Where is the working example in crypto, where a peg has, and continues to, work as intended?
NuBits had a peg but it temporarily broke and there was a scandal on ccdek or whatever the exchange was called.
NuBits uses custodial wallets and is probably front running.
Then there is BitUSD. They use collateral in BTS. It's interesting but relies on BitShares staying alive and costs alot of BitShares to put/call. It works for now. It is a low market cap at 100k
Then there is Tether. So far it works but it depends entirely on their company backing the coin.
None of those pegs are scalable, none of them can roll in price. They aren't attractive to speculators either.
BitUSD is probably the most promising since Tether can fall at any minute. But if BitShares falls so does BitUSD.
In Bitbay even if Bitcoin falls, Bitbay survives! It's decentralized and no backers or custodians required. However out peg can fluctuate in price. Munti can elaborate on economic pegs since that's his area of expertise.
My apologies in advance for what I know must end up as a long winded post, but I'm starting to realize a lot of people don't know much about pegging.
If you look at it schematically there are only two kinds of peg, asset based and trust based.
Asset based peg was the first generation of pegs. Governments or institutions like banks would hold an amount of gold or silver that equaled the value of the money or IOU's they issued. The gold standard is the most commonly known variation of this, and has several subclasses. There are several problems with asset based pegs.
1. The value of the asset can change dramatically like it did when the silver standard broke down.
2. It's not practical to have an asset that is physical like gold because it's time consuming, expensive, and risky to move around when needed.
3. At the end of the day an asset based peg is also a trust based peg because you trust the government or institution to have the amount of asset they claim they have.
4. Even if they have the asset, they can run away with it! This is especially a danger with crypto based asset pegs as you can imagine...
5. Most use cases can be solved cheaper by other means like SWAPS or CDF's. (It is possible to make financial instruments like those with Bay's smart contracts)
The trust based peg is what we see in fiat. (Fiat is latin and means "it shall be". Referring to governments defining their their money is worth something and how much) For most developed countries, Bretton Woods was the transition from asset based to trust based peg. Bretton Woods was originally mainly asset based (gold) but also had a trust based element to bridge temporarily gaps. Pegging is a complicated topic in fiat because most fiat has some pegging in it, declared or not. The reason is obvious. Trade surplus or defecit is heavily influenced by currency exchange rates, and thus influence a lot of other parameters you would want to control like unemployment, taxes, welfare, etc.
The declared pegs are the easy ones to see, but they can vary a lot. First generation of fiat pegs used to be what I call hard pegs, meaning they don't allow much deviation from target. This is what we have in Bretton Woods with +/- 1%. The advantage of the hard peg is of course it's stability when it holds, giving very predictable terms for trade etc. The disadvantage is that it is the easiest to break, and that it creates a shock in the economy when it breaks. Establishing a trustworthy new hard peg after your first one is broken is also difficult. Hard pegs are relying heavily on buy/sell walls either de facto placed, or (more commonly) expected by the market when outer limits of the peg are reached. There are two main reasons why the hard peg is the easiest to break:
1. Over time the fundamentals in the countries economy or the ability to defend the peg may change a lot, and thus make the pegged value unrealistic. That is an open invitation for traders to break the peg.
2. It is very profitable for traders to break a peg because of the fomo it creates when it's broken.
Hard or relatively hard pegs in fiat have a long tradition for failing. Modern pegs tend to be softer i.e. allow more movement, and are often not declared at all. They don't provide the same predictability as the hard ones, but are considered more robust. Have you noticed that many central banks keep mentioning inflation targets? They are often a key element in modern pegs because they directly influence the amount of money printed, and thus are an important parameter in finding the "correct" exchange rate between currencies.
Sidhujag mentions a third peg described by Vitalik. A prediction based peg. That is not a peg. That is a lottery! Even though hard pegs have a history of failure, they would be much safer than the prediction based peg because they don't fail that often. Prediction based peg has much in common with the technical analysis many traders rely on. Just like TA, prediction based peg can be expected to often be a self fulfilling prophecy. But would you bet your house on it? I wouldn't. I'm not going to be a participant in the battle regarding the usefulness or "truth" in TA, but for those of you who don't know this; the theory behind TA is that the market is right, and that the collective knowledge of fundamentals is reflected in the price of a currency, commodity, or whatever. Well, in crypto there are few fundamentals compared to stock market or forex. This leaves the field wide open to whales. And news about fundamentals can have 10x the impact in crypto compared to forex. So I completely disagree with you sidhujag. Schelling coin would not be better than the pegging attempts we already see in crypto, it would be the worst of them all. That said, it's a fascinating concept, and I'm sure there are other use cases where it can have a lot of value.
So, that was a lot about pegging in fiat. How is that relevant? Mostly not. But we use the term pegging, and fiat is where we can see what has worked and what not. Also the reason for one or the other. The reason pegging is so complicated in fiat is because, as I have mentioned before, it affects and is affected by so many factors in a country's economy. It's less complicated in crypto. If you go back to early posts by David you will see that it was not decided in the beginning if Bay should have a fixed (hard) peg or a rolling (soft) peg. Fiat shows us that rolling peg is much more robust, so that's why we go for that. There are a few other topics from macro economy like flow of money to consider too (remember 2008? That was not a lack of money, but a lack of trust that disturbed the flow of money), but they are really minor in the big picture.
To sum it up, BitBay's peg must be classified as a trust based peg, and has chosen the safer version -a soft peg. The rest is micro economics -supply and demand. The revolutionary concept is that it is decentralized! Every other peg is centralized, i.e., controlled and/or dependent on one person or group of persons. If he/they fail, the peg fails! What happens in a pegged coin that relies on custodians if the custodians don't think being a custodian is the best investment alternative for them? Those are the kind of problems we have eliminated by going decentralized.
