VIP4: The Mechanics Behind VTD’s Dynamic Peg

We’re implementing dynamic pegging, this is a technical deep dive, for a brief overview read this: (https://vtdollar.medium.com/vtd-challenges-the-status-quo-9fe74d36e965)

Let’s get the formula out of the way first:

Let Price be the previous epoch’s TWAP

Let M be the Momentum Price

Let β1 be the Momentum Factor of 0.85

(in testing a β1 = 0.85 best captures the last 10 epoch’s momentum)

Mprevious = β1 × Mhistorical + (1- β1) × Price

If Price > Mprevious : then the next epoch is a Contango Epoch

If Price < Mprevious : then the next epoch is a Backwardation Epoch

If we expand Mhistorical, it’s the weighted momentum of all the previous epochs with higher weights for more recent epochs:

Mhistorical =

β1×

(β1×

(β1×(…Mepoch0) + (1- β1)×Priceepoch-3)

+ (1- β1)×Priceepoch-2)

+ (1- β1)×Priceepoch-1)

Does your head explode when you see math? Here’s what it means:

1. Every epoch, we keep track of this Momentum Price, which is kind of like the weighted average of the last 10 or so epochs, skewed to the more recent epochs. It’s a way of measuring the force behind the current price movement.
2. If the price continues along this trend, the next epoch will be the same as the current one. So if it’s in Contango, it’ll keep expanding, if in Backwardation, it’ll keep contracting.
3. When the force behind this price movement stops, the momentum is overcome, and it starts going the other direction.

Okay, that was a lot of words, I still don’t see it… So here’s a graph:

This a simulated prices graph (don’t worry, the dashboard will also have a graph for you). The blue is the price, the red is the momentum. You see how the momentum slowly follows the direction of the price? When the price crosses the momentum line, that’s when it goes into Contango or Backwardation.

Similarly, this exact same method is one of the most profitable trading methods in stocks today:

If you’re a stock chart reader, you should find it familiar.

This isn’t the best formula. XYZ is better!

We know some of you are highly technical, or other teams may come along and fork our work. This is the simplest formula that leaves the least room for error because we’re breaking new ground here. We’ve left room in the contract to track moving averages, volume and a host of other factors that can be used to create more complicated schemes later. Let’s keep it simple first though, shall we?

What are the Implications?

It gets rid of the root of all evils — the Peg. Every other project has been trying to find a counter-force to expansion, so somehow the peg is kept. This doesn’t make any sense, the $1 US dollar is arbitrary. Why not 80c, or $4 or for that matter 1/1000 of a ETH, or 1/10000 of BTC?

Is the industry really going to use ESD or DSD as a medium of exchange when they can use USDC? Are people really going to use an algorithmic “stablecoin” when none of these have ever been stable and mostly used as a medium of speculation?

Therefore the market should find the peg. The Dao and stakeholders shouldn’t be held hostage unless a peg is met, if it’s so unattainable, the peg will lower to meet it. If the token is doing well, there’s no point massively inflating the supply to drop the price down.

This means the token could go into Backwardation at a price above $1 though. Don’t panic! Contractions under dynamic pegging makes it easier to go into the next expansion.

“But.. I hate coupons!”

So do we, so do we. Which brings us to VIP5….