Let's Talk About The Dec Peg

DEC is getting crushed and so are card values.

I put out a post a couple days ago explaining why but none of the tags I used showed up either time I posted it so almost no one saw the post.

Today I want to talk about the infamous Dec price peg.

There are some serious misconceptions about this peg and I've just had it brought up to me SO MANY TIMES now that I figured its time to write about it. Especially as the price comes closer to it and it looks as though we could not just hit it but break through it.

When and if we get there, you should know it's not the magical pull of the peg that brought us there. It's bad asset and player management that did it.

For those of you who may not be aware, Dec used to be a "stablecoin" sort of. When the game had just a few thousand active accounts Dec was "pegged" at .001 or $1/1000 Dec.

They never did away with this peg. It just broke under buying pressure and the price of Dec ran all the way up at one point to over $15/1000 dec. That's right, it was over 15x higher than its peg before dropping all the way back down to where it is today which is 60% above that peg and there's a pretty good chance we actually visit that peg again. If we do, be prepared for card prices to cut in half.

As it comes back down, many people believe it was destined to do so and that this was the aim of the Devs.

I'm hoping to change your mind on that here.

First let me say that if the devs took a coin that many people hold and created intentional policies to lower the price from .015 all the way back down to .0016 where it is today, that is price manipulation and it's extremely immoral and in most places very illegal.

I don't believe they did this but I do believe it was horribly mismanaged.

Let's leave that aside though and just talk about the peg and why its not what most people believe it is.

How The Peg Works

Controlling the peg is done 100% on the supply side. Most of the created supply of dec is from the ranked rewards pool. Therefore the devs use an algorithm just simply adjusts the amount of dec that goes into the pool based on its price.

If the price starts to rise that indicates higher demand so the algorithm puts more DEC into the pool and therefore increases the supply which hopefully meets the demand and equalizes the price.

If the price goes down it's indicative of lowered demand so the algorithm puts less new dec into the pool which should raise the price.

In practice it sounds fine but when you realize there are now billions of DEC tokens in circulation, adjusting by a couple hundred thousand or even a couple million dec given out isn't really going to do anything in the short term to the price of Dec.

While it was more effective early on when there wasn't nearly as much in circulation, as time has gone on the algorithms ability to control the price by adjusting the supply has gone almost to nothing and if we're being honest it was never that effective.

What actually works to keep a peg? Market psychology.

I remember a few months before the price exploded there were people in the Discord talking about DEC. One person was saying the peg was going to break when SPS came out and everyone else was calling that person an idiot and telling they didn't understand anything because there's a peg.

Everyone was sure the currency was pegged and it couldn't move more than a little bit in either direction without the algorithm correcting it. Therefore buying dec for gainz was thought of as stupid and that guy could go jump in a lake for all anyone in the discord was concerned.

All of those people will probably not admit it now but they were obviously dead wrong.

What caused the peg to hold in relative close range as long as it did was less the algorithm and more those people and their belief in the peg.

Price arbitrage

If you believe the price of something is pegged at .001 and it drops to .0097 you buy a little for a guaranteed gain. If enough people buy it sends the price back up the price corrects to the upside. If it goes up to .0013 you sell a little knowing you can buy it back cheaper and that corrects it back down to the downside. As long as people believe in the peg, they will maintain it just through that belief.

Think about it. If you "know" a coin has a peg and its more expensive than that peg, what are the odds you're going to buy that coin? It's like taking a guaranteed loss. So upside pressure ceases when it's up and vice versa. Suddenly, you have a peg that works even if the algorithm doesn't.

But let's talk about the real inner workings of the algorithm because I want to show you that there never really was a peg to .001 in the first place. Instead what they built with the algorithm was more of a price movement dampener and in fact, it was the algorithm itself that caused DEC to spike off the charts to 15x when it was supposed to be pushing it back down.

To start, let's look at the Splinterlands whitepaper and see exactly what their description says about how the algorithm works to control the price of Dec.

The whole thing is important but look at that last line with the example.

