Predictable Supply of PEG

Creating predictable PEG scarcity in both the mining rewards & conversions

David A. Johnston
Dec 2, 2019 · 6 min read

TL;DR Summary

Today PEG tokens are scarce, but user conversions into and out of PEG make the supply unpredictable. To add predictability to the PEG supply, the PegNet software will allow a total of 5,000 PEG in conversions from pAssets, per 10 minute block. This is done with a proportional approach allowing any user to submit a conversion into PEG and get a pro-rata number of PEG, in the case when users are requesting more than the 5,000 PEG per block limit.

Combined with the existing 5,000 PEG block reward, for the proof of work miners, the PegNet software will see a predictable 10,000 PEG added per block. This upgrade will give users confidence via an easy to calculate maximum PEG supply in circulation at any given time.

History of Scarcity

Since the birth of Bitcoin on January 3rd 2009, we have witnessed the power of scarcity in digital monetary systems.

When anyone learned about Bitcoin their first question was “Why do these coins have value?” The simple answer was that there would never be more than 21 million Bitcoins and to send value on the Bitcoin protocol you had to have Bitcoins to do so. This proved true, as the demand for sending value via Bitcoin increased, naturally the price of these scarce Bitcoins increased as new users added their value to the system.

The Proven Path

Since the success of Bitcoin’s monetary model, many other digital tokens have copied this model of digital scarcity, normally by offering regular and predictable block rewards to miners securing the network. Bitcoin offered 50 BTC per block the first 4 years, 25 BTC per block the second 4 years and currently pays 12.5 BTC per block to miners. This predictable schedule creates an easy calculation to know the current or future number of tokens in circulation at any time.

In the case of PegNet, the software also uses a similar predictable reward to its miners of 5,000 PEG per 10 minute block. With 144 ten minute periods per day, a total of 720,000 PEG are rewarded per day, 21,600,000 PEG per 30 day month, and 262,800,000 PEG per year.

PEG Is Scarce, But Currently Its Supply Is Not Predictable

In the case of PegNet the mining reward is predictable, however there is a second means of creating PEG in the system which is unique to PegNet. That is converting pegged assets (pAssets) into PEG tokens inside a user’s wallet. This is an important feature for the arbitrage on PegNet to function.

During the first 55 days of PEG conversions, the users have converted pAssets into about half of all the PEG in the supply (74,000,000 PEG from mining / 80,000,000 PEG from conversions). The challenge with this design is that a user can convert into more PEG whenever they want as long as they have enough value in their pAssets to do so.

So while PEG is scarce in that its supply will always be constrained to the amount of pAssets in the system available to convert into it, the supply of PEG is not easily predictable. A large holder of pAssets is capable of moving into PEG and creating many more of them especially if the PEG price takes a dip.

Chart Shows The Addition of 525.6 Million PEG Year Cumulatively Over 10 Years

Adding Predictability to the PEG Conversion Model

The proposed solution is to add predictability to the conversions of PEG during each block. Given the demand for PEG seen thus far it seems best to have PEG converters be on par with the miners. So miners can earn 5,000 PEG per block and converters can get 5,000 PEG per block by converting via pAssets. This sets the total PEG per block at 10,000 resulting in 525,600,000 PEG per year.

This upgrade accomplishes several objectives at the same time.

  1. Provides PEG holders predictability about the supply of PEG.
  2. Defuses any liquidity attack where a whale tries to push around the PEG price and use it to their advantage to convert into PEG on the PegNet.
  3. Preserves arbitragers ability to convert pAssets into PEG for balancing prices between the PegNet reference prices and the external exchanges.
Chart shows the arbitrage cycle for when pAsset price are low compared to their reference on PegNet

Using A Supply Curve Approach To Address High Volatility Times

Two behaviors may lead to there being LESS PEG in circulation than expected, either users convert OUT of PEG into any pAsset or arbitragers may not convert INTO the full 5,000 PEG per block on every block.

This is important observation and offers an opportunity. If the objective is simple predictable supply curve, then users have bought into that concept of up to a maximum level of PEG will be in circulation according to the schedule. If the supply falls below the expected supply curve, then it is proposed PegNet set aside the creation of these PEG for future blocks, so either arbitrage usage or people converting back into PEG can take place later.

The math works out so the PegNet software allows for 5,000 PEG per block to be created cumulatively via conversions over time since the first block of the PegNet’s history. Therefore, pAsset conversions into PEG will be limited to the total of number of blocks since the beginning of PegNet, times 5,000.

So for example if the PegNet has been live for 365 days, then in order for there to be pAsset conversions into PEG, the total PEG supply must be below 262,800,000 (5,000 PEG per block, times 144 blocks per day, times 365 days).

Market volatility comes in waves and in unpredictable swings so arbitrage activity is likely to spike from time to time. Having this buffer of PEG built up from low activity times and available in high volatility times seems a useful feature to have. While preserving the total PEG supply predictability people desire.

This buffer concept of available PEG is more complex topic than can be fully covered in this article. There are a number of edge cases that should be further explored by the community after the basic 5,000 PEG conversion per block update is made.

Chart shows the arbitrage cycle for when pAsset price are high compared to their reference on PegNet

Balancing Incentives and Functions In PegNet

For PegNet to function well there must a balance of incentives. Its worth remembering that pAsset holders / users are the main audience of the system.

Miners play the role of providing accurate price data to the users and arbitragers provide narrow pAsset price spreads on the exchanges, again in service of the pAsset holder. Both functions are in service of a reliable PegNet that users can trust.

If arbitrageurs have 99.9% of the value in the system nothing is left for miners and users and that is a real risk in an uncapped PEG supply system. No formula is perfect, but equally rewarding the critical functions of accurate data and narrow price spreads seems fair and as much as the miners and arbitrages are holders of pAssets then they also benefit from a stable and trust worthy PegNet.

Conclusion:

This is an important step in the development of PegNet. Every software system has certain trade offs; this proposal seems to strike a good balance where it enables the arbitrage needed in the system, prevents attackers from running liquidity loops, and provides PEG holders predictability about the supply of PEG.

PegNet

Building a Payments and Store of Value Network on the Factom Protocol

David A. Johnston

Written by

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

PegNet

PegNet

Building a Payments and Store of Value Network on the Factom Protocol

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