Cryptocurrencies were conceived as a decentralized and trustless alternative to fiat currency, later emerging as a brand-new asset class. With this developing asset class to displaying volatile price swings, a new sub-class of cryptocurrencies pegged to traditional fiat currencies has begun to emerge. These fiat-pegged coins, known collectively as stablecoins, offer a solution for holders and traders seeking the decentralization benefits of the blockchain along with the price stability characteristics of established fiat currencies such as the US Dollar.
However, these crypto-fiat tokens have only been limited to using mostly USD as their peg. Until now.
Introducing PEG Network
PEG Network is an innovative protocol for creating customized asset-pegged tokens. Through PEG Network anyone can create an ERC-20 token pegged to a currency, commodity or underlying asset of their choice.
Instance managers, vault creators, and token traders. The PEG trifecta. The process of creating a new asset-pegged token begins with the PEG Instance manager. A PEG instance is the management layer responsible for setting the terms for creating and maintaining an asset-pegged token. Responsibilities of the instance manager include configuring the price stability market mechanics and feeding the price stability smart contract with reliable, up-to-date price information. Businesses needing a local currency which would allow customers to pay for goods and services and fund managers and bankers looking to create blockchain-based derivative products are just some of the participants who would benefit from managing a peg instance.
Once a PEG Instance has been established, any user can issue themselves asset-pegged tokens by collateralizing a vault and incurring a loan corresponding to the number of their newly-minted tokens. Once the loan is repaid the collateral is released. Vault creators may wish to borrow against crypto collateral by depositing PEG into a vault and issuing asset-pegged tokens in return.
Bringing The Liquidity With PEGDEX
Asset-pegged tokens, once issued, will be available for trade. Built on Bancor relay technology, the PEGDEX is a decentralized liquidity protocol which allows any token on the network to be converted for any other token listed on the DEX. Unlike traditional exchanges that maintain an order book for matching buyers and sellers, Bancor technology does away with order book architecture entirely. Liquidity is provided by smart contract-managed reserves which hold a balance of a listed token and a universal ‘connector’ token. The connector token used by the PEGDEX is PEG:USD, a USD-pegged stablecoin. When a user wishes to exchange TokenA for PEG:USD, a smart contract manages the trade by depositing TokenA into the reserve and issuing PEG:USD from the reserve to the user.
Price Stability Mechanisms
PEG Network has developed novel market mechanics to ensure that asset-pegged tokens meet the targeted price of their underlying asset. These price stability mechanisms, known as debt scaling and wallet scaling, affect loan holders and ordinary wallets respectively.
* Debt Scaling — The cornerstone of debt scaling is the collateralized vault and the corresponding loan issued to the user. If the token price falls below the targeted price threshold, the amount of debt owed is increased, incentivizing users to buy tokens at a discount on the open market to repay their loan. Should the token price move above the targeted price, the amount of debt is reduced and in turn over-collateralizing the vault, making it possible to mint more tokens which can then be sold, putting downward price pressure on the token.
* Wallet Scaling — Wallet holders will also see their balances scaled in the event that the price of an asset-pegged token deviates from the targeted price of the underlying asset. If the token price falls below the targeted price, ordinary wallet holders have their token balances increased, incentivizing them to buy more tokens that can then generate more bonus tokens. Should the token price move above the targeted price, the number of tokens in an ordinary wallet may be reduced, causing wallet owners to sell before their balance is further reduced.
As a result of these manual market mechanics pushing the price of an asset-pegged token towards that of the underlying asset, natural market mechanics are at play as well. An arbitrage opportunity arises whenever a price deviation occurs with the PEGDEX, providing ample liquidity between available asset-pegged tokens. Traders can take positions in the expectation that price of the token will return to its equilibrium, further enhancing price discovery.
Currently live on Ethereum, the next step on our roadmap is to spread to other blockchains with PEG network, eventually reaching cross-chain atomic swap functionality between a variety of networks. This will bring us closer to our vision of a vibrant, blockchain-agnostic marketplace for tokens pegged to a wide variety of currencies, commodities and underlying assets