Tokenomics – a combination of the words “Token” and “Economics” – is vital to understanding a cryptocurrency’s utilization and value proposition. It helps users and investors to see the potential of a cryptocurrency and make judgments based on a number of things such as issuance, distribution, functionality, governance, and more.
A crypto’s tokenomics is essentially the quality of the token and anything that impacts its value. Good tokenomics will convince users/investors to adopt the token, help build its ecosystem, drive demand, and establish the long-term value and viability of the token. Therefore, a crypto’s tokenomics cannot be understated.
In the following article, we’ll take a deep dive into the tokenomics of PEG – the token at the core of the new and innovative PegNet protocol.
What is PEG token?
PEG is the token utilized in PegNet – a decentralized, non-custodial network of tokens pegged (stabilized) to different currencies and assets that allows for trading and conversion of value without the need for counterparties.
The PegNet network is launching with 29 assets including 14 major currencies, 2 metals, and 14 cryptocurrencies (including the PEG), with more assets including baskets planned. Each of these assets is represented as pegged tokens such as pEUR, pUSD, pBTC or pGold. PEG is the main gateway into tokens pretty much summarize the value of all these pegged assets/tokens. Therefore, it’s a token that serves as a relief value to the PegNet protocol.
Another way to think of it is as a company share, ie. Facebook, Google, or Microsoft shares that represents a piece of the company that you can actually purchase and trade. With protocols, it’s similar, as the tokens are pretty much the form of a modern share. You can invest in protocols by buying its token.
How is PEG token Created and Distributed?
Most cryptocurrencies are created either by mining, minting, or staking tokens. See some examples below:
- In Bitcoin’s (BTC) case, bitcoin is mined via Proof-of-Work (PoW), where each time a block is mined, the miner(s) receive a block reward of 12.5 BTC.
- In the case of Ethereum (ETH) with Ethereum 2.0, new ETH will be rewarded to users who validate blocks by staking their ETH holdings.
- As for the minting method of creating tokens, the popular Nano (NANO) cryptocurrency simply minted and distributed its maximum supply of tokens right off the bat.
In the case of PEG token, it differs from most other cryptocurrencies by creating PEG tokens in two different ways; 1) via PoW mining and 2) via burning Factom (FCT).
Creating PEG via PoW Mining
PEG tokens are created via Proof-of-Work in which anyone who wants to mine for PegNet can use their computers to mine price data. Pricing data of pegged assets in the network is what the miners “mine” and all the mined price data is collected into an Oracle Price Record (OPR).
The OPRs are sorted by PoW and the highest 50 are then evaluated for agreement. The record that most agrees with the rest of the 50 records provides the prices for the current block. The top 10 OPRs in the most agreement all share a 5000 PEG reward with the best miner receiving 800, second receiving 600, and the other eight receiving 450.
Since the PEG token is built on top of the Factom protocol, block times are every 10 minutes, meaning 5000 PEG tokens are distributed to miners every 10 minutes. Thus far there are no plans to reduce this block reward through time.
Creating PEG via Burning Factom (FCT)
While PEG is created via mining,PEG tokens can also be created by first converting Factoids (FCT) into pegged Factoids (pFCT). This effectively burns the FCT from the Factom Protocol’s point of view, but are credited pFCT by PegNet.
For instance, FCT can be converted into pFCT at a 1:1 ratio, ie if you burn 100 FCT using the PegNet burn address, PegNet creates 100 pFCT and assigns it to your FCT address. You may then convert the pFCT to pUSD or pBTC or any other asset at the oracle defined market price. This is facilitated by burning the pFCT and issuing the equivalent of the asset wanted, (when you convert to a new token, the old token is burned/destroyed).
Additionally, any pegged token may be burned into PEG. Therefore, users can convert FCT for pFCT (using the PegNet burn address), and then convert pFCT into PEG. The PegNet adds payment utility to the Factom protocol, and increases the liquidity of FCT through conversion to pFCT, and forever reduces the Factom (FCT) supply. Therefore, demand for all the assets in PegNet will drive demand for the FCT token and drive its price up as a result.
Moreover, apart from mining and burning to create PEG tokens, I should note that PEG tokens were never issued or distributed through a pre-mine, airdrop, initial coin offering (ICO), or initial exchange offering (IEO). PEG tokens are and forever will be issued and distributed in a fair and transparent manner.
PegNet always respects Value to Value. Conversions of FCT to pFCT occur value to value. And all conversions of pFCT to any other PegNet asset occur at the market price, value to value. $100 pFCT can be converted into $100 of pGold or $100 of PEG.
What determines the price of PEG token?
Since the PEG token is still very new and has yet to be listed on any exchanges, it is priced in a rather unique way because there are no market participants to establish PEG’s price. However, once PEG is listed on exchanges, the market will establish PEG’s market price.
Before Exchange Listing:
Before an exchange listing, the PegNet token (PEG) summarizes the value of the set of pegged tokens in the market. In other words, the market value of all the pegged assets, (pGold, pEUR, pUSD, pBTC, etc.) divided by the number of existing PEG is used to set the value of PEG.
The project has set up its own Market Cap website (PegNetMarketCap.com) to show users the total market value and supply of PegNet’s pegged assets as well as the conversion volumes between assets.
Currently, at the moment of writing, PegNet (PEG) sits at around $0.0034. Let’s do some simple math to prove that it actually reflects the value of all the p(Assets) such as pFCT, pUSC or pBTC combined together.
At the moment of writing, the PegNet MarketCap is around $351,000. The value of the PEG tokens, which rank #1 on the list make up for $175,000 cap.
