PEG Price Stability Explained
Blockchain technology enhances the transparency, speed, and efficiency of transferring asset ownership. As investors become more accustomed to decentralized financial systems, real-world assets will be onboarded onto the blockchain with greater frequency. At Peg, we are creating a vibrant economy for asset-pegged tokens. Crucial to the smooth functioning of our economy is maintaining the 1:1 relationship between the price of the custom token and that of the underlying asset.
The user can mint themselves asset-pegged tokens of their choice as a loan by depositing PEG tokens as collateral into a Vault. Once the loan is paid back the full collateral is released. Vault collateralizers are an essential component of the price stability infrastructure responsible for maintaining the price peg.
Arbitrage and its effect on price stability
Successfully engineered blockchain networks align incentives in such a way that users can simultaneously maximize their own self-interest while contributing to the overall performance of the network. Peg Vaults can be collateralized by enterprising individuals looking to engage in no-risk arbitrage trading by holding both the underlying asset and the corresponding asset-pegged tokens. Should the price of asset-pegged token deviate from the asset itself, they can sell the more expensive of the two in order to purchase the cheaper asset in anticipation of a future price correction.
Ben wants to play the arbitrage game
Ben has decided to utilize the Peg Network Vault infrastructure in order to profit off an arbitrage opportunity. He deposits PEG into a Vault and issues himself 10 PEG:Gold tokens worth $1,000 each, totaling $10,000. At the same time, he buys the same total value of gold on the spot markets. Ben wakes up the following day to the news that the price of gold has increased 10% while his PEG:Gold has only increased 5%. By selling some of his spot gold and buying more PEG:Gold, Ben now owns the same amount of gold and PEG:Gold but spent 5% less on it. Vault creators exploiting arbitrage opportunities will encourage traders to do so as well, enhancing price discovery and reinforcing the price stability mechanism.
Wallet Scaling & Debt Scaling
In addition to the natural market incentives of Vault Collateralizers to buy low, sell high and maintain the peg of each token, Peg Network consists of built-in price stability mechanisms that further ensure a 1:1 relationship between token and underlying asset price. The first of these mechanisms is known as debt scaling and it too relates to the Vault collateralizers. Should the price of the asset-pegged token exceed the price of the underlying asset, the amount of tokens owed back to the Vault begins to decrease. This cause the Vault to over-collateralize allowing the Vault collateralizer to issue more asset-pegged tokens which can then be sold on the market. This will increase the available supply of said asset-pegged token and in turn decreasing the price. Alternatively, in the event that the token price dips below the lower threshold, the amount owed to the Vault begins to increase, incentivizing the Vault collateralizer to buy tokens cheaply on the market in order to pay off the debt.
Wallet Scaling, the second of these mechanisms, affects any asset-pegged token holders. An increase in the price of an asset-pegged token above the target price will see wallet balances scaled down, incentivizing users to sell their asset-pegged tokens on the market which in turn reduces their price. Conversely, when the token price drops lower than the price of the underlying, wallet balances are scaled up, creating an incentive to buy and hold tokens.
The promise of a decentralized financial system that is more transparent and inclusive is one we are super excited about and actively working to achieve. Onboarding real-world assets onto the blockchain is a critical step in allowing innovative investors to construct portfolios of their choice. Through a combination of built-in price stability mechanisms and monetary incentivize for Vault collaterlizers, Peg Network facilitates the creation of custom tokens with a robust peg to a wide variety of currencies, commodities, and underlying assets.
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