A peg is a peg

in cryptocurrency •  last year

Just like /tom, /robert , you keep changing the subject. You bring a lot of technical programming jargon to a subject that is not programming, and actually very simple. I know perfectly well what a peg is. I will tell you what a peg is, since you force me. Not that I think you or Tom do not know what a peg is, but it seems you don´t want to acknowledge the meaning of this very simple monetary concept.

I definitely do not misunderstand the concept of peg. I have to accept, though, that I did not understand this message of yours.

A peg is a promise the issuer of a currency makes, to keep it´s price within a short range. I have seen it in action many times. (And, as a matter of fact, it certainly is what is described in the WP).

Price meaning it´s value against another currency (the countercurrency). For the Swiss Franc it´s the euro, for other currencies normally it is the USD. For MECOIN, it´s the USD.

The one thing you need, to seriously enforce a peg, is a reserve in the countercurrency (USD, for MECOIN). Without a big enough reserve, your peg will be just an empty promise. You have to have funds that are sufficient to buy the whole of the currency you have issued. (Does MECOIN have a USD reserve of this sort?)

The issuer establishes a range, and sells currency at the higher end of the range, and buys currency at the lower end of the range. The price, thus, won´t go higher than the top end, since you are willing to sell any amount of currency at that value. Same thing with the low end: the price won´t go lower than the limit established, since you are going to buy any amount at that price.

Let´s use MECOIN as an example. Let´s say you want to issue MECOIN, pegged with the USD at a price of 6 USD per MECOIN, with a range of +-10%. The upper end will be 6.6, the lower end will be 5.4. Initially you sell say 1000 MECOIN. You get your 6000 USD - AND YOU KEEP THEM. (This process was the ICO, in crypto talk). If the price fluctuates within the range, you don´t participate. If the price reaches any of the two ends, you buy at the low and sell at the high. Each time you sell new coins, you receive MORE countercurrency than the original price. If you buy coins, you give for them LESS than the original price.

Let´s say the currency drops in price, and the issuer has to buy, in order to enforce it´s promise. Let´s say it´s a considerable run and it has to buy back half of the issued currency. It would be left with 6000 - (5.4 * 500 ) = 3300 USD. It will be liable for just USD 3000, though, so the issuer would have made 300 USD in this process. Let´s say it uses these extra funds, but keeps the required amount of 3000 USD.

Now, the market has tested the issuer, and the issuer has done well. The currency quickly increases it´s market price. When it reaches the top end, the issuer starts selling, enforcing it´s promise. Let´s say it sells 600 MECOIN. It managed to recover it´s original base, and even increase it a bit. Now it has the remainder of the original fund, plus the procedures of this last sale. That is 3000 + (6.6 * 600) = 6960. It only has to keep 6600 (3000+3000+100 * 6) as a countercurrency fund, so it has 360 USD to use to fund the project.

Finally, the issuer decides it wants a higher value for it´s currency. Instead of keeping increasing it´s base, it will enlarge the range, just on the upper side. For instance, it can establish a new range, from 5.4 to 7.5 . If the currency keeps doing well, the new price will be 7.5, and the issuer will keep selling his hot bread currency at a handsome profit, with which it can, of course, finance it´s activities.

Note that the higher price is achieved BY THE MARKET. It is not arbitrarily established by the issuer.

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