BitBay’s Dynamic Peg — FAQ
Does the Dynamic Peg make BitBay a “stablecoin”?
In short, no.
Technically, a “stablecoin” is any cryptocurrency which uses a mechanism to stabilize its own value. However, this term has been heavily associated with Ethereum-based tokens, all which attempt to maintain equilibrium with the US Dollar, other fiat currencies, or assets.
BitBay’s Dynamic Peg is an entirely different animal.
- It is not backed by ANY collateral, and there are no “reserves”.
- It is not an Ethereum based (erc20) token, BAY has its own blockchain. :)
- It is not fixed to any specific price (such as the US Dollar), and is free to move (within limits) in accordance to stakers’ consensus.
- It is a highly decentralized system.
What is the Dynamic Peg?
The Dynamic Peg is a brand new mechanism for stabilizing BAY. It is strictly controlled by the users, for the users.
Through the simple freezing and unfreezing of coins, stakers can collectively change the liquidity of BAY’s supply, in order to change its price.
As it’s known, price is determined where supply and demand intersect. The Dynamic Peg ties the supply of BAY to the volume of votes behind the coin, forcing a direction in price. This helps reduce speculation and tame wild volatility. Unlike traditional currency pegs, the Dynamic Peg is not backed by any asset or form of collateral. It is decentralized and highly resistant to centralized manipulation or regulation. Speculators can still seek “fair market value”, yet they have to contend against investors and marketplace users who desire stability over volatility.
This system creates three balances for BAY: Liquid, Reserve, and Frozen.
Due to the different levels of liquidity, Liquid (BAY) and Reserve (BAYR) are traded on separate markets, and traded at different exchange rates.
Frozen coins act as a form of “savings” and cannot be traded.
We are now in the era of programmable money, and can democratically affect the properties of money. A system like this would have been unimaginable prior to the advent of cryptocurrency.
Why does BitBay need a Dynamic Peg? Can you please explain it in layman’s terms?
The Dynamic Peg is a tool specifically built to stabilize BitBay’s existing Double Deposit Escrow contracts and decentralized marketplace. These unique, peer-to-peer contracts rely on mutual deposits of Liquid BAY (from each party) to enforce the completion of each deal.
***ANY currency (including crypto and fiat) can be used as payment, however, Liquid BAY must be used for the deposits. As an option, Liquid BAY can also be used for payment within the contracts.
To satisfy users, the price of Liquid BAY must retain its value throughout the entire contract duration. They rely on this value, as it is a direct replacement for third-party trust within each deal.
Imagine you are buying a guitar through the marketplace. Both you and the seller place a deposit of 100 BAY into the contract, and the price of BAY crashes by 30% shortly after. Now both you and the seller have less financial skin in the deal. If someone decides to cheat or tries to back out of the deal, they have that much less to lose. With the Dynamic Peg, the supply liquidity can be adjusted collectively to compensate for this sudden decrease in price.
To act as both a medium of exchange (for payment) and a store of value (for collateral), the price of Liquid BAY must be stable.
If nothing is backing the coin, what enforces its price?
A highly adaptive supply liquidity enforces the price of Liquid BAY.
As it’s known, the law of supply and demand always remains true. When the supply changes based on consensus, so does the price. With this system, there are three balances: Liquid (BAY), Reserve (BAYR), and Frozen.
Liquid (BAY) and Reserve (BAY) hold independent market values and can create trade markets:
- Liquid (BAY) traded against other crypto or fiat pairings
- Reserve (BAYR) traded against other crypto or fiat pairings
- Liquid (BAY) / Reserve (BAYR) direct trade pairing
Imagine that you’re very thirsty, with a group of people in a hot desert. What would you (as a buyer) pay more for: Pure Liquid water you can drink immediately? Or a Reserve block of ice that takes months to melt before becoming usable?
The Dynamic Peg effectively adjusts the supply of Liquid BAY according to how many people want to buy it, and the rest is Reserved for future use.
This directly connects the price of Liquid BAY to volume of people buying it.
So if the demand for Liquid BAY drops, the amount of Reserve BAY increases. If the demand for Liquid BAY increases, Reserve BAY is “unfrozen” to make more Liquid BAY again. The perfect amount of liquidity will always be available to match demand, which stabilizes the price of Liquid BAY.
Meanwhile, Reserve BAY can still be traded, but with a time-delay. This makes the Reserve BAY price speculative. This price is based on market sentiment towards future demand for Liquid BAY, which is unpredictable and can fluctuate over time.
Is the Dynamic Peg 100% decentralized or “pseudo-decentralized”?
BitBay’s Dynamic Peg is 100% decentralized. It is currently “obfuscated open-source” with intentions of making completely open-source in the near future.
Unlike many other stablecoins, it is a system that does not require any third-party custodians, auditors, or regulation to operate. It will never liquidate assets, because it doesn’t require collateral, and thus never requires a centralized entity to decide who’s assets to liquidate first. This monetary supply mechanism is purely controlled through consensus of the participants themselves, no matter how small or large their numbers.
Raw base-layer decentralization is imperative to the success, robustness, and security of the entire BitBay economy.
When and how can I spend the different liquidities of BAY?
(Liquid, Reserve, Frozen Reserve, and Frozen Liquid)
Each liquidity class can be transferred at a different speed.
Liquid (BAY) can be moved instantly, at any time.
Liquid coins can also be voluntarily frozen, which gives it “Frozen Liquid” status. Freezing liquid coins places a 4-month time lock on the coin input. The receiving address will have to wait 4 months before these coins become spendable, however the coins can stake as soon as they enter the recipients wallet (earning 40 coin stake rewards).
Reserve (BAYR) can only be moved on the blockchain with a 1-month time lock.
***Note: Exchanges that use IOU accounting systems (transactions off-chain) are not bound by this rule. Reserve BAYR on exchanges can be traded without any time lock restrictions.
When reserve BAYR are moved on the blockchain, they are marked as “Frozen Reserve” status, and are not spendable again until a 1-month time lock matures. However, the receiving address will be allowed to stake the coins while they are time locked (earning 20 coin stake rewards).
Once time locks mature for either frozen (BAY) or frozen (BAYR), these coins will remain marked as “frozen”. This will allow the coin holder to continue to stake for the higher stake reward (40 coins for frozen BAY, 20 coins for frozen BAYR), while still being spendable. Once coins are spent from the frozen marked coin, they lose their frozen marked status and return to normal stake rewards (5 coins for liquid BAY, 10 coins for reserve BAYR).
The peg coding mimics a Layer 1 protocol, it works on top of UTXO, but it has right to decline non-peg transactions. Any transaction that attempts to deviate from this protocol will be rejected by the network. This ensures that every network participant (including exchanges) must follow all the rules of the Dynamic Peg.
How can investors benefit from BitBay’s Dynamic Peg?
There are many lucrative benefits to for investors who hold BAY:
Positive Price Pressure —
As the user-base for BitBay’s decentralized marketplace increases, so does the demand for liquid BAY needed within its Double Deposit Escrow contracts. As both buyers and sellers lock Liquid BAY into contracts for the duration of their deal, the amount of available Liquid BAY is reduced. This puts positive price pressure on Liquid BAY’s exchange rate.
Also, more Liquid BAY being locked into contracts equates to fewer Liquid BAY staking on the network, and therefore less “staking competition”. So the more BitBay’s marketplace is used, the higher potential ROI of investors who participate in staking.
Variable Staking Rewards —
BitBay’s Dynamic Peg brings a lucrative variable stake reward system to investors/nodes:
- Liquid earns 5 BAY rewards
- Reserve earns 10 BAY rewards
- Frozen Reserve earns 20 BAY rewards
- Frozen Liquid earns 40 BAY rewards
***Note: The annual rate of return on stake rewards depends on how many stakers are active, annually. It is unlikely that every user who holds BAY will stake, allowing for a higher annual return for those that do.
Independent Correlation —
With the Dynamic Peg, BAY’s correlation with Bitcoin and the larger cryptocurrency market is completely independent. The direction of price is chosen by the users themselves, and not any large entity. This creates a unique hedging alternative during prolonged bear market cycles, yet can still achieve positive correlation during bull runs.
During past bear cycles, long-term investors have often chosen to move their capital into both fiat currency and fiat-backed stablecoins. At best, this has allowed them to preserve any profits and minimize losses.
