The peg is freely floating and set by the market.

At 20% interest rate, the problem doesn't seem obvious. But lets say the interest rate is 5% and the fee to convert from HBD to Hive is 5%. You buy HBD for $1 USD but you would have to keep that one HBD in savings for one year just to break even if you wanted to convert that HBD back to $1 worth of Hive.

In such a scenario, in a liquity pool like PHBD/USDC, people who need liquid funds would almost always choose converting PHBD to USDC, which means the PHBD would never be able to hold at peg of around $1 but be around $0.95. This means that eventually the pool would empty of USDC or conversely PHBD would always be around $0.95.