBits GUI you have an "Park" tab where you can choose to park your NuBits for a fixed amount of time. (related: https://nubits.com/about/faqs#how-is-interest-paid-out)
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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.
1I don't know about digital currencies in particular, but the way that a peg usually works is that some large and rich entity announces that, on request, they will exchange unlimited amounts of one currency for the other at 1:1 (or another fixed rate, plus nominal fees). This effectively keeps the market price from moving above or below the fixed rate; in any proposed trade at any other rate, one of the parties could get a better deal at the rich entity's exchange. – Nate Eldredge – 2015-11-10T18:17:47.627
1Meaning it's centralized and highly risky as it requires a rich party in both USD and in coins (i.e. premine) that can be trusted to stick around and be honest forever and not run off or get closed down by the government (which on all accounts, history shows, they will). – Jannes – 2015-11-11T01:33:32.473