Crypto glossary
Peg stability module (PSM)
A peg stability module (PSM) is a contract that swaps a stablecoin one-for-one with another, usually USDC, so arbitrage keeps its price close to one dollar.
MakerDAO created the PSM in 2020 to support DAI. Anyone can deposit USDC and mint DAI at a fixed rate, or return DAI and take USDC back, sometimes paying a small fee. If DAI trades above one dollar, arbitrageurs mint it through the module and sell it; if it trades below, they buy it cheaply and redeem it, pushing the price back toward the peg.
The mechanism made DAI far more stable than its purely crypto-backed design allowed, and similar modules now support other decentralised stablecoins and synthetic dollars. A PSM also gives large users predictable liquidity for entering and leaving the stablecoin without slippage.
The price of that stability is dependence on the asset held in the module. When much of a stablecoin's backing sits in USDC, a problem with USDC flows straight through, as happened briefly in March 2023. Modules have debt ceilings, so a large rush can exhaust them, and critics argue that heavy PSM use undermines the goal of a censorship-resistant stablecoin.
Example
When a decentralised stablecoin trades at 1.004 dollars, a trader deposits 1 million USDC in its PSM, mints 1 million tokens and sells them on a DEX, pocketing the gap.