However, with dynamically pegged BAY, they have the potential to continue making profits while waiting out the market cycle. As an uncorrelated asset, combined with higher annual ROI from staking frozen coins, BAY presents a lucrative option for investors.
Active influence —
For the first time, investors can play a direct role in the value of their investment, without being a whale. When the market makes a turn, anyone who holds BAY can vote to temporarily freeze/unfreeze the liquid supply, allowing the majority consensus to apply pressure on the price.
With the BitBay Markets Client, investors who hold BAY can benefit from one of the most secure (and advanced) crypto wallets in the industry.
- 2 key multisignature wallets
- Steganography (hide private keys within images)
- Cold staking (between two computers)
No need for expensive mining equipment to earn passive income. With BitBay’s Proof of Stake 3, anyone who holds BAY can earn newly minted coins (in the form of stake rewards) with a simple laptop computer.
Don’t currencies achieve stability as they grow in size? If so, why not focus on adoption vs. building a specific system like this?
First, we must define the meaning of stability itself, and understand its relationship to time.
In our opinion, stability is only perceived when value changes slowly over a long period of time, and volatility is perceived when value changes quickly over short period of time.
For example: If the US Dollar’s value drops 5% in a day, it is considered a global crisis. If it slowly drops 5% over three years it’s considered normal.
In essence, stability equals low volatility… and low volatility occurs when supply and volume intersect during a significant length of time.
Despite its fundamental structure, the US Dollar has successfully maintained the appearance of stability for its users. This is primarily due to its massive volume. It does fluctuate in value, but that value has changed over a long period of time. Many cryptocurrency proponents are waiting for adoption (volume) in order to achieve this kind of size, and therefore become stable. However, this process can be a double-edged sword, as stability itself is needed for adoption to take place.
Given historic price data, currencies like Bitcoin could easily take take another 10–20 years before they are considered a “low volatility” currency. BitBay’s Dynamic Peg speeds up this process exponentially.
What keeps users from voting to pump or dump the price overnight?
The Dynamic Peg uses a few mechanisms to prevent users from pumping or dumping the price to extreme levels. While the price is always allowed to move up and down, it must do so within limits. Each of these mechanisms serve to regulate the supply liquidity of BAY.
First and foremost, a hard-coded voting interval of 200 blocks limits the number of “liquidity rate changes”. This keeps the pace of supply change to a consistent 7 sessions per day.
In addition to the voting intervals, there is also a limit on the percentage of liquidity change per voting session. This limit is set at 1–3% (inflation or deflation) per 200 block voting interval, depending on the ratio of votes.
- If vote ratio is “deflate” 3x more than “inflate”, then supply deflates 3%
- If vote ratio is “deflate” 2x more than “inflate”, then supply deflates 2%
- If vote ratio is “deflate” 1–2x more than “inflate/no change”, then supply deflates 1%
- If “no change” wins the vote count by any %, then supply remains constant.
What will the price of BAY be in X amount of time with the peg?
With BitBay’s Dynamic Peg, there is no fixed price, so it’s impossible to say what it will be in the future. The beauty of this system is that the price has room to adapt with demand and volume of the participants, at a healthy rate.
This price-flexibility truly separates the Dynamic Peg from other vulnerable “hard pegs” or “asset-backed pegs”, which attempt to match the value of traditional fiat currencies, cryptocurrencies, commodities, and assets — all of which experience varying levels of demand.
How do the non-liquid balances of Reserve (BAYR), Frozen Liquid (BAY), and Frozen Reserve (BAYR) have value? Are there any benefits to holding them?
Reserve (BAYR) and Frozen coins are valuable in several ways:
- Due to a 1-month time delay when transferring, and the ability to be traded on a secondary market, Reserve BAY is a speculative vehicle for future trading. This is very similar to most “futures” markets of today.
- Another incentive is the increased ability to earn stake rewards. Since Frozen coins have less voting power than Liquid BAY, a higher annual percentage in stake reward helps balance demand.
When the two characteristics of a time delay and expected interest are combined, a brand new set of asset classes is formed.
For example, two parties can trade liquid BAY for Reserve BAY, which creates a unique form of zero interest lending:
— — — — — — — — — — — — — — — -
Loan Duration: 1 month
Loan Amount: 20 Liquid BAY
Collateral: 20 Frozen Reserve BAY
- Alice sends Bob 20 Liquid BAY (loan)
- Bob voluntarily freezes 20 Reserve BAY, and sends the newly Frozen Reserve BAY to Alice (collateral)
- Alice receives 3x higher interest from staking the Frozen Reserve BAY for one month on the network, meanwhile Bob pays zero interest to Alice.
- After one month, Alice’s Frozen Reserve BAY turns back to Liquid BAY, so Bob doesn’t have to return any Liquid BAY back to Alice, and Alice doesn’t need to return any Frozen Reserve BAY to Bob.
***Disclaimer: Liquidity rate fluctuations may occur throughout the duration of any loan scenario, and any frozen coins that are traded may or may not become liquid upon unfreezing. To account for this, the borrower can be required to compensate for any differences upon time of “debt settlement”.
How does the Dynamic Peg handle “black swan events” such as an extreme decline in demand, market shock, etc.?
Throughout its entire design, the Dynamic Peg excels at adaptability. No matter how extreme of an event occurs, the supply of Liquid BAY will adjust to meet demand.
If absolutely necessary, the Dynamic Peg can deflate the supply of Liquid BAY down to a maximum of .0000058423% of its total, or (58,423 BAY) to keep the price stable. This is more than enough to cover 99.99999% of any “black swan event” that may occur.
In theory, if the demand for liquidity were to continue its decline past the point of maximum deflation, there is always the temporary option of decentralized asset backing. This would allow an investor (or pool of investors) to put up a specific amount of collateral (or a buy wall on an exchange) and have the community select an algorithm which deflates to that amount on a 1:1 ratio.
***Note: The probability of an event like this is extremely low, as the Dynamic Peg is designed to prevent this from happening in the first place.
What advantage does BitBay’s Dynamic Peg have over traditional fiat currency management?
The Dynamic Peg has many advantages over fiat currency management systems.
Here are several:
- The Dynamic Peg’s entire monetary supply is controlled by the users themselves vs. a traditional centralized institution. This reduces the effects of self-interests, entity manipulation, corruption, or national government intervention.
- In comparison to fiat currency management, BitBay’s Dynamic Peg changes its supply at a much faster rate. With the available tools, central banks are forced to work on a timeline of 3–24 months to create indirect economic impact, whereas BitBay’s Dynamic Peg continually makes direct impact every few hours.
- Unlike central banks, BitBay’s Dynamic Peg is not influenced by external factors such as unemployment rates, tax rates, interest rates, foreign interests, or other political agendas. It is purely driven by mathematics, game-theory based incentives, and secure democracy.
- With traditional fiat currency management, the rate of supply inflation is widely unlimited. This unrestricted influx of new money entering the economy (aka “quantitative easing”) has often led to severe hyperinflation throughout history.
- BitBay has a variable target rate of inflation which is facilitated through neutral mathematics and code. It is currently set at a variable rate between a minimum of 0.25% to a maximum of 2% of the total supply (currently roughly 1.02 Billion BAY), and can only be changed through a consensus of all stakers.
- When BitBay stakers vote on the supply level of Liquid BAY, they are communicating their own demand directly to the Dynamic Peg oracle, which adjusts supply with 100% accuracy. By the time central banks receive communication of their economy’s demand, it has been filtered through countless third-party relays, who collect information over a significant period of time. This makes it extremely difficult for regulators to adjust the supply of fiat accurately or efficiently
Who provides the capital to maintain the peg’s exchange rate? How are they compensated?
The beauty of the Dynamic Peg is that no capital (or collateral) is required to maintain the peg rate. The peg exchange rate is simply backed by the volume of the people using the currency.
***Note: Many other stablecoins offer private backing. In our opinion, this model is no different than a privately backed dollar over a government backed dollar. The age-old problem of counterparty risk will always be present in models such as this. A dynamic supply is the only viable solution for sustainable economic growth over time.
What will happen with the price in the short, mid, and long term?
As with anything, market predictions are never safe to make. We do not guarantee any expectations of price action or offer “investment advice”. There are an infinite number of factors that influence markets, and every investor must perform their own due diligence before investing their money.
The Dynamic Peg is designed to remove some very significant influences (such as whales and large price manipulators) which are all too common within cryptocurrency markets. It allows BAY to continuously search for a fair market value, and creates a place where both investors and platform participants can mutually benefit.
In our opinion, we expect several months to pass before a consistent fair market value (FMV) is discovered. The Dynamic Peg is a brand new concept which has never been attempted before… it essentially functions as a decentralized and democratic “Federal Reserve”. There is no telling how much capital will be directed towards such a robust and valuable system like this.
Bitcoin currently takes 2–4 years to complete a market cycle, as it slowly seeks to facilitate price stability and become a medium of exchange rather than a speculative store of value. We estimate that BAY will be able to complete market cycles within a few weeks. With these shorter-term cycles, investors should feel much more comfortable hodling through the “low” periods. This would lead to reduced sell orders on exchanges. The dynamic peg allows voters to freeze bearish manipulators’ liquidity by nearly 100%… in as little as 10 days. With fewer sell orders, these large players then loose incentive to manipulate BAY, and move on to other, more malleable cryptocurrencies.
Although future demand is impossible to predict, there are several Dynamic Peg features which incentivize demand for BAY. As these mechanisms work over time, we look forward to seeing the volume of BAY increase as well. We anticipate that this increase in volume will eventually arrive at a point where no more than 50% of the supply needs to be Reserved in order to stabilize price. Under this scenario, we see a stability level in which institutional investors feel comfortable and want to enter.
The long-term is even more difficult to predict. However, as more institutional investors enter the picture, and new innovations of BitBay satisfy a steady flow of demand, we hope to see a very stable ecosystem. Ideally, stakers would never have to freeze more than 3–5% of the total supply. Institutional investors seeking to make large transactions could do so with trustless OTC smart contracts (already built into the BitBay Markets Client), thus limiting any major impact on exchanges.
Are all Dynamic Peg votes considered equal?
With the Dynamic Peg, all votes are not considered equal.
A “variable voting power” mechanism is in place, which incentivises users to hold a balance of both Liquid and Frozen BAY. In the beginning, when supply is 100%, the voting power for Liquid and Frozen BAY is the same. However as deflation occurs, the Liquid BAY votes become stronger. Liquid BAY votes can be up to 40 times stronger than that of Frozen BAY.
There are several reasons for this structure:
- It balances demand for Frozen BAY, which earn higher stake rewards and prevents Frozen BAY from being traded for personal liquidity when things are deflated.
- It protects the users of BitBay’s p2p contracts (which require Liquid BAY as collateral).
- It provides demand for liquidity and stability on exchanges’ liquid market, which helps their business thrive. Exchanges can sell Liquid BAY at a premium over Reserve BAY.
- Investors who wish to collect stake rewards will also want to sell any Liquid BAY rewards at a premium. Newly minted BAY earned from staking will be valued based on the current Liquid to Reserve supply ratio, so stakers who wish to sell earned Liquid BAY at a premium must vote towards the stabilization of the Liquid BAY price. This maximizes their rewards’ liquidity, and therefore maximize profit potential.
What is the voting algorithm, and how does it work?
The voting algorithm is the easiest way to participate in the Dynamic Peg’s consensus. It will vote for a healthy price based on current market conditions, without the user having to vote manually.
- The algorithm’s voting power depends upon the number of stakers using it.
- Switching back to manual voting is as simple as the click of a mouse. Without an algorithmic oracle, manipulators will incur extreme risk trying to manipulate price in their favor for any significant length of time.
- With this unique voting system, BitBay can change algorithms to test new ideas without requiring a hard fork. Hypothetically, once enough data has been collected and a series of reputable algorithms are found, the human element could be removed entirely. Users can also design their own custom voting algorithms for personal use.
- Also, voters must remain active with their wallets in order to participate in the Dynamic Peg consensus. They will not be able to unlock their wallet, set a vote preference, and let it run passively forever. Every voter must manually refresh their vote decision after a designated number of votes.
These rules are as follows:
- Manual votes (deflate, inflate, no change) = 10 votes / 4,000 blocks before reset needed
- Algorithmic votes = 20 votes / 4,000 blocks before reset needed
***Coming soon: BitBay’s custom algorithm option. Users will soon be able to cast votes based on their favorite TA indicator!
How long are coins frozen for, and what enforces this rule?
There are different timelines for each liquidity type, which is hard-coded into the Dynamic Peg protocol, using checklocktimeverify. This ensures that spending cannot occur until after the allotted time has expired.
The freezing schedule is as follows:
Reserve: These will maintain Reserve status or become Liquid depending on the Dynamic Peg Consensus.
Frozen Reserve: 1 Month (from time of initial freezing)
Frozen Liquid: 4 Months (from time of initial freezing)
***Once Frozen Liquid BAY unfreeze and become Liquid BAY, they will retain their high interest staking privileges until moved. This feature allows users to “ladder” their Frozen BAY, maximizing the benefits of high interest and premium liquidity as each rung of the ladder unfreezes.
How often do votes change the supply liquidity?
As of now, the consensus intervals are at an even 200 blocks, starting at “0”. As each block is approximately 64 seconds, this interval occurs roughly every 3.5 hours… or about 7 voting sessions per day.
How much can the liquid supply/price of BAY fluctuate in one day?
The liquid supply level is currently set to change at a variable rate of 1–3% per voting session. Since there are approximately 7 voting sessions per day, the supply can fluctuate 1% compounded (21 times daily) or roughly 19%.
***Note: This rate is based on a compounding effect (during inflation) and a discounting effect (during deflation). As growth and volume of the BitBay platform increases, the rate can be adjusted to create a “smoother” change in supply.
See this chart for better understanding: https://docs.google.com/spreadsheets/d/18GSE76QnaasB09JSp_xEc-U6Xyz4Qyc3yRd5013EhpU/edit?usp=sharing
Does your protocol require information outside the blockchain, such as a feed of price data? If so, how does this oracle work? What makes the BitBay oracle different?
With this system, a reliance on traditional oracles for price data is unnecessary. Currently users cast votes on the liquid supply based on their own criteria, which acts as a “decentralized human oracle” for liquidity demand. This creates a flexible system that can quickly adapt as market conditions change. However, if other information was needed, then stakers could register their own data and check each other’s results. Incorrect information would result in a penalty on the stake reward.
Which participants can see which transactions? What data and metadata is available, and who can access it? How does this impact voting privacy?
Since peg audits cannot be obfuscated, the data is publicly available to everyone and does affect privacy. It is unclear if ring signatures or zero knowledge proofs can be used in combination with this system, due to their complexity.
For added privacy, users have the ability to broadcast using the Bitmessage network, which hides their IP address. While better solutions are available, we feel that it is temporarily sufficient for user privacy.
How does the Dynamic Peg affect BitBay’s DDE contracts?
BitBay’s DDE contracts must adhere to the Dynamic Peg’s rules. In order to account for time consumed during the negotiation process, the system initiates large buffer zones which proactively freeze a portion of the funds during their withdraw to escrow. This buffer zone occurs within 10 blocks before and after each voting session / supply rate change. As an alternative, the wallet can also sign multiple versions of the same withdraw to anticipate changes.
How does the Dynamic Peg affect spending? What if there is a reorganization?
In Bitcoin, reorganization can retroactively invalidate timelocked transactions, and can also be used to double spend on any network during a 51% attack event. This is why all cryptocurrencies wait for a set number of confirmations to secure a payment. In order to avoid discrepancies in liquidity during payments, the wallet initiates buffer zones 10 blocks before and after each voting session. In most circumstances, a change in rate can be predicted in advance, as votes are easily trackable on the blockchain.
What happens if my BAY freezes while in the middle of a BitBay contract?
To prevent problems, a buffer zone (of 10 blocks) is created when BAY is anticipated to freeze during a withdraw. Only Liquid BAY is allowed to be sent to escrow. Since Reserve BAY can be moved with a one month time lock, it is possible to withdraw both the Liquid and Frozen portions from of BAY escrow.
What if I accidentally send in the wrong vote? Can I go back and change it?
To maintain strong system integrity, a vote cannot be changed once cast. All votes are placed on-chain, and are considered final. This ensures that the voting system is fair, secure, and publicly auditable.