In one of the last AMA where @Yabapmatt appeared, he brought up a very interesting concept that he liked from luna/terra. He said because DEC should be a stable coin he'd like to use SPS to stabilize it.
While he figures demand for packs and potions sold in a fixed amount of DEC would support DEC from falling to the downside, he's like to put in a mechanism where if DEC goes up, you could burn $1 worth of SPS to create 1000 dec.
The idea being that if DEC goes above $1/1000, any SPS holder could create more at the $1/1000 price. This would stop people from buying DEC when it went up because you'd get a better deal by buying and burning SPS. It also means if it did go up there's an instant way to create lots more dec until the demand in the market evened out with the new supply.
The added benefit is that the buying pressure in DEC gets transferred as value into SPS.
Brilliant right?
Maybe. But like most adjustments made to complicated systems, there will be unintended consequences. In this case, it could stunt growth in the game in multiple ways.
Consider how the current DEC system works.
Price is "pegged" at $1/1000.
This will ruffle some feathers but there is only one thing pegging DEC at that price and it is Splinterlands assets sold by the company that are priced in a certain amount of DEC.
Because you can buy packs and potions in both credits and DEC and because credits really are pegged since they can't freely trade, the credits set the psychological price of the goods sold. If DEC goes too low, it makes it seem like a deal but the reality is that its not a deal. You are getting market price and the market is valuing those assets at a lesser amount at that moment for whatever reason. But that's another post.
This style of peg only works to protect against the downside and it only works if demand stays high for the goods you can buy in both DEC and credits.
But the algorithm!
The algorithm is not a peg. It's not a soft peg. It has nothing to do mechanically with a peg.
The algorithm just responds to demand and dampens price changes. Even that is debatable since it can and has magnified changes in price before too. Really all the algorithm does is links a certain price to a certain amount of DEC issued to the pools each day. It favors no price any more than any other price.
If DEC is at "peg" the rewards pool is set to have 1 million dec in it. There is nothing saying that 1 million dec per day is the optimal number of tokens for the economy of Splinterlands. They just decided on 1 million at a time when the game had a few thousand players and there was no rental market. It now has a few hundred thousands players so it would stand to reason that the amount of dec needed to run the game might have gone up since then?
If the price of DEC goes down, the algorithm adds less DEC to the pool. The idea being that if price goes down that means there was less demand for DEC so they put less of it out there until demand and supply meet. Of course this also lowers the value of playing the game so lowering supply could act to lower demand but let's ignore that for now and pretend the world is never complicated.
Once supply and demand meet, there is nothing about the algorithm that pulls the price back specifically to $1/1000. It will happily just stay spitting out the same lower amount of DEC each day at the enw lower price. No reason for it to change anything.
But what if DEC goes up?
But what about if theres buying pressure on dec because let's say 200k players need to use it to rent a bunch of cards each day and that takes more than the 1 million dec the algorithm puts out.
Well, demand should go up which should send the price up and as a result, the amount of DEC kicked in to the prize pool should also go up in an attempt to meet demand at some point. Maybe demand gets met with Dec at $3/1000 dec when the algorithm is kicking out 3 million dec per day into the pool or maybe its met at $5/1000 dec when the algorithm is kicking out 5 million dec per day into the pool.
One way or the other, eventually demand gets met and price stabilizes somewhere when demand stabilizes.
There is absolutely nothing pushing the price of DEC back down to $1/1000 where its kicking out 1 million per day again. The algorithm does not go on a campaign of releasing progressively more DEC the longer it stays away from the peg or anything like that. There's just nothing magic about that 1 million dec or $1/1000. If demand remains constant, there's no reason for price to drop again and no reason if it does drop it will go to that price specifically........
EXCEPT the psychological idea that DEC is pegged and will eventually go back to $1/1000 so you might as well sell if its above that price which fulfills the prophesy. Even if you understand the peg isn't real, knowing others will react this way means price will probably head back there so it would be prudent to sell it.
It wouldn't be fair to not mention that there is a little bit less demand when DEC is over peg because no one is going to use it to buy a pack if its 5x the price of credits. But the impact is very limited because you can go to hive engine and trade a little dec for enough hive to buy a lot of credits.
Also since card packs and positons would never send price above peg, the main demand is likely the rental market which is priced in DEC, removing pack demand isn't going to do much to lower the price back down to "peg" if it wasn't pack demand that drove it up there.
The artificial cap on Splinterlands value
Here we get into the meat of the issue.