Notice that while they set a peg at $1/1000, there is no real force keeping it there against any real change in demand. It will work against minor fluctuations in demand but not permanent changes like a 250x increase in active accounts.

If something happens to change the demand permanently, the peg just resets itself to whatever new equilibrium it finds. Price isn't looking for $1/1000, its just looking for where it balances out with demand and then it works to keep it there no matter where that price is.

For instance, let's say the player count doubles and this doubles the demand for Dec which doubles the price. Now it gives out 2 million per day instead of 1 million but as long as the demand stays up, the price will stay at $2/1000. It won't start applying more pressure if it doesn't go back down because the algorithm doesn't care where the price is.

If you believe the algorithm can actually control the price, which is questionable now that there's so much Dec in circulation, you can't really look at that and say there's anything special about $1/1000 price point. All the algorithm is doing is working to stabilize the price wherever it's currently at based on the demand the game is currently creating. That's it. Thats all it does. It doesn't push the price from wherever it is to .001 where it can be happy again like so many people believe. If people never believed there was a peg, it probably never would have stayed at that price to begin with.

If Dec is $1/1000 the pool will give out 1 million dec per day. If it goes up to $2/1000 it will just start spitting out 2 million dec per day. If it goes to $3/1000 it will spit out 3 million dec per day and if it drops back to $2/1000 it will go back to spitting out 2 million dec per day.
The rewards pool will continue lowering and raising the supply on each upward and downward move to the price no matter where the price is. Nothing changes in the structure of the movement between the $1/1000 and any other price.

Price will probably end up going back to .001 or lower at this rate but when it does, it's not because of a peg. Its because the game and assets were poorly managed and the belief in the peg that still exists.

So what broke the peg that had been holding?

Simple. Sophisticated investors were brought in for the SPS private sale and they took one look at the peg and realized what I'm saying. They realized the peg is held together by belief and nothing else. Then they looked at the upcoming SPS drop, assigned it an expected value, figured out how much they would get per DEC they bought and then worked out the max price they could buy DEC for that and still be able to make a profit on the SPS drop. Then they bought every bit under that price they could get their hands on.

This broke the peg.

I'm sure many of the people who used to arb the market sold those investors everything they had .0015 expecting it to plummet back down but it didn't and those people probably fomo'd back in even higher sending the price up further.

At the same time this was going on, Axie Infinity woke up a lot of people to gaming for profit. Those who were already priced out of Axie but who could still get into Splinterlands came in and bought DEC up even higher.

Then this sent the algorithm nuts spitting out more DEC which was now valued at an all time high.

Consider this:

When they set the peg the game had a few thousand players. When the price of Dec is at $1/1000 the pool giving out 1 million dec.

1,000,000 * ($1/1000) = $1000 which means the reward pool was worth $1000 every day.

When the price got up to $15/1000 the rewards pool was now spitting out 15 million Dec daily. 15,000,000 * ($15/1000)=$225,000 every. single. day.

The game went from $1000 per day in dec ranked rewards to $225k per day.

This is what I mean when I always say the game was a slot machine stuck on jackpot and everyone ran in with their buckets to catch all the coins.

SPS lit the spark but the algorithm is actually what caused this game to explode higher along with the price of dec. The higher it went, the more people came running in and the higher it was going to go.

So what happened?

With just under 500k accounts, the game could have gone far higher as more people heard about it. But there was a problem. Most of the growth wasn't real players. Bot owners were taking their winnings and reinvesting it into more spellbooks to hook up more bots. Some players opened over 10k bot accounts to farm the game of these rewards which are still running today. Real players were coming in but word of mouth wasn't nearly as fast as the bot owners could duplicate their efforts.

No one seems to know exactly how many of the currently 400k daily active accounts are bots but I would bet its over 300k of them based on many conversations I've had with bot owners.

The thing about Splinterlands is the battle history is on the blockchain. If you know what you're doing you can scrape the data and find winning strategies that require no additional investment into buying and renting cards for your bots.

