Staking pAssets As An Arbitrage Function on PegNet — PIP 12
Shifting The Arbitrage Function To A Staking Model, Instead of A Conversion Model
Staking rewards are often used to incentivize those involved in consensus and confirming transactions on a proof of stake blockchain. In PegNet, the work that needs to be done is primarily that of arbitrage. In order to align arbitragers and give them a reason to do the work of converting their PEG into pAssets, and balancing pAsset prices on external exchanges, PegNet has to strengthen the reward for those efforts.
Specifically this proposal is to directly reward the 5,000 PEG per block already available to arbitragers, to all those converting from pAssets into PEG during that block. Instead of deducting from the pAsset balance of the person converting into PEG, their proportional PEG reward is distributed back to their address at zero cost. They get their PEG and keep their pAssets too.
Before Staking: $12.50 of pUSD is converted into 5,000 PEG every block.
Result: in 0 pUSD / 5,000 PEG per block.
After Staking: Hold $1,000 pUSD earn $0.60 of PEG per day, that’s $219 USD worth of PEG each year at current prices (21.9% staking reward).
Result: $1,000 of pUSD + $219 of PEG per year.
1. PegNet already has a 5,000 PEG allocation per block for the arbitrage function. So keep the PEG supply curve / inflation model the same.
2. Instead of distributing 5,000 PEG each block via conversions (which deduct pAssets from the address converting into PEG), the protocol will reward the 5,000 PEG each block to people converting into PEG with their pAssets.
3. The reward would still go in proportion to those converting their pAssets into PEG each block. For example, if all $3,000,000 of pAssets currently in the PegNet were participating in arbitrage each block for 1 month, then at current PEG prices ($0.0025) times 4,380 blocks, times 5,000 PEG, they would all get a proportionate amount of about $54,750 worth of PEG each month. A nice 1.825% monthly reward for participating in pAsset arbitrage or 21.9% per year.
4. In order to avoid over loading the network with conversions every block, have an arbitrager demonstrate the pAsset conversion once every 24 hours. Their pAssets plus their portion of the PEG is then returns at the end of the 24 hour period (144 blocks specifically).
The obvious effect will be an increase in pAssets flowing into the PegNet as even at the current $0.0025 USD price per PEG the reward is very attractive. This will be a nice virtuous cycle. Arbitragers buying PEG, converting them into pAssets, thus taking PEG off the exchanges and reducing the supply of PEG in the system.
Of course as the pAssets in the system increase, the competition for the reward will increase and reduce the total the reward for converting from pAssets to PEG. So it should be expected that an equilibrium will develop over time as pAssets flow into PegNet more or less depending on the current reward level.
I generally like this approach because:
A. It does NOT change the supply curve / inflation model of PEG.
B. The super powers of PegNet are really demonstrated here as the user can keep their value in whichever tokens they are most bullish about while earning a reward at the same time. This will create rewards for many tokens such as BTC, BCH, ETH via pBTC, pBCH, pETH that don’t yet have a reward model.
C. The 5,000 PEG each block is more closely tied to its intended arbitrage purpose, because this creates a motive to keep pAssets instead of selling them on the market.
D. This option leaves the means of HOW the arbitragers keep the pAssets prices close to their reference prices, to their expertise and their discretion. This proposal just sets the reward (for converting PEG into pAssets), but leaves smart minds to figure out the HOW.
E. The coding is very straight forward as its simply a switch from conversions charging pAssets for the conversion into PEG, to instead the pAssets being returned to the users with each conversion into PEG.
Concerns: pAsset Liquidity on Exchanges
This proposal creates a powerful reason to hold and arbitrage pAssets on the PegNet. However there is a concern to be addressed around demand for pAssets on exchanges, where the market price for pAssets is ultimately determined.
Ways To Address This Concern
First, exchange liquidity issue might be addressed by having more pUSD trading pairs and even a pUSD / PEG trading pair on external markets. Then pUSD holders (all pAsset holders really, as anyone can convert into pUSD) could trade pUSD more easily and even trade for PEG via an external market without re opening the liquidity attack internally on the PegNet.
Second, this issue might be addressed by implementing the “buffer” discussed before when implementing the Predictable PEG Supply Curve. So that as PEG is removed from the system by conversions into pAssets, additional capacity for conversions into PEG builds up over time. This is the future scenario pictured at the top of the article where both Staking and the Buffer have been implemented. Then all PEG burns into pAssets create more available PEG for conversions to help with liquidity.
Third, after publishing this article a community member (ElectroChemical on Discord) pointed out that there will be a nice incentive created by this upgrade, where by if the arbitrager buys cheaper pAssets off an external exchange, they can then Stake those pAssets on PegNet at full value. This offers a nice boost in reward and gives another strong reason to buy cheap pAssets off an exchange and move them into the PegNet.
Forth, after publishing this article a community member (Wes on Discord) pointed out there may actually develop a premium for pAssets on exchanges because of the reward they earn from Staking may drive the market to value them above their par value. Interesting angle I hadn’t thought of.
After receiving positive reactions from miners, exchanges, traders and a wide variety of community members and hearing no opposition to the concept, I think it would be great for developers in the community to get involved and evaluate the details in implementation, coding and launching this Staking feature in the next upgrade during March.