FAQ: Dynamic Peg Mechanism in the VTD Ecosystem
VTD has recently announced it will move from a fixed pegged to a dynamic pegged with its ERC-based Algorithmic Convergence Coin (https://vtdollar.medium.com/vtd-challenges-the-status-quo-9fe74d36e965). The ultimate goal is to become a through-the-cycle store of value token that can be used in the DeFi ecosystem. By unpegging VTD to a fixed target, we overcome major obstacles faced by existing algorithmic “stablecoins”.
This document answers some relevant questions and illustrates our view of VTD’s development over time as we are expanding into new territories.
What is a Dynamic Peg?
Unlike traditional stablecoins with a peg to a fiat currency (USDC, USDT, DAI, DSD, ESD) or some newer attempts to peg to another stablecoin (ZAI), VTD’s dynamic peg is not pegged any currency, asset or form of collateral. It is a first attempt to adopt a floating peg that finds its intrinsic value based on supply and demand of the market.
Ultimately, and over cycles of expansion and contraction, market dynamics will determine a fair value for the peg that will adjust to new conditions in the overall cryptocurrency and Defi market. In our view, this is a self-fulfilling prophecy based on community trust and a certain saturation of VTD’s market capitalization.
We expect a gradual convergence of VTD’s intrinsic value to the overall cryptocurrency or Defi market capitalization. As the total crypto market cap grows, we expect the expansion and contraction cycles of VTD to oscillate and drift upwards as shown in the following graph. Of course, the opposite is true during crypto winters — but as we know crypto always comes back even stronger after periods of consolidation.
Why is a Dynamic Peg Better than a Fixed Peg?
Fixed peg-based currencies (assets, fiat and tokens) have historically been used more as a medium of exchange than a store of value. Fixed peg currencies are also more prone to major disruptions and manipulation, as evidenced by various examples in the history: e.g. fail of Bretton Woods System (gold peg: 1973), Black Wednesday (peg of British Pound to Deutsche Mark: 1992), Black Thursday (DAI overreaction and stress: 2020). Thus these fixed pegged currencies serve as a useful medium of exchange but a terrible store of value.
Furthermore, algorithmic stablecoins such as ESD and DSD (and particularly their forks) have faced severe stresses moving towards their pegs of 1 USD. It is even more difficult (and if not impossible at higher market caps) to then sustain a price above $1 to achieve expansion.
As of the time of writing this article, last night DSD whales spent US$10 million (assuming their 50% of the last 24 hour volume) trying to pump DSD above $1 with no success:
For a more detailed explanation of our thesis please refer to our previous medium article: https://vtdollar.medium.com/vtd-challenges-the-status-quo-9fe74d36e965.
How Does the VTD Dynamic Peg Mechanism Work and What’s the Math Behind It?
Please refer to our previous medium article on the math, mechanics and implications of our dynamic peg here: https://vtdollar.medium.com/vip4-the-mechanics-behind-vtds-dynamic-peg-9385d5767157
In summary, the minting of expansion supply or contraction debt is similar to ESD and DSD, except we don’t take the difference between the previous epoch’s TWAP and $1. Instead we use the difference between the previous epoch’s TWAP and the Momentum Price (defined in the medium article link above). A few further tweaks include a) expansion cap at 10% per epoch, b) debt cap at 5% per contraction epoch, and c) a variable devisor based on the current # of epochs per day instead of DSD’s fixed 12.
Why is it Easier for VTD to go into Expansion?
During debt cycles, the narrower distance-to-peg value requires less capital and volume to push price above the floating peg. Furthermore, the dynamic peg disincentives short-term scalpers to implement a buy-low / sell-high strategy because any buy order during the contraction cycle automatically sends VTD closer to above its dynamic peg.
This will even incentivize short-term investors and scalpers to hold their coins because the rewards from the next expansion phase come sooner and are greater than quickly selling. Ultimately the DAO and LP bonders will benefit from this self-fulfilling and incentive-optimal phenomenon.
Will This Lead to a Sustainable and Trusted Store of Value Token?
We think a dynamic peg mechanism is a positive disruption and a game changer for the DeFi ecosystem. VTD has learned from the different stablecoin projects that came before it. The team and developers apply best practices and learned from worst practices from its predecessors. VTD improves on various factors, i.e. move from static to dynamic peg, use of dynamic epochs based on price level, and a totally redesigned coupon system coming out in VIP5.
