Let's Talk About the DEC Peg

Exciting times in Splinterlands. Did you see that jump in DEC yesterday?

We all knew the SPS announcement was coming and still so many people were selling off DEC even just a few days ago and then even selling into this move higher.

I saw so many people taking about how they were taken by surprise by DEC's move. I'm just surprised it took so long for this to happen since again, we knew this was coming and usually markets buy in anticipation.

Here's a spoiler: it's not done yet. It may take a breather but DEC is going back to peg. That's another 35% upside.

Let's talk about the peg

If you've read any of my stuff on the old peg, you know my stance was that it wasn't a real peg.

I find it very entertaining because when I say this, even though The price of DEC hasn't been at its "peg" in over a year people come out of the woodwork to argue the peg is real.

Without getting too much into it, my argument with the old system was that the algorithm was not a peg to any particular price but was just trying to find an equilibrium at any price.

The psychological peg

The only thing that pegged the price to $1/1000 dec was the idea that there was a peg. This caused people to trade DEC as if the peg was real, selling if it got above the "peg" and buying if it went below. This made it self-fulfilling psychological peg.

This only works when demand is fairly stable. When demand goes up to the point people ignore that little profit incentive, we get DEC at 15x it's "peg". When supply and demand push prices of a coin up and down without limit, it was never a stable coin or a peg. It's just a coin like any other.

The "product backed peg" is also not real

Likewise, the idea of a product backed stable coin is also not real.

Many people are pointing to oil and the US dollar as an example of this working but this is a bad analogy.

Oil is priced in dollars but dollars are not pegged to oil. A certain amount of USD will always buy you a certain amount of oil. If that were the case you couldn't call the US dollar a fiat currency.

You can either peg the price of a pack to a certain amount of DEC or you can peg the price of a pack to a certain amount of USD. You can't do both.

Again, they are falling into the trap of believing that just saying something has a certain value gives it that value. This product backing is a psychological peg to the USD and not a real one.

This should be obvious by now to everyone since this product backed peg is already in place and it isn't working. The market just repriced packs lower and DEC followed.

Repricing packs

There's a lot of CL cards out there, they are priced so cheaply that its hard to get more than $2 of value out of a pack on average and therefore the perceived value of packs dropped. Pegging DEC to an asset that was falling against the USD didn't help DEC hold to its USD peg. Call me shocked.

You could make a pretty solid argument that pegging a product no one was willing to pay $4 for to DEC helped push DEC further away from its peg instead of closer to it. And if they don't change the structure of their pack offerings going forward, the biggest driver of DEC going down against the peg will continue to be its peg to packs.

But that's another post.

Still, the new peg is mostly real

Going forward there's two reasons the peg will be something to take more seriously.

The first is its inability to go over the peg by more than a percent or so.

With the ability to burn $1 worth of SPS for 975 DEC, it means if anyone puts in an order to buy DEC above the peg by more than a percent or two, a bot is going to fill the order and then go burn the SPS to replenish their DEC, pocketing the difference. DEC can't go above peg anymore by more than about 1%. It's impossible.

This already happens on hive engine on tokens that have robust liquity pools. If you put in an order for a token on HE and there's a better price available in the LP, a bot will instantly fill your order and then replenish themselves with the LP, pocketing the difference.

But what about the downside?

Well, as we already talked about, the product backing method isn't going to support it. Yabapmatt has said it will as long as there is demand for Splinterlands products but but demand isn't binary. It's not just off and on. Just because people are playing Splinterlands doesn't mean they are willing to buy packs as certain price. Just like now they might be willing to buy packs for $2.50 that they aren't willing to buy at $4 and in that case, the peg breaks if that's all you're relying on to hold it.

However, this thankfully isn't all that's being relied on.

The supply constraint on DEC is what's going to hold DEC at peg most of the time.

As you may know, 80% of the DEC supply comes from in game rewards. The other 20% comes from LP rewards. The LP rewards will still be there and that means there will be new DEC minted still but that's just not enough to run the game.

The game is going to start running out of DEC as more is burned from things like guild upgrades. This is where as long as people are still playing Splinterlands, DEC will have demand beyond what the game produces.

That shortage should always be nipping at DEC's heels.

Since all DEC minted now to shore up the constant shortage is manually done by the market with no incentive to mint more than what is absolutely necessary, the supply of DEC should almost always be perfectly matched to the demand for DEC.

The only times this won't be the case will be when some big seller gets very impatient and sells a boatload all at once. This shouldn't happen often but it should get bought back up very quickly when it does.

The other time is right after major events that temporarily inflate the supply of DEC like a pack sale or something. If there's a bunch of SPS burned to satisfy a very temporary demand increase, we may have a short time after demand normalizes when we have a lower priced DEC due to oversupply. Remember, the price can't go up so any correction would causes it to drop below its peg.

These events should be rare enough though that when they happen, there should be plenty of bots and traders ready to quickly buy the excess and get it back up to peg pretty quickly. Arbitrage.

So my plan for DEC going forward is simple: Arbitrage

For now I'm holding about 2.5 million DEC plus whatever I get from rentals until we get back to peg. I'll sell once we get there and keep a buy order at 5% and 10% below peg to catch any weird shocks.

I fully expect as long as the game is healthy for them quickly to get bought back up for quick profits.

Posted Using LeoFinance ^Beta