PEG Supply & Demand Equilibrium
Introduction to PEG Dynamics in PegNet 2.0
PEG the native token in the PegNet system plays a series of important roles.
First PEG serves as the reward mechanism for the three behaviors that the network needs to function. Namely providing Oracles, Arbitrage, & Liquidity. 10,000 PEG are rewarded every block to miners & 10,000 PEG to Stakers that are involved in these three functions. This is the supply side of PEG.
Second PEG is used as the gateway into the PegNet. PEG burning acts as an honest ledger to transfer value into pAssets. The PEG tokens are destroyed and an equal value of pAssets are created. Thus the PEG supply decreases every time a pAsset is created. This is the demand side of PEG.
Estimating Equilibrium Over Time
Given that demand for PEG via burning is equal to all the pAssets that enter the network, at least in theory the value of PEG should be equal to all the pAssets in the network. For the first three months or so this is roughly what was seen in the system, with the market cap of PEG being around $3 Million USD and the combined pAssets being around $3 Million in value.
While PEG rewards and PEG burning tell us the basic balance, the missing part of the equation is “time”. Are the PEG rewarded to Miners & Stakers immediately sold or held for the longterm? When Miners & Stakers do sell, is the PEG burned into pAssets quickly or held as PEG for the longterm? When a person holding pAssets wants to exit the system do they sell the pAssets for PEG or sell the pUSD for example directly on the market?
The answers to these questions tell the story of important metrics, such as the average hold period of PEG, the hold period of pAssets, and how buy and sell pressure on PEG effects price and liquidity.
The Math So Far & How It Changes With PegNet 2.0
What we know so far is that during the last 4 months the PEG supply has been deflationary as more PEG have been burned then mined. 350 Million + have been burned while under the PegNet 1.0 rules only 5,000 PEG per block was rewarded to miners, which is 86.4 Million over the 4 month period.
Under the new PegNet 2.0 rules 346 Million PEG would be generated four months following its activation. So if a similar number of PEG is burned the next four months as the previous four months then burning and minting of PEG would be relativity balanced.
However the additional pAsset reward and PEG Staking reward introduced in PegNet 2.0 offer users a strong incentive to both buy cheap pAssets and hold them in order to receive more rewards. Similarly the PEG Staking offers PEG holders a strong incentive to both buy cheap PEG and hold it in order to receive more rewards. How these pAsset + PEG Staking rewards add to demand and lengthen the hold times remains to be seen.
The hoped for effect of these improvements is to increase order book depth to over time as more value flows into the PegNet. Allowing for easier entry and exit of the system as it scales. A subject covered in depth here:
Estimating Inflows & Outflows of PEG
I’d put forward the equation is basically this:
1. If the number of PEG burned is greater than rewards + PEG sold as an exit
2. Then PEG is adding more value to the network & may gain value overtime.
3. If the number of PEG burned is less than rewards + PEG sold as an exit
4. Then PEG is removing value from the network & may lose value overtime.
These are the core variables that PegNet must work to improve over time in order to build up the stability and liquidity of the system.
PIP 12 adds a PEG reward to hold pAssets, so that may increase the people willing to hold pAsset for longer.
PIP 13 adds a PEG reward to hold PEG and report oracle prices, so that may increase PEG holding times.
Other methods for decreasing sell pressure on PEG include having the option for users to exit via selling pUSD on exchanges pUSD is above par. Or selling pUSD for PEG on exchange, thus creating PEG demand in the exit process, equal to the sell pressure.
Dealing With Bull Runs & Bear Markets
One of the big questions that everyone comes to as they think through the economics of PegNet is that of “How do big swings in price up or down effect the system”. For example say there were $4,000,000 in pAssets in the PegNet of which $1,000,000 is held in pETH. Then the price of ETH increases by 2X in a few months during a bull run. Users placed $4,000,000 USD worth of value into the PegNet and now all of sudden there are $5,000,000 USD worth of value in the system. If users want to exit those gains from PegNet, what is the effect on the system?
It could be argued this is part of what we have already seen the last 3 months. There was a nice BTC bull move from the $5,500 — $6,000 price range to the $9,500 -$10,000 range the last three months. Users on PegNet saw those gains, with traders nicely growing their pAssets at a similar rate during those 3 months. Then one of the largest traders in the system moved to exit their value from the system the result was to push down the price of pUSD. This was shortly after PegNet experienced its 51% attack so many people conflated these two events, but analysis indicates these are likely separate actors. Though the actions of the 51% white hat miner may have lowered the confidence of the large trader and triggered their desire to exit the network.
Since the announcement of the PegNet 2.0 improvements it appears the large trader has stopped selling pUSD and other users are buying up the cheap pUSD that is available on exchange in order to lock in an attractive low basis in the PegNet going forward. In many ways the triple shock of Covid, the 51% attack and a large seller are among the largest systemic hits one could imagine for PegNet and they all happened within short order of each other.
I think what we have learned so far is that “time” is on PegNet’s side. Miners continue to mine, the oracles continue to be recorded, traders continue to flow into the system and conduct tens of millions worth of conversions each day. In short PegNet didn’t die. And every day that the system continues to function it proves to any observer that its a good bet that the improvements made to the network will again return the pAssets to there par value. And if the system reach par value on pAssets that means PEG tokens will continue to be burned in order to add value to the system.
The second advantage that PegNet has in order to address bull runs and bear markets is “diversification of pAssets”. PegNet is strong because it isn’t a single coin but rather a “network” with an ever broadening set of pegged assets that represent fiats, cryptos, & commodities. Already there is a big four in PegNet with pUSD, pETH, pBTC, and PEG as having a similar amount of token value in the system. With pUSD being the fastest growing and the most stable in terms of external price variation.
So while users might imagine a scenario where crypto rises quickly in value and create an imbalance, the opposite is true for fiat currencies which make up a large part of the network’s value. All the world’s central banks are currently in an unprecedented race to print more and more currency in a desperate attempt to shore up stock markets and their economies. The effect of which can only be a massive increase in inflation. This inflation means that all the pFiats on PegNet are actually declining in value over time. If this inflation is 5% or 50% per year, that depends on the currency, but a 10% annual reduction in purchasing power is likely a reasonable estimate. Meaning over “time” users have actually placed more value in pAssets than is still held in the network if these trends continue.
PegNet 2.0 expands the rewards to give people holding pAsset and Staking PEG, a strong reason not just to mine & report oracles prices, but to get actively involved in arbitrage and add liquidity to the network. PegNet has already weathered effectively many of the worse possible hits to the system with the Covid induced economic down turn, the 51% attack and a large seller exiting the system. Despite all these hits PegNet continues to function for traders and supports the conversions of ever more value across its rails. Time will tell if these improvements have their intended effect of improving the speed with which PegNet reacts to market swings and system shocks.