1) What is PAX?
PAX is BitcoinDark’s Pegged Asset Exchange. It will allow users to lock funds to the value of real-world securities – assets, currencies, commodities and so on. What that means is that anyone will be able to use PAX to invest in stocks or precious metals, lock funds to USD or CNY, and so on, without jumping through the bureaucratic and KYC hoops (and paying the high fees) that are involved when going through traditional exchanges and brokers.
2) How does it work?
The simple version is that BTCD are burned (effectively destroyed) and then redeemed (recreated) in the amounts required. So let’s say you want to lock funds to the value of $10 USD, and BTCD is $1. The exchange rate is provided in each staked block by a decentralised price feed. You send 10 BTCD to the designated burn address, specifying when you want to redeem them, and receive a string of ‘bearer bits’ in return. At the end of the given period of time, you receive BTCD to the value of $10, at the new exchange rate. It could be a year later and BTCD is now at $2, so you’d receive 5 BTCD. Of course, this raises various problems. You don’t want to be creating lots of new coins if the value of BTCD drops and you need more of them to pay for the locked funds on redemption. Fixed supply is a big deal in crypto. So, there are various mechanisms to avoid that issue.
3) How is the price maintained?
This is where it gets more complicated. You want to ensure that users receive the funds they have locked, without messing with supply. There are a few ways this happens. Firstly, you can lock funds long or short. So if you think BTCD is going to go down in value relative to the dollar, it makes sense to lock funds as USD. But equally, you could lock funds as -USD (you think BTCD will rise against the dollar). Leverage is available. The trick, of course, is to make sure +USD and -USD are roughly in balance. That way, coin supply isn’t compromised. This is achieved using an incentive system to encourage users to lock funds in a way that keeps the system in balance. Short term traders pay a 1% spread, and this funds interest payments for longer-term investors. Interest rates of up to 7.77% are paid, upon redeem. If a lot of people are locking funds as -USD, the rewards on -USD will drop towards 0%, whilst the rewards for locking funds as +USD will rise – encouraging more people to go for that option. There are also limits to the amount of each security (USD, GOLD, FTSE, etc) available, so combined with the incentive system, this ensures that no ‘unfunded promises’ are made. (The more people use the system and lock funds, the higher the limits.) Finally, in case of a black swan event – which shouldn’t happen according to the simulations run, but better safe than sorry – there is a reserve than can be injected directly to cover positions.
4) What makes trading on PAX unique? How does it differ from Bitshares?
PAX is different to any other pegging system. Firstly, it’s fully decentralised. I don’t believe any other system can claim that. It doesn’t require any collateral, as BitShares does. And BitShares in particular has poor liquidity, which means it’s very hard to buy any number of BitUSD for $1 – which completely defeats the point. I’m also a little concerned about BitShares’ model, because it can come unpegged if BTS moves 50% in a day. That’s a lot, but this is crypto. It means that BitShares’ answer to the problem of volatility in crypto can be broken by excess volatility…Otherwise, PAX has a slightly different redeem mechanism. Funds are locked for a specific period of time, so you can’t redeem until that time is up (though you will eventually be able to trade locked funds on a secondary market). The way PAX works means that sudden fluctuations in BTCD price are still possible – as they are with any crypto or other commodity – but balance will be restored by the incentive system.
5) PAX is part of superNET and BTCD, could you explain there relationship and how PAX benefits both parties?
PAX is built into BTCD. It’s part of the protocol. So is SuperNET. Although SuperNET uses features and tech from many different coins, the core functionality is coded into BTCD. There’s a symbiotic relationship there, because BTCD will receive stakers’ dividends from SuperNET revenue.