If the price of DEC is now locked by the SPS burn at $1/1000 AND the total amount of DEC issued per day is locked by the price of DEC, what happens to the value of playing the game as more players enter? It goes down on a per player basis.
The amount of DEC printed each day will always only be 1 million. And the value of those 1 million dec will always be at $1/1000. That means the DEC prize pool to be split amongst all players will be stuck at exactly $1000 per day no matter how many players there ever are competing for the pool.
What you have is an artificial cap on the value of playing the game in terms of the DEC winnings.
But it doesn't stop there.
I rent out my cards. When DEC ran up last year, I was renting cards out for about 25k DEC per day. At one point DEC got all the way to $15/1000. That means the free market was dictating that with the cards I owned, I should be getting $350 per day under those market conditions.
Now the market has changed. I have far more cards but they are earning only 10-15k dec per day. DEC is back to being worth $1/1000 which means the free market has decided my cards are worth renting for about $12 per day. I know right?
What's the difference between now and then? The rewards then were high enough that people were willing to spend more because they would still come out profitable. Now rewards are low so its not worth it. Part of the reason rewards are low is because of the peg.
Rentals are priced in DEC. So if the price of DEC is artificially pegged at $1/1000 and the algorithm uses the price to to peg the amount given out to a fixed 1 million, it puts an artificial cap on the rental value of cards. Theres only so much dec that's going to be won from playing the cards, your paying in dec to rent the cards so there's only so much you should ever spend on a rental.
So if you put an artificial cap on the value of using a card and also put a cap on the value of renting a card you own out, you are also putting a cap on the value of the card itself.
You might now be starting to see why this isn't a great idea. But there's more.
In fact there's two more major things to consider.
The first is that when the value of playing the game goes up it increases demand to play the game.
While chest rewards is a big part of that, DEC rewards almost single handedly drove the last rally. If you remember, there weren't even any cards coming out of those chests or nor were there packs for sale for most of that player growth rally last summer.
Consider that when DEC was at $15/1000, the game was spitting out 15 million DEC per day at that elevated price. That means instead of $1000 in dec rewards being split between the player base, there was $225k dollars in dec value being pushed out there.
Yes, SPS was exciting and was part of what pushed DEC up but $225k meant player could rent cards for insane amount of money and still make a profit that was much larger than the profit they can make today. That sent the value of assets higher which sent the value of playing to get those asset higher. What started as an SPS rally ended up being a DEC rally.
That's why assets kept soaring. The price of DEC went parabolic and brought in so many people that eventually the Splinterlands tech and organization couldn't handle it and they pulled the plug on DEC rewards in Bronze to stop the craziness. (my theory anyway)
And this is why I said, that algorithm can magnify price moves just as easily as it can dampen them.
So, what they will do is kill off that growth potential which is absolutely huge. Maybe they want to kill that off though so they don't end up with another uncontrollable situation? It's possible. After all, parabolic rallies always have to break down at some point.
But maybe you're saying, yeah but just hold SPS and then you get all that value!
Well, sure but also, eh, not really.
First, you lose the value of actually playing the game in favor of investors and bots just arbing the market when more dec is needed. You also lose the parabolic growth potential we discussed above.
But the real problem here is scale.
SPS is a monster. It's 3 billion tokens for a game!
Burning enough SPS to make up for DEC deficit is the equivalent of throwing a cup of water in an empty olympic size swimming pool and calling it progress toward filling it.
To demonstrate this we can look at what just happened with validators. Currently there is only 1/5 the max supply of SPS circulating and only half of that is liquid.
So its still a bit of a monster but not even close to what it will one day be. So the effects on burning SPS should be substantially more now than when we burn an equivalent amount later on.
So far they've sold 2000 presale licenses and 430 in Tranche 1. I'll spare you the math but if we assume full voucher usage and say 80% SPS spent was burned, all told validators so far have burned about 24 million SPS which is about 7% of the liquid supply and we are burning more every day.
What happened to the price of SPS? It's pinned to the floor at its all time low.
Might it have gone down even more if we hadn't burned that amount? Sure. But you'd hope burning 7% of the liquid and locking up another 2% in the DAO with the threat of burning much more would have pushed the price off the floor.
Now let's look at DEC.
Let's say the game needs to flat out double the supply of DEC. There is currently 5 billion dec in existence with only a fraction of that on the market but let's stick with it. A double of the entire supply is needed.