Let’s do some simple math:
Total PegNet market cap - PEG token market cap = market cap of all p(Assets)
$351,000 - $175,000 = $176,000
This way we get to know the combined value of all the p(Assets). From here, determining the true value of it is pretty easy. The equation will look like this:
Market cap of all pAssets / PEG tokens supply = Value of 1 Peg token
Proceeding with this equation:
$176,000 / 50,322,024.37 = $0.00349747
These simple formulas allow us to understand where the current price of a single PEG token comes from.
After Exchange Listing:
PegNet (PEG) will soon be listed on exchanges as the Factom team which stands behind the PegNet Network is already discussing it with various exchanges. Once PEG is listed, the price of a PEG token will most likely be highly volatile and speculative. Price discovery might take some time before traders come to understand PegNet and how to properly value it. Some will argue that the market is still undergoing this process of determining a proper value for Bitcoin.
To put it simply, the price of PEG will be realized when more and more people hedge their crypto investments by converting their crypto ie. Bitcoin into various p(Assets) such as pGold, pSilver, or stablecoin p(Assets) such as pUSD, pUSDC, pEUR, etc.
When people start using the network, the market cap size of the whole PegNet network will grow and since the PEG token is highly correlated to the PegNet market cap, the PEG token is expected to appreciate in value.
In other words, if you have PEG tokens, you can profit from their appreciation once people start hedging their crypto profits in a stablecoin such as pUSD. And if you’re wondering why anyone would choose pUSD instead of DAI? The main incentive is the swap cost at ½ of a cent. Other stablecoin networks don’t offer that.
To sum up, soon after PEG tokens get listed on exchanges, the price will be volatile and might even go down despite PegNet’s assets growing in size. Or the PEG might go up rapidly as demand requires arbitrage to bring down the price of assets like pGold or pUSD in the market. (Arbitrage to bring down the price of an asset like pGold involves selling high priced pGold for PEG on an exchange, while converting PEG to pGold at market price on PegNet. Buying PEG this way drives up the PEG price).
Additionally, PEG doesn’t suffer the downward pressure most tokens might have. After all, it can be liquidated at market price to any of the other 28 assets in PegNet. So if pUSD has a great deal of liquidity, instead of trying to sell PEG on an exchange, a PEG holder can convert to pUSD at market price, and sell the pUSD.
Providing another example, Bitcoin has undergone repeated price discovery cycles. In fact, it took 3 years until February 2011 for Bitcoin to reach a price of just $1.00 and another 2 years in 2013 for Bitcoin to reach a price of $1000. In the last few years, Bitcoin has ranged from nearly $20,000 dollars to below $4,000 dollars. We are still in a market seeking to value Bitcoin.
All in all, the adoption of technology takes longer than most people think and we can’t expect people to understand PegNet’s value proposition right off the bat.
How does p(Assets) such as pUSD or pEUR remain stable? - Arbitrage as Stability Mechanism
A common misconception regarding PegNet (PEG) and it’s stablecoin network for decentralized finance is that the PEG token itself is a stablecoin. However, the PEG token itself is not meant to be stable.
Rather the pegged tokens “p(Assets)” in the network is pegged (stabilized) to different currencies and assets. In other words, the p(Assets) will remain stable to the assets they’re pegged to and the PEG token itself is not a stablecoin.
The way p(Assets) remain stable is simply through arbitrage on exchanges.
To provide an analogy:
Using an exchange, let’s say John spots the opportunity to profit from arbitrage. He notices that pUSD is being valued at ¥115, and Yen (JPY) is below its value of ¥108.9 (say low by 2%) making it ¥106.7.
To profit from this opportunity John will sell the high priced pUSD and buy the cheap pJPY. Then, he will convert the same pJPY to pUSD, and net the 7% spread between pUSD and pJPY on the exchange.
To put things in perspective, John sets his sell orders at ¥115 per pUSD. When a large market buy occurs, his sell order fills in and he converts his pJPY to pUSD at ¥106.7 per pUSD, netting him a 7% spread between pUSD and pJPY on the exchange – free money.
As the message spreads, Bob decides to make money off that as well. But, in order to grab some pJPY during a large sell he needs to put his asks lower than John, say at ¥114 per pUSD. Then, if Alice wants to join the party she needs to sell lower than Bob and set her ask price to ie. ¥113 and so on…
The selling pattern described above works the same for buyers.
The more people try to grab some of that free money, the tighter the fluctuation gaps of pJPY and pUSD, therefore its pegs remain even more stable to the $1.00 per pUSD, or priced in Yen, ¥108.9 per pUSD.
Taking this analogy described above, the fact is that in reality Alice and Bob are in fact trading bots that function in a much tighter spread.
Moreover, see another example of how arbitrageurs maintain the pegs between p(Assets) and Oracle Prices:
Let’s say pGold is trading at a market price of $1470 against the PEG token, which is $20 under its oracle provided price of $1490. An arbitrager spots this opportunity and buys the pGold asset at a lower price and sells it on a different, more liquid market such as pUSD for $1490. Then, the arbitrager keeps buying undervalued pGold until there is no more of it at a discount, therefore bringing pGold back to its Oracle Price.
In summary, the arbitrage works to bring both the pGold and the pUSD to their pegged values and nets the arbitrager a decent percentage gain which can be held in pEUR or pUSD (choice of the arbitrager).
While the tokenomics behind PegNet may be a little confusing at first, they appear to be sound and of high quality. The PegNet network is unlike anything we have seen before and it opens up a whole new realm of possibilities.
The PEG token has some interesting utilization in the PegNet network as well as a fair issuance, a fair distribution, and a transparent economic token model. It will be interesting to see how PEG establishes long-term value and to see the token's utility in action.
There is a lot more analysis and depth to the PEG token that has not made it into this blog. Therefore, I welcome all readers to read the PegNet whitepaper and join the PegNet Discord where you can join a growing community of forward thinkers and discuss all aspects of PegNet and the PEG token.