Solving The Granularity Problem

A small market cap + lots of tokens + high BTC prices leads to some interesting problems

History of PEG Supply

Developers early on destined the PegNet to have a high number of PEG tokens in circulation by selecting 5,000 PEG as the block reward for miners. It was fully expected that PegNet would have a supply of Billions of PEG tokens as described in the Predictable Supply of PEG article. And its true that there are some nice advantages regarding adoption for low cost tokens. Namely that retail buyers can easily pick up a high number of tokens for a small cost and feel positive about building a good size position in the asset.

The Granularity Problem

There has been one side effect of having a large number of PEG tokens that wasn’t foreseen in the original design. The price granularity of PEG when measured in Bitcoin’s smallest unit (called “a satoshi”) is currently too low. This is due to a satoshi being a 100 Millionth of a Bitcoin and the current Bitcoin price being around $10,000 USD. So the smallest amount of BTC that can be sent is $0.0001 USD.

Lets call this problem “The Granularity Problem”. Because BTC is still one of the most common & liquid trading pairs on many exchanges and since PEG’s price is currently at $0.001 (10 Satoshis), then a single Satoshi increase or decrease in the price of PEG represents a 10% swing.

The function in the PegNet most effected by this low granularity is the arbitrage cycle. It’s currently impossible at the 10 satoshi price of PEG for an arbitrager to make a profit buying cheap pAssets off an exchange at anything less than a 10% discount to the PegNet oracle price.

Example: Buying Cheap pUSD
Buying pUSD for $0.95 should represent a 5% gain for an arbitrager on PegNet. But lets run the numbers to see why that isn’t working right now. First, lets presume the arbitrager has PEG tokens to sell, perhaps they earned the PEG by mining it, got it as a Staking reward or just bought it at a lower basis earlier. In any case, when the arbitrager goes to sell his PEG in order to get BTC, if the effect is to push down the price on PEG even a single satoshi, then the arbitrager will have lost 10% of his PEG value when trading for BTC. Understanding this risk, the arbitrager is unlikely to buy up any cheap pUSD unless he can get it for less than $0.90 in price.

Solving The Granularity Problem

Method A — “The Reverse Split”
One simple method to solve this issue would be to divide the number of PEG in existence by 100. Every PEG holder would continue to have the same percentage of the PEG supply they held before. However now the total supply instead of being 1.8 Billion PEG would be 18 Million PEG. Presuming the market is properly made aware of this change + wallets and exchanges are all updated to avoid user confusion. The likely effect is PEG tokens will trade for 100X its current price. So instead of 10 satoshis each, one PEG would trade for 1,000 satoshis.

This would be a real boost for arbitragers who deal in PEG / BTC trading pairs as now they would have a granularity of 0.1% instead of 10%. Meaning anytime pUSD is trading for less than $0.999 on an exchange, then the arbitrager can profitably conduct his arbitrage cycle.

This option comes with a lot of technical work, related to updating the Mining and Staking rewards, as they would need to also be adjusted to be 100X less. The other concern voiced by the community is that the low granularity of the BTC / PEG actually works as a positive in that the exchange order books are pretty significant at these low satoshi levels as the low side is limited and the up side is high.

Method B— kPEG
Issue a new kPEG token on PegNet that can be swapped into 1,000 PEG for 1 kPEG token. This allows you to do the higher granularity trades between kPEG to BTC pairs at the rate of 0.01% .

The down side is now you have to get kPEG listed on a bunch of exchanges and rebuild the trading depth there. There might also be a lot of user confusion between the different tokens and other changes would need to be made to the mining rewards.

Method C— Built In pUSD / PEG Trades + More Trading Pairs
In the PegNet wallets and other interfaces users expect to be able to convert pUSD into PEG like they can into any other pAsset. As they may not have read the details about PegNet and don’t know about the limitation of the 5,000 PEG conversion per block in PegNet 1.0.

So as a solution simply set up a trading function in PegNet wallets for selling pUSD for PEG via an exchange API. That way the user can easily move from pUSD to PEG, using a trade via an exchange API vs. an internal PegNet conversion. The first upside is that PEG demand increases every time there is a pUSD to PEG exchange. Secondly, the user gets liquidity, though with some more cost (exchange fee + slippage) than a normal PegNet conversion. With one more exchange API call a user could trade PEG for ETH.

The Pegnet wallet interfaces could also add ETH + BCH deposits and withdrawals as that will offer an on ramp and off ramp for users to enter and exit the pAsset network. Thus completing the cycle the great cycle:

If pUSD is over $1.00 then:
1: Trade ETH for PEG.
2. Burn PEG into pAssets.
3. Convert freely between any pAsset to any pAsset.
4. Trade pUSD for PEG
5. Trade PEG for ETH

If pUSD is under $1.00 then:
1. Trade ETH for cheap pUSD.
2. Convert pUSD into any pAsset.
3. Convert freely between any pAsset to any pAsset.
4. Trade pUSD for PEG
5. Trade PEG for ETH

Easy entry. Easy exit. PegNet has to combine internal PegNet powers with external trading to achieve this goal for the user. Ideally the wallets will handle the logic for the user. When using the wallet to convert crypto such as ETH into pAssets use the following logic.

Nothing for the user to learn. Its handled automatically in the most favorable way for the user and will help with the balancing of pUSD & PEG prices as a nice side effect.

The last step for this solution to work well is to increase the PEG trading pairs on exchanges that don’t suffer from the BTC granularity problem. Alternative pairs such as PEG/ETH, PEG/BCH, & PEG/USDT. These pairs historically have had less liquidity than BTC, however they are growing quickly and options such as USDT now regularly match BTC in daily trading volumes. Though a focus on ETH might serve the PegNet better as its more native to DeFi apps and doesn’t carry the longterm regulatory risk of USDT.

Conclusion — Fix It At The Wallet Level vs At The Protocol Level

There are a lot of trade offs to think about here. The reserve split is an interesting option, but will likely generate a lot of user confusion. The kPEG option requires a lot of listing and work with exchanges to get the new pairs trading. And switching to other trading pairs lack the liquidity advantages of BTC.

Out of all the options, building out a pUSD to PEG exchange API call function at the wallet level seems the most straight forward solution. It makes for an easy user experience when moving from pUSD back into PEG. As a nice plus it adds demand for PEG instead of trying to address the issue with more PEG supply.

Entrepreneur, Investor, Technologist, Voluntarist, Future Martian Settler, & Evangelist for Decentralization.

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David A. Johnston

David A. Johnston

Entrepreneur, Investor, Technologist, Voluntarist, Future Martian Settler, & Evangelist for Decentralization.

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