Pip10

pip-0010.mediawiki

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+<pre>
+  PIP: 10
+  Title: Add asset averaging to both prevent liquidity attacks as well as open up conversions
+  Layer: Consensus (hard fork)
+  Author: Paul Snow <paul@factom.com>
+  Comments-Summary: No comments yet.
+  Comments-URI: https://github.com/pegnet/pips/wiki/Comments:PIP-0010
+  Status: Draft
+  Type: Standards Track
+  Created: 2020-02-12
+  License: BSD-2-Clause
+</pre>
+
+==Abstract==
+In the whitepaper for PegNet, the ability to convert into and out of PEG is explained as necessary to create a means of allowing users of PegNet to provide liquidity as needed at a profit.  So if demand for pUSD is high, users of PegNet can convert and sell pUSD at rates higher than an dollar, and buy PEG.  PEG can be converted to pUSD and provide more pUSD to meet the demand.
+
+Likewise, if demand to sell pUSD is high, users of the PegNet can sell PEG and buy pUSD, then convert the cheap pUSD to PEG and repeat until the demand to sell pUSD is met.
+
+The problem with the latter case is that an attacker can execute a liquidity attack.
+
+The problem with liquidity attacks is that some assets can be driven up and down in price on the market pretty easily. What an attcker can do is drive a reference price down, and then convert to that pegged asset.  Then push the price of reference price up, and then convert out of that pegged asset.  This can be repeated over and over, and thus pump up the token balances of the attacker.
+
+This pip would aproximate the spread by tracking the average price over time vs the market price. Converting into an pAsset would be done at the higher of the spread, and converting out of a pAsset would be done at the lower of the spread.
+
+Adding a spread calculation to the PegNet allows users and traders to take advantage of the spread between the original reference price and a lower, market manipulated price by countering the liquidity attack.  The impact of the PegNet on a low liquidity reference asset in the real market is to support the reference asset price with the liquidity in the PegNet. 
+
+If the price of the pAsset in the real market is being driven down, then users in the PegNet may certainly wish to buy into the sell off in the real market, since 1) Dumps generally leave the market thin, and 2) if they drive the price higher than the current reference asset price, all the pAssets for the reference asset converted at the original value or higher.
+
+Persistent market moves in reference prices for pAssets are still useful for users of the PegNet because the spread goes to zero as prices stabalize.
+
+===Implementation===
+
+With each block, a decaying average price is calculated for each pAsset by taking the previous decaying price (PDP) and computing a weighted average price with the current market price (CMP).  This becomes the new PDP. A weight between 5 and 10 would be my suggestion.  Using 6, the calculation for the next PDP in a new block would be:
+
+PDP' = (6*PDP + CMP) / 7
+
+Converting out of a pAsset would use the MIN (PDP', CMP)
+
+Converting into a pAsset would use the MAX(PDP', CMP)
+
+The limits for conversion into PEG would be lifted.
+
+==Motivation==
+In order for the PegNet to work as designed, we need to be able to convert into PEG and out of PEG without the restrictions we currently face.  Furthermore, the restrictions on pFCT limit the utility of the PegNet from be leveraged by users of the Factom Protocol.  While this PIP does not suggest adding back the conversions of pAssets to pFCT, it does allow conversions into PEG.  This opens up all the capital currently trapped in PEG to be leveraged to add liquidity on exchanges for PEG, and pAssets.
+
+The impact of PIP-10:
+* increases the time required for the attacker to eithr hold a reference token price down or push a price down to perform the attack.
+* creates a counter incentive that allowing other PEG holders to trade against the interests of the attacker and profit by buying up low cost reference assets (or PEG, or pFCT) and converting the pAssets (or PEG and pFCT) at the previous higher value in the PegNet
+* Allows conversion out of PEG if the PEG price is falling, preserving the capitalization of the PegNet as a whole
+* Allows conversion into PEG to provide OTC and Arbitrage functions
+ * If a pAsset holder wishes to liquidate a good amount of a pAsset, the pAssets can be placed on the market at a discount. Selling PEG to buy the pAsset, and converting that pAsset to PEG provides a profit to the liquidity provider.
+ * If the selling of PEG does drive the price of PEG down sharply, buying into the drop of PEG also privides a profit to the buyer (as they will get PEG for a discount compared to the PEG Average, but will drive up the price to the PEG average allowing conversion to other pAssets at a profit).
+
+The cost to convert into or out of a rapidly changing value pAsset goes up by calculating a spread based on price changes.  This effectively insulates the PegNet from more volitile assets. More importantly, this allows the movement of liquidity in the PegNet to flow through Exchanges, increasing the liquidity of pAssets.
+