PegNet Review

Overview

PegNet is a decentralized, non-custodial network of tokens pegged (stabilized) to multiple market-defined assets and values. These assets may include currencies, precious metals, stocks, stock indexes, etc. The PegNet Network allows trading and conversion of value without the need for counterparties. PegNet is built as a Factom Asset Token (“FAT”) standard on top of the Factom Protocol.

About PegNet

PegNet was created by the Factom and the Ethereum community members in August 2019. It is a fully decentralized, auditable, open-source stable coin network using PoW consensus and external oracles to converge on the prices of currencies and assets. Anyone can contribute to the Core code and run a miner in the PegNet Network.

The current PegNet assets include 15 major currencies, 2 metals, and 14 cryptocurrencies. To get a complete list, refer here . Each of these assets stands alone as a cryptocurrency token in the market and are designated with a leading 'p'. For example, pUSD is pegged to the US Dollar. PegNet leverages simple game theory in which the set of pegged tokens self-reinforce each other in holding their mutual pegs.

PegNet’s own Token (PEG) summarizes the value of the set of pegged tokens in the market (only during the capitalization phase of the protocol). After PEG is established on exchanges, exchanges will set the value of PEG.





The Problem Statement

The below problems are generally faced by the cryptocurrency payment industry:



Conversion between assets not possible : Reserve based assets do not support the conversion between assets. The user is restricted to the liquidity of the reserve assets held on an exchange.

Price instability : Cryptocurrency for payments has faced implementation roadblocks due to shifting values, lack of liquidity, difficulties of reporting payments, currency risks, etc.

Complex processes : Complex usage processes and high transaction fees have contributed to the low adoption of digital assets.



Stability mechanism : Smart contract-based stable coins are decentralized to a great degree but involve leverage contracts that achieve stability through liquidation when the market pressure is forcing asset prices down.



The PegNet Solution

The PegNet network provides a mechanism for managing payments, treasury allocations, risk abatement, arbitrage, and budgets across jurisdictions without requiring expensive and slow processes through external parties such as financial institutions, payment processors, exchanges, etc. Let us look at some of the benefits:



Inter asset conversion : Only PegNet provides conversions between pegged assets. This is PegNet’s main USP.



Exposure to any of the listed asset : PegNet allows users within their wallets to choose their exposure to any of the listed asset values. Also, users (merchants & customers) can make payments in any of the real world currencies without having to resort to 3rd parties such as exchanges & payment processors.



Removal of complex processes : The network of pegged tokens provides a mechanism for managing payments across jurisdictions that bypass the slow and expensive processes associated with external third parties.



Low Fees : Transaction costs are about 1/10th of a cent, making them ideal for microtransactions.



Stability mechanism : PegNet proposes a different price stability mechanism through arbitrage. This needs one of PegNet’s assets to be liquid. Gradual adoption will tell us whether this mechanism will work. More details here.





Others features include:



High throughput

Secure data entry that easily integrates with existing systems

Efficient, an immutable publication of data.









Economy

The 3 major onramps (ways of entering) into the Pegnet economy include:



Mining : Mining determines the exchange rates, and the miners are rewarded with PEG.



Burn FCT : Burn Factom Tokens, Factoids (FCT) into Pegged Factoids (pFCT).



Inter asset conversion : Convert assets to each other at the current exchange rates (pFCT -> pUSD) or send them to another address.



Converting PEG to a pegged asset would reduce the supply of PEG and increase the total value of pegged assets thus increasing the value of remaining PEG. When converted to a new token, the old token is destroyed. Any pegged token may also be converted into PEG.





Technology



PegNet is a layer 2 application on top of Factom. This means that the data’s availability and immutability are secured by Factom’s proof of authority consensus model.



Block times are 10 minutes (the block time of the Factom Protocol which PegNet is built on top of).



Till now 378,609.8 Total FCT has been converted



The PegNet provides a static 5000 PEG reward with every block. This award is distributed evenly amongst the top 25 graded OPRs.



There are no halving or other reduction mechanisms for block rewards.





The Oracle: The Oracle is what determines the exchange rates used in a particular block. The process is a continuous loop, with one cycle lasting ten minutes.



Grade: Grading selects 10 best OPRs - Oracle Price Records (“best” means closest to the true exchange rate). These winners set the prices to use for that block.

Create: Create the OPR by gathering currency exchange data and combining it with the list of winners that we will be submitting.

Mining: Mining enables the network to find a Nonce for the OPR that has a high difficulty.

Write: Write the OPRs you want to submit to the Factom Blockchain before the block is over so they can be graded next block.







Proof of Work



PegNet works on a Proof of Work Mining algorithm to gain consensus. It uses a custom hash called LXRHash, which is designed to be GPU and ASIC resistant. The block duration is determined by the Factom Protocol’s 10-minute block time, which is why it can't have a predetermined minimum difficulty. It is not guaranteed that a certain threshold will be met during the mining time.

PegNet has seen an increase in Hashrate, with the current hash rate being at 914.5 Mh/s

Price Stability through arbitrages:

here . Once pAssets start to be listed on exchanges, then their price outside of PegNet will vary. PegNet is designed to employ arbitrage as the stability mechanism on exchanges. Further details

Conclusion

The PegNet project is relatively new and needs time to gather momentum. There are very few real-life implementations and case studies to be showcased in the current time.

PegNet’s method of achieving stability in prices for the pegged assets in exchanges is through arbitration. However, this needs one of the PegNet assets to be liquid in an exchange, so that cost arbitrage purchases can be converted to the liquid asset and which can be then sold for profit. Till the time a good off-ramp scenario is created by the market, there is a risk of the price remaining unstable. This problem will subside with adoption and the PegNet has the potential to become big.

Also, it costs money to submit OPRs. The byte-size of the OPR is below 1KiBi, which costs exactly one Entry Credit to submit. One Entry Credit can be bought for the equivalent of $0.001 USD. There is a maximum of 144 directory blocks in a 24-hour window.

PegNet also needs to address liquidity by listing on major exchanges (with big volume) and multiple exchanges.

Saying that the USP of inter-asset-conversion is unique and needs special mention. PegNet is a flag-bearer in this area. The nature of PegNet and its lack of counterparty opens up new implementations for the cryptocurrency industry such as simplified smart contract settlement and novel DEX liquidity mechanisms.







Disclaimer

This article is not financial advice and to be used for educational purposes only. It is our own point of view. Please do your own due diligence before making any financial investment decisions.

References