What is the Dynamic Peg?
BitBay’s Dynamic Peg is a brand new mechanism for stabilizing a digital currency. It is strictly controlled by the users, for the users.
Through a simple mechanism of freezing and unfreezing, stakers can collectively change the liquidity of BAY’s supply, putting pressure on its market value.
As it’s known, price is determined where supply and demand intersect. The Dynamic Peg ties the supply of BAY to the volume behind the coin, forcing a direction in value. This reduces speculation, tames wild volatility, and creates completely independent correlation with the wider crypto market.
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 that desire stability over volatility.
This system creates three balances for BAY: Liquid, Reserve, and Frozen.
Due to these different levels of liquidity, Liquid BAY and Reserve BAY are traded on separate markets, and traded at different exchange rates. Frozen BAY acts as a form of “savings” and cannot be traded. In the era of programmable money, we can democratically affect the properties of money. A system like this would have been unimaginable prior to the advent of cryptocurrency.
Does the Dynamic Peg make BitBay a “stablecoin”?
Not exactly. This system does reduce volatility, but is vastly different from what is commonly thought of as a “stablecoin”.
Technically speaking, a “stablecoin” is any cryptocurrency which uses a mechanism to stabilize its value. However, this term has been heavily associated with Ethereum-based tokens which attempt to maintain equilibrium with the US Dollar, or other fiat currencies or assets.
BitBay’s Dynamic Peg is an entirely different animal.
It is not an Ethereum-based (erc20) token.
It is not backed by ANY collateral, and there are no “reserves”.
It is not fixed to any specific price target.
It’s an extremely adaptable system that enforces a stable value without the need for any collateral or centralized management.
If nothing is backing the coin, what enforces its market value?
An adaptive supply liquidity puts pressure on the market value of Liquid BAY. As it’s known, the law of supply and demand always remains true. When the supply’s liquidity changes based on consensus, it applies pressure to the market value.
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 value 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 value of Liquid BAY.
Meanwhile, Reserve BAY can still be traded, but with a time-delay. This makes Reserve BAY speculative, as it’s value is based on market sentiment towards future demand for Liquid BAY, which is unpredictable and can fluctuate over time.
Liquid BAY and Reserve BAY hold independent values and can create three 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
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 stability systems, 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.
What prevents users from voting to simply pump or dump the supply?
The Dynamic Peg uses a few mechanisms to prevent users from quickly pumping or dumping the supply to extreme levels. While the supply liquidity is always allowed to move up and down, it must do so within limits. Each of these mechanisms serve to collectively regulate the supply 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.
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 maintain equilibrium. 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 a 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.
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 stability systems 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.
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 value. This maximizes their rewards’ liquidity, and therefore maximize profit potential.
How much can the supply liquidity of BAY fluctuate in one day?
The liquid supply level is currently set to only change at a variable rate of 1–3% per voting session. There is 1 voting session every 200 blocks (approximately 7 voting sessions per day), and the supply can fluctuate by 1% per session (compounded 21 times daily) . This equates to a maximum of 7% to roughly 19% rate change per day.
***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.
Where can I learn more about BitBay and its Dynamic Peg?
For more information, feel free to check out these links: