The Great PEG Shock Absorber
By: David A. Johnston
Tags: Ethereum, Pegnet, Staking, Factom, Blockchain

The Great PEG Shock Absorber

Exchange Price for pUSD the Past 30 days

TLDR;

In all markets there are spikes and swings in prices. In order to keep the Stablecoins in PegNet “stable” the PEG token acts as “shock absorber”. Put plainly, there needs to be PEG available for arbitragers to convert pUSD into PEG and sell the PEG on external exchanges in order to get pUSD back to its $1.00 price when volatility is high.

Through the addition of pAsset “Staking” and the “Buffer,” the power of the PEG Shock Absorber is growing from its small size today to something very substantial in the coming months. This will be a powerful tool to balance the price of pUSD at a faster and faster rate. Returning pUSD to $1.00 used to take 30 days, today it takes 9 days, and with these improvements its possible pUSD can reach $1.00 within only a few hours after a market swing. Credit to “AroundTheBox” on Discord for coming up with the term.

Phase 1: The Small Shock Absorber

Today the “PEG Shock Absorber” is very small and only functions slowly. Specifically 720,000 PEG per day (5,000 times 144 blocks) or 5,040,000 PEG per week (5,000 times 144 blocks per day times 7). That’s $12,600 USD of worth of PEG per week available for conversions with today’s set up. Which I’d point is working… though slowly.

It’s worth noting that pUSD is staying around $1.00 in price, but recently for example took 9 days to come back to par price after someone sold a lot of pUSD. So it’s working at week day volumes averaging around $10,000 pUSD trading on exchanges. It just works too slowly.

PEG Supply Dynamics: Diagram shows PEG supply after the “Buffer” is implemented. The PEG being used as a “Shock Absorber” are represented in the blue band labeled “Available For Conversion”

Phase 2: The Large Shock Absorber

Now, let’s look with numbers at what happens next when the “Buffer” gets implemented after supply falls under the Maximum Supply Curve in say 130 days. The buffer will significantly increase the power of the shock absorber by about 14 times. Specifically those 10,000,000 PEG per day on average that were burned the last 30 days, those would be added to the “Available Conversions” which powers the shock absorber.

PEG Supply Decrease Due To PEG Burns

So let’s add that up. The PEG Shock Absorber would then have 10,000,000 PEG per day instead of 720,000. The 10 Million PEG at current PEG prices $25,000 USD per day or $175,000 USD per week. That’s a lot more conversions to PEG available.

If we take the recent example of how much PEG was needed to close the pUSD price to par over 9 days, 6,480,000 PEG ($16,200 USD worth). The PegNet with the buffer implemented now has that much PEG available within 15.5 hours instead of 9 days. With pUSD prices closing to par within a single day, now the system is getting to a level of much higher confidence.

Phase 3: The Great PEG Stock Absorber

Now let’s look with numbers at what happens next when the price of PEG has moved up from the current level. Let’s say for example the price of PEG reaches $0.01 USD. I think this price assumption is very reasonable as in this scenario the Maximum Supply Curve is at 473,000,000 PEG which at $0.01 PEG is a market cap of $4,730,000 USD. Which is very close the the current $4,392,000 market cap. With a price of $0.01 PEG and still presuming 10 Million PEG per day being burning into pAssets, now the daily PEG conversions increase by 4X to $100,000 USD worth or $700,000 per week.

Going back to our example of how long it takes to close the pUSD par gap. With the Great PEG Shock Absorber now in action, it would only be a matter of 3.88 hours to have enough PEG available for the price correction of pUSD, potentially even faster if arbitragers have that much in their available reserve to act almost immediately on cheap pUSD that gets offered on exchange. Then PegNet is in a position to absorb large pUSD sales and very quickly rebalance.

Conclusion: Enabling Staking + The Buffer Builds The Great Shock Absorber

The PEG Stock Absorber is basically recharged by the market and thus grows in proportion to the scale of the pAssets on PegNet. As demand for pAssets consumes PEG, more capacity becomes available for arbitragers to balance pAsset prices on external exchanges.

This major improvement to the PEG shock absorber moving from $12,600 per week of PEG for conversions to $700,000 per week of PEG for conversions can be accomplished by first enabling pAsset Staking, say the next 4 weeks, which will help drive PEG burns and then enabling the Buffer in 3 or 4 months whenever the Current PEG Supply crosses the Maximum PEG Supply Curve (estimated at 129 days from now).