The v-dollar Hard Peg

At present, Vow currencies are priced by decree, by virtue of merchant commitments that accept them at face value in exchange for a discount on product. This arrangement effectively creates a retail peg to the underlying sovereign currency and satisfies the purchasing public without the need for collateral

However, for v-currencies to play a greater role in the world, particularly within financial markets where the constituency is not seeking product delivery in exchange, a firmer peg mechanism is required

This document elaborates upon the thesis that Vow may piggy-back upon the efforts of other coins, to ultimately gain the liquidity of sovereign currencies, and expand its utility within finance without limit

Background

Assets tend to trade across markets, giving rise to arbitrage opportunities where profit is reaped from the rebalancing of divergent price discovery dynamics

Today, trading is increasingly done in liquidity pools (LPs), a recent innovation that differs from traditional marketplaces in that price discovery is algorithmic

The import of this fact is that due to their nature, LPs favour price over order book depth. Thus ordinary trades, particularly those whose size is large relative to the pool, impact the internal price in a consistent manner, creating disparities against the inconsistencies of traditional markets, effectively generating arbitrage

Because commercial buyers and sellers want price stability for assets, as their trades are meant to manage risk exposure rather than to make a profit, the primary function of an LP is to eliminate slippage in trades. LPs accomplish this on the basis of their liquidity and because the larger the pool the lesser the price impact of any given trade, pools must be sized to fit market conditions

Of course, most assets are arbitraged against global markets, where the real value of the asset depends on economic supply/demand characteristics. This means both that LP price convergence is consequential (not causative), and that stability is a function of the reference. In other words, presently, global markets represent the dog whereas LPs, the tail that gets wagged

For non-commercial traders, LPs represent a continuous source of profit as they reconcile the differences in demand characteristics between the LP audience and its reference: the markets at large. This is desirable as it is their…