It would stand to reason that if we need twice the DEC we probably already have a higher SPS price. SPS by that point could be up at $0.50 for all we know and that would mean for each 1000 dec we'd only burn 2SPS. That would mean we'd only end up burning 10 million SPS to double the supply of DEC.
But ok, let's be more fair and say the game has taken off but SPS hasn't really moved. Let's say its sitting frustratingly at just $0.10. Now we need to create 5 billion dec so we do 5 million burns. Each burn costs 10 SPS. So now we are looking at 50 million SPS burned.
50 million of a much higher amount out there than we have right now.
We just burned half that amount in the last week and it did nothing to the value of SPS because SPS absorbed it like it was that cup of water in the swimming pool. Or a gallon of gas in a cruise ship engine vs your hybrid car. Or $10,000 spent by your government on a "project" instead of you spending it on your own household project. The point is, resource allocation matters and an amount of energy that could make a real difference if used in one place could not move the needle somewhere else.
So does while yes, value is going to be transferred into SPS, the actual benefit to the SPS holder will be far less than the value that the game would experience if they just let DEC float freely.
And the real benefit comes to SPS not when you transfer little bits of value to it from the overflow tank but when the actual game experiences growth.
Game growth is an exponential force
Game growth means more players. Each player is their own economy. Their own cards bought, their own assets rented/utilized, their own amount of SPS collected, their own communities of friends they can tell about the game, and their own in-game communities of friends who encourage each other to keep caring.
The value of SPS should come directly from growth in the game. Growth in the game comes from setting favorable conditions for growth and then allowing the assets in the game economy to respond properly to market forces instead of absorbing all that positive energy into something too big to move the needle on.
Final thoughts. The game will get its supply of DEC from somewhere. It can either enter the game through players winning it by playing the game and being able to spend it however they want or it can come by it being sold to you by arbitrage bots that take their profit and leave before you even notice the buying pressure in dec happened.
If this comes up for a vote, I can tell you that I will be voting to leave DEC alone.
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A hell of a write up brother. Interesting times. SPS coming down today, to those nasty prior lows, hmmmm. Hate seeing it below $0.10.
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Thanks! Interesting times indeed. This seems to be the final shakeout before we start moving higher. By the end of yesterday my rentals were higher than they would usually be at this point in the season with only 1/3 the player base. Once those 2/3's come back online, the people selling now may regret those choices unfortunately.
Aggro said the most recent dip was triggered by some dude who bought 3 million SPS about 6 months ago panicking out for a loss. I guess even whales can be shaken out of their positions. I just wish I had the funds to keep accumulating right now.
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This.
With the Splinterlands economy being as complex as it is, featuring a combination of the NFTs themselves and a number of different tokens, these consequences could be massive.
You've gone over a number of scenarios in detail which could very well play out.
The bottom line is we just don't know and if players do get that vote (which they won't though, right?), you'd probably be wise doing as you said and voting to conservatively leave DEC as is.
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I'm hoping we do get the vote. They want to do this after validators go live and it does impact SPS directly while not being "core company" so hopefully it will be voted on. But the crypto community just gets so excited when they hear "burning tokens" and its being suggested, backed, and supported by the devs who also have a lot of voting power and clout. The chances of it not going through are extremely small.
Sort of a problem with the idea of a DAO right?
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You make some interesting points but...
I'm sure Matt has thought this through in the context of the ENORMOUS amount of SPS that's going to be locked when land comes live.
I think we're all in for a massive shock when it comes to just how much of the liquid SPS supply is going to be required for even minimal functionality when LAND goes live, which could change things VIZ the economy.
I think we're going to be looking at at least 5 figures per plot, maybe up to 6 for max functionality.
I'm still unclear on what the role of SPS is going to be inside land. What is it that makes you think the requirements will be that high?
I'm sure they've said it will play a 'significant' role in the past....
And based on the fact that with my quite large SPS stake I'm barely able to keep up with current developments (voucher wise) - I'm just expecting LAND to up the stakes.
I guess another thing is this - if the DEC-SPS thing goes through, which it probably will, how are you going to get rid of it?
The only way is to stake SPS for more governance rights!
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All I know is the moment a comparison was made to LUNA/TERRA, I noped right outta that thought process. I understand the various limitations that make the two pairings different, but I agree with much of your concerns that paint a clear picture of what I'd consider price suppression. I say let the markets do what markets do best ;)
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Yeah I don't blame you there. I don't think anyone should be holding up any part of Luna/Terra as an example of what works.
There are so many free market people in crypto who lose sight of that value as soon as they see a cool tokenomics trick !LOL
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