Two values
A dollar token is meant to be redeemable for a dollar; a savings token for a growing amount of its base. That is its redemption value. Its market price is whatever buyers pay on exchanges and in pools. When redemption is open and fast, anyone can buy below the redemption value and redeem, and that trade pulls the price back. That is the peg.
What breaks it
- Liquidity: a large seller meets a thin pool, and the price falls although the backing is intact. Redemption brings it back, as fast as redemption allows.
- Access: if only approved holders can redeem, or redemption waits in a queue, the trade that restores the price is slow or closed to most holders, and the gap can last.
- Solvency: if the backing has lost value, the redemption value itself is lower, and no trade brings the price back to the old figure.
The first two are about the way out; the third is about what is behind the token. From the price alone they look the same.
Tranches
Some tokens split one pool of backing into tranches. A junior tranche takes losses first and is paid more for it; a senior tranche is paid less and loses only once the junior one is gone. A loss small enough for the junior tranche to absorb leaves the senior one whole; the same loss can wipe out the junior one. The asset pages say which tranche a token is, and of what.
What a depeg does to a PT
A PT's redemption is measured in its accounting asset, so two different things can happen.
- If the exchange rate the underlying's own contract reports falls below its earlier high (a loss in its strategy, written into that rate), the PT redeems for less than one unit. A fall in the underlying's market price alone does not change what the PT redeems for.
- If the accounting asset itself falls against the dollar, the PT still redeems for one unit of it, but that unit is worth fewer dollars.
Before maturity the PT's price in the pool can also fall with the underlying's price, and a lending market's oracle may follow it or not, depending on its design.
Redemption on the asset pages
Each asset page records how the token is redeemed (at once, after a cooldown, through a queue, or only by approved holders) and the longest wait its issuer states.