This is what the devs had a problem with. They didn't care if there were 5 million bots as long as they spent a little in the market buying or renting. So they stripped bronze of its rewards so there would be a CP requirement for winning DEC which meant some money would have to be spent.

There are several problems with this thought process. Some I've talked about before and some I haven't but I'm already off topic so I won't veer further.

This took out many of the new players who weren't ready to move to silver but also realized their growth was now stopped dead. Meanwhile the optics of the move to take bronze rewards and add them to the top tiers was horrible. Bots just had to take some time to adjust and spend a little of their profit with asset owners but besides that still had a healthy mint --> market farm going that just kept driving prices down on everything.

Card prices, Dec, and SPS all took a dive as the player base stagnated and some of the smart money that stacked up on DEC early started unloading at the first sign of trouble. Suddenly the slot machine was shut down and steady player growth turned into steady player loss.

The game then got hit with the biggest card drop ever into a declining player base while more cards were sitting unused and almost free on the rental market than ever before since playing wasn't that profitable anymore.

Then came the news that the next miniset which used to only be sold as a way to burn DEC would no longer even allow dec to be used and you suddenly had a free fall in the price DEC.

I just skipped a lot in that story but the basic idea is that every single time DEC tried to find a new floor, some dumb move was made that sent it lower. And yes I know crypto was weak but Splinterlands has continually faired far worse than the crypto market or even its competitors like Axie. Heck, the Axie Ronin hack that stole hundreds of millions of dollars only sent Axie down like 10% and that same weak Dec dropped almost 50%.

Let's go back to the peg now because there's another point that should be made what a $1/1000 Dec price means for the game and players now VS what that price once meant. It's not the same game anymore and the effects are wildly different now.

What happens when to player value Dec falls?.

Remember when I said at the first sign of trouble a lot of the smart money who bought everything they could low started selling out at $15/1000? Let's see what that did to the game besides just shutting down the slot machine.

When the game had 2000 players in early 2021 and the peg was holding at $1/1000. As we saw earlier 1,000,000 dec at that price means the daily pool was worth $1000.

$1000/2000 players= .50 cents per player in the prize pool

Now we know this wasn't distributed evenly. Top players competing at the highest levels with the best cards did much bettter than $0.50 as they should while smaller fish made less but the pool was still that size in regard to the number of players.

Now let's look at the peak of the market when the game had almost 500k daily active accounts and the price of dec was $15/1000.

As we said earlier, that meant it was giving out an amazing 225x the value it did at the peg. But the game had 250x the players.

$225,000/500,000 players=.45 cents per player.

That's right. The ranked rewards pool was giving out less per player than it had while there were just a few thousand players even after dec 15x in supply and price.

But the algorithm doesn't take into account the number of players when it fills the pool. It just looks at price. That means whether there are 500k players or 1000 players, if the price of Dec is $1/1000 its going to put out 1 million dec to be split amongst the player pool.

So when Dec started selling off, the exponential movement of the rewards pool reversed downward quickly.

Let's see how fast rewards dropped with the price decrease and see if you can tell why the game went from massive player growth to slowly bleeding lower in the span of a few days.

Dec Price	Rewards pool size	Size per player at 500k players
$15/1000	$225,000	$0.45 per player
$14/1000	$196,000	$0.39 per player
$13/1000	$169,000	$0.34 per player
$12/1000	$144,000	$0.29 per player
$11/1000	$121,000	$0.24 per player
$10/1000	$100,000	$0.20 per player
$9/1000	$81,000	$0.16 per player
$8/1000	$64,000	$0.13 per player
$7/1000	$49,000	$0.10 per player
$6/1000	$36000	$0.07 per player
$5/1000	$25000	$0.05 per player
$4/1000	$16000	$0.03 per player
$3/1000	$9000	$0.018 per player
$2/1000	$4000	$0.008 per player
$1/1000	$1000	$0.002 per player

So as you can see, at $0.002 per player in the ranked reward pool, that peg isn't the same as it once was when it represented $0.50 per player.

