Thought experiment. Coding a stable exchange rate.

[hannesnaude]

First off, what follows is NOT a proposed change to bitcoin. Nor is it really an idea for a new blockchain. Bitcoin has forced me to think long and hard about the nature of money and the experiment described here is one of the things that still screws with my mind.

Suppose one coded a bitcoin variant that works as follows.

Difficulty still varies up and down to target a set number of block being generated in a set time period. However, the coinbase amounts are not following a hardcoded decreasing pattern to target a fixed final amount of issued currency, but are adjusting up and down to target a fixed exchange rate, for example pegging the currency to the dollar. (Please don't get stuck at this point on how undesirable this is, I'm not advocating for it, just trying to convince myself whether it would work.)

Exchange rate is determined by demand and supply. We have no control over demand but some control over supply (not perfect control, since we can't control when hoarders will choose to sell, but assuming some miners sell their coins soon after generation, we have control over this portion of supply). In order for the network to know what the coinbase amount for the next block should be it needs to know what the exchange rate is. Therefore the current exchange rate is also placed into every block. If the exchange rate in a block is incorrect for the time when the block was generated, the block is rejected. If the exchange rate goes above one (Fiatcoins become too valuable), then the coinbase transaction is increased and if it drops below one (Fiatcoins become too cheap) then the coinbase amount is decreased. This is analogous to a central bank increasing and decreasing the money supply via interest rates which in turn affects the exchange rate of the currency.

One important point is that this may well work, not because the feedback loop thus created is particularly effective, but because it creates an expectation of what the exchange rate "should be". If a large group of people believe that the exchange rate will tend to 1:1 in the long term they will buy when the rate dips below 1 and sell when it rises above 1. The built in mechanism can only affect the the exchange rate over long periods, but the expectation that the protocol will eventually force the rate back to 1 leads traders to keep the rate at unity, even in the short term.

Of course having the exchange rate in every block causes technical issues. If everyone is getting their rates from the same exchange, then the network has a single point of failure. If we get our rates from different exchanges, then as long as there is still a functional exchange somewhere that is reachable by most miners, the network remains functional. However, if miners are free to use exchange rates from any exchange, then I can't reject any block that has a price that doesn't match the price at my reference exchange exactly, since the rate may well be different at other exchanges. I can however reject anything that deviates by more than a small margin, since arbitrageurs should keep the exchange prices close to one another.

The power of expectations is unbelievable. Give people a plausible reason to believe that the exchange rate will tend to X in the long term and it becomes a self fulfilling prophecy. Another example is the bitcoin test network. On a technical level the test and production networks are indistinguishable (aside from scale), yet bitcoins are worth almost $17 dollars each (right now, who knows what they'll be worth in 5 minutes) while test network coins are utterly worthless. Why are they worthless? Because we expect them to be.

This messes with my mind




 

[bji]

Difficulty still varies up and down to target a set number of block being generated in a set time period. However, the coinbase amounts are not following a hardcoded decreasing pattern to target a fixed final amount of issued currency, but are adjusting up and down to target a fixed exchange rate, for example pegging the currency to the dollar. (Please don't get stuck at this point on how undesirable this is, I'm not advocating for it, just trying to convince myself whether it would work.)

Aside from the problem that you mentioned with getting miners to agree on exchange rates, there is also the problem of being able to validate a block some time in the future; you'd have to have definitive historical data for the exchange rate in question going back to the beginning of the block chain to compare against.  Even if you were just going to trust the longest chain implicitly when there is a single longest chain, if ever there were forking (and there would be alot of forking because everyone's rules for what a valid block would be different because invariably nobody would agree exactly on what the exchange rate was at a given time), you'd still have to have authoritative exchange rate information going back to the time of the fork.

[hannesnaude]

Aside from the problem that you mentioned with getting miners to agree on exchange rates, there is also the problem of being able to validate a block some time in the future; you'd have to have definitive historical data for the exchange rate in question going back to the beginning of the block chain to compare against.  Even if you were just going to trust the longest chain implicitly when there is a single longest chain, if ever there were forking (and there would be alot of forking because everyone's rules for what a valid block would be different because invariably nobody would agree exactly on what the exchange rate was at a given time), you'd still have to have authoritative exchange rate information going back to the time of the fork.

Yes, I won't verify historical exchange rates. Only when a new block is added that would become the new head of the chain, would I decide whether to accept it or not. Alternatively one could verify the exchange rate in the last 6 blocks (therefore only needing about an hour of historical data). Depending on the bandwidth of your feedback law, data points older than X would be irrelevant anyway.
 
I don't agree that there would be a lot of forking since the NORMAL condition is for everyone to be connected to all of the exchanges and report some average value. Only when there is some network disruption, would some or all miners not be able to access some exchanges. You could have a generous margin for error on what rates you will accept for when things DO go wrong, maybe as much as 10% variation. Arbitrage should keep exchanges closer together than that. With such high noise in the measurement, the control loop will have to be quite loose, but as mentioned before, this doesn't actually matter. Once traders believe that the control law CAN work it won't actually have to work.

I don't want to get bogged down in implementation details, because I have no intention of implementing. If you don't believe it could be done decentralised, then assume for argument's sake that the exchange rate is being reported by one or more trusted entities, similar to how alert messages are provided on the bitcoin network today. They could misreport the exchange rate, but that would mean the end of the currency, since traders would immediately know that they misreported and lose faith in the system. If they are somehow temporarily prevented from reporting, the network would simply keep going at whatever reward level was set previously. The expectation that rate reports will come back online in future and force the exchange rate back to parity would keep the exchange rate at parity even in an extended absence of reports.

[FreeMoney]

There is not AN exchange rate. Are you going to measure it relative to some currency that could die? What if all exchangers going from USD to BTC are murdered by the government and so ZLT exchanges are used? Likely in the future there will be regulated and unregulated exchanges with slightly different prices due to difficulty/risk of arbitrage. Or simply different prices because of different fees and methods of payment.

[Gