Bootstrapping Liquidity In PegNet
Solving The Bear Whale Problem
Summary
Boot strapping liquidity in PegNet is THE next major milestone for the project to accomplish in 2020. Many of the prerequisites for opening up liquidity were a matter of technical upgrades to the oracles and these will be addressed with the coming PegNet 2.0 set of upgrades. However beyond the technical hurtles the last major issue to address is an economic one. Namely, how to protect the PegNet from large whales, especially when they want to exit their value from the network.
Below I examine a hypothetical “bear whale” scenario by using a large pUSD / PEG holder as an example and discuss their exit as a way of thinking through how the price of PEG will be effected if conversions into PEG were made “unlimited” (a source of major debate in the community). Lastly, I review alternative means of boot strapping the liquidity in PEG beyond unlimited conversions into PEG. In short, welcome to our pUSD powered future : )
Statements
1. Everyone wants liquidity to increase.
2. Users of PegNet want to easily enter and exit the PegNet.
3. The most liquid trading pairs on external exchanges are pUSD & PEG.
4. pAsset to PEG conversions have been restricted to 5,000 PEG per block.
5. The bear whale that has been converting from pUSD to PEG for months.
6. The bear whale dumps all the PEG onto the market that he gets.
7. The bear whale has at least 500,000 pUSD in the PegNet system.
8. The PEG buy side market depth on exchanges is less than 100,000 USD
The Critical Question
If conversions are made unlimited from pAssets into PEG then how many PEG will be created and what will be the effects on PegNet?
Answers
1. If the bear whale converts even just 100,000 pUSD into PEG and sells it all on the market, the price of PEG will crash to 1 Satoshi.
2. At this 1 satoshi price the bear whale can convert their remaining $400,000 of pUSD into about four Billion PEG.
3. Four Billion additional PEG into the system more than doubles the current supply and even if this supply is bought up at one Satoshi (Sat) in price, this causes a series of problems.
Problems of Massive Over Supply of PEG
1. At 1 Sat in price the granularity of conversions is now 100% up and 50% down, meaning a pAsset buyer simply waits for the PEG market to go up 2 Sats in price, and takes a 100% gain converting PEG into pAssets.
2. The same actor now converting pAssets into PEG can wait for the price of PEG to go down to 1 Sat in price and convert into twice as much PEG as they started with. Repeat again and again until 99% of the PEG / pAssets in the system are held by this individual or others doing similar games.
3. This granularity issue generates untold billions of PEG and pAssets in the PegNet damaging interest and confidence in the honesty of the PegNet ledger.
4. Static Mining + Staking rewards of 20,000 PEG per block each, are reduced to a value of $2 per block / $288 per day. At these levels of reward little hash power can be expected to secure the oracles and little interest in Staking can be expected.
5. Without trading volatility in the PEG price, the interest in PEG declines among traders and eventually the PEG token is delisted from exchanges due to low trading volume.
6. Without many external markets for the PEG token, there is no means of entry or exit and the PegNet values become frozen & mining ceases and the oracles are no longer updated every 10 minutes and the system fails completely.
Evaluating Solutions
1. Bootstrapping Liquidity Through pUSD
2. Expanding The Base of pAsset / PEG Holders
3. Opening pAsset to PEG Conversions More, Once It Achieves Scale
4. Strengthening the Utility of PEG
5. Opening The Path From pUSD to PEG Conversions Via Trading Pairs
Bootstrapping Liquidity Through pUSD
pUSD is the most obvious alternative to PEG for users to enter and exit the system. The external exchange trading volumes for pUSD have recently surpassed PEG as pUSD’s current low price has made it an attractive target for speculators to buy cheap pAssets in the PegNet, with the prospect of having more liquidity later on in pUSD or exit through PEG conversions when the conversion rate is increased / uncapped.
The actions to take would be to lean into pUSD listings, more wallet & trading tool infrastructure, and any other means of creating additional pUSD demand. This demand for pUSD ultimately drives usage of PEG, as all pUSD is created by the burning of PEG into a pUSD in the first place.
Expanding The Base of pAsset / PEG holders
The potential solution is one of spreading out the ownership of PEG & pAssets to a broader set of users so that no player has such a concentration of PEG or pAssets as a percentage of the total network value. The bear whale seems to be now dumping pUSD in addition to his PEG. With a number of different pUSD buyers replacing the single large seller the ownership of pUSD is becoming more diverse.
The means to achieve broader adoption seems to lay in the addition of Staking via PIP 12 & PIP 13. Instead of a few big miners, now hundreds or even thousands of people will see PEG rewards sent to their addresses and the distribution of PEG supply will begin spreading out more and more over time at a rate of 1,051,200,000 PEG per year. Within 1 year, the percentage size of any whale now in the system will reduce by 50% as the total PEG supply nearly doubles.
Opening pAsset to PEG Conversions More, Once It Achieves Scale
The PEG issues at their root are ones of scale. If the PEG market capitalization was worth $100 Million USD and its daily trading volume was $5 Million USD (the minimum to become a listed pAsset) then a large seller unloading 500,000 pUSD into PEG wouldn’t be an issue.
So part of the solution maybe to only uncap conversions once PEG tokens reach the same market cap and daily trading volume expected of any pAsset.
Strengthening The Utility of PEG
1. PegNet 2.0 upgrade closes the FCT gateway into pAssets (this makes PEG the only gateway). This concludes the pAsset boot strapping process. Plenty of pAssets are now in the system, going forward pAssets should be created via PEG burning. Any gateway additions in the future would have to include a mechanism for the value being added to PEG in the process.
2. PEG’s predictable supply curve should be maintained in order to avoid the gaming discussed above and also increases in conversions from pAssets to PEG have to be done in a way that doesn’t increase the supply curve.
Opening The Path From pUSD to PEG Conversions Via Trading Pairs
By having a liquid PEG/pUSD trading pair on external exchange for people who want to enter/exit PegNet or change their pUSD into PEG without creating more PEG in the system. There is already one such listing on qTrade however there hasn’t been any focus building this market and more of the PEG and pUSD are on exchanges such as ViteX and VineX so opening up these markets seems critical to makes this trading pair attractive and building its volume.
Conclusion
A demand side problem can’t be solved with a supply side solution.
Meaning the adjusting the number of PEG will never address the issue of boot strapping demand for pegged assets (the source of liquidity). The utility of PegNet is in its pegged assets, especially pUSD the most popular asset on the network and other popular assets including pBTC, pETH, pBCH, pGold and so forth. By focusing on building demand for these assets, starting with pUSD as the on ramp and off ramp, that the PegNet can achieve a high degree of liquidity.
