Flywheel Game Theory

Oh boy we are getting close! Splinterlands land is coming out 'SOON', and DEC is already starting to move towards peg. I think there is no possible world where it doesn't make it, the flywheel will start. So now I am thinking about what that means, what will happen, and the implications of such things.

Are you interested in this too? Read on to find out more!

What do we know?

We know there is not enough DEC out there for staking on lands and for creating the missing power cores. We don't know how fast Praetoria will fill up, probably over months, but we do know that there will be a big rush at the beginning, while things are hot, and SPS mining is at its maximum APR.

We also know that when there is not enough DEC, SPS can be turned into DEC, with a ~2.5% fee. Here is what that looks like:

So $1 worth of SPS at market price can be turned into 975 DEC. If we reverse calculate that, at par that means that conversions will start when DEC is equal to 1.0256 per thousand:

So players who need DEC, and there may be many, or not as many as I think, will start turning SPS into DEC at our around $1.03 (for simplicity). Maybe. The issue is - would you want to be the first one converting your SPS into DEC when SPS is at 2.1 cents?

In this game theory, the first to convert loses, as SPS should start to pump up in price over this process. So unless someone really needs the DEC and has nothing else to spend, I think players are going to be resistant to start the flywheel themselves. This is where arbitrage robots come in, from here on 'arb bots'.

Its an arb bot world

So if I have a stable coin or a coin like HIVE, at some point it will make sense to buy SPS, convert to DEC, and sell DEC back to stable/HIVE. This is known as an arbitrage, a complete circle that nets a profit. We are going to use HIVE in this example.

On hive-engine, there is a 0.25% fee per swap. So swapping HIVE to SPS incurs a 0.25% fee, convert SPS to DEC is a 2.56% fee, and swapping the DEC back to HIVE is a 0.25% fee. We need to have some profit left, so if we add these up, we can see that before DEC gets much over $1.04 per thousand, arb bots will start their work.

This gives us a ceiling, DEC is unlikely to get over $1.04 per thousand for any period of time, before automated arb bots start their work.

Arb bots don't GAF

Arb bots, since they are not holding SPS, don't care about the price of SPS on conversion. They will start work regardless of the SPS price, and start driving it slowly higher.

Players on the other hand, holding SPS and anticipating a SPS rise, will be reluctant to start this swap process, unless they really really need the DEC.

Where we are now

At the time of posting, DEC is sitting at just under ~$0.85 per thousand. There is still a ~21% run approaching us if we consider that DEC should settle around $1.03.

SPS is sitting at just above 2.2 cents, who knows how high it can go. Calculations are impossible really, too many assumptions for my taste. But I think at least a 10% rise or more is inevitable at this point.

Prepare yourself, I think we are in for a wild ride coming up at the end of August. Personally I don't plan to leave my room much.

Freedom and Friendship