Notice in this chart that due to the exponential nature of the algorithm, the numbers move very quickly. There's just over half the rewards per player when you get down to $11/1000 as there were when its at $15/1000.

When the devs hit the switch on bronze and the selling started, it dropped the worth of the game per player real fast. When it dropped from 15 to 10 the value per player was less than just a few weeks earlier when it first hit .010 on the way up but there were fewer players.

So what I'm saying is, the game was never in an unsustainable position because of its growth or the price of the cards like people will tell you. What made it unsustainable was the fact that most of the new players were bots that were sending the DEC straight from mint to market and the fact that the devs attacked bronze instead of just limiting bots which took the base of new players out and soured many of the actual real new players in the process.

When the sellers hit, the new players who were supposed to absorb it were gone.

That started a dec sell off which exponentially shrank the value of playing the game for real players who couldn't stack thousands of small rewards like the bot owners to make it worth it.

Even those who had already gotten comfortably to silver and maintained DEC rewards were slowly dropping out as rewards shriveled. Let's look at this phenomenon in a chart of daily active users. For some reason I can't get the page to load to grab a new chart so here's an old one. Look at the 3 month bleed of active accounts. Then you finally start to see a bottoming in February.

If you look at a price chart of DEC you'll see something similar but again, I can't get the page to load so I can't post it.

With land supposedly coming and tournaments coming back in, players started to inch back in. This stabilized the price of dec and started slowly sending it higher. The whole game was ready to start moving again. SPS moved from $0.10 to $0.16. Card floors were thinning and Dec was moving higher.

But then they pushed land back a year and it all reversed down. Then they came out and said they were doubling the rewards pools and lowering the expected CP requirements for Modern Format to half causing the DEC and now a card selloff to accelerate. Dec and cards and SPS are all tightly linked but its DEC -- not SPS like many people believe and the devs want -- that runs the show right now.

This sell off has lowered the value of dec to .0016 which is still 60% above the "peg".

Let's look at what this means for the value of ranked play with the current 400k daily actives. Remember, last time Dec was at its peg, it meant there was .50 cents per player being distributed.

Today, at 60% above that price it means the daily rewards pool for ranked play is at $3200.

$3200/400,000 =.008.

That's 8/10th of a cent per player.

If we got back to the peg it would be 1/4 of a cent with our current player count.

Do you really expect a game that rewards 1/4 of a penny in value to the average player to attract more players? Do you expect that game to have people buying more cards? Do you expect it to do anything at all but bleed until something great happens to respark some life or until everyone gives up on it and it just dies?

The old peg is irrelevant to this game now

and really the mechanical mechanisms that supposedly created the peg never acted to make a peg anyway. It was all psychological.

I have never heard the devs say they wanted to push the price back down. I have heard them say they saw value in having a stable dec price and I've seen them say a higher peg might be in order. I've also heard them say the peg was never meant to last above 5000 players.

However, so many people bring up this peg when I mention the falling price of dec and game management mistakes that have sent it lower as if it was predestined to fall back to it. It wasn't and the peg isn't real.

The price of dec, even with the algorithm, should float higher based on the amount of active accounts if left alone. That price and supply increase maintains the value of playing the game for each player as the game grows.

If the price/supply stays pegged using the current system it means each new player lowers the overall profitability of every other existing player.

Surely everyone can see that isn't a recipe for player growth.

This means, if the devs want growth in players, they should be well aware the DEC peg is dead and won't be trying to push it back down but instead creating value for Dec wherever they can.

Yet, they instead are dropping uses for it and doubling the supply without any new demand while its already weak and in a downtrend.

I can't think of any other word than incompetence at this point. And the fact that they just keep getting a pass because there was once a peg or because crypto was down or 100k players was just too many so it had to reverse negative for a while or whatever the excuse is just mind boggling to me.

The devs could have turned this whole thing around many times now but they just keep doubling down on supply mistakes. The game has enough supply of everything for a game 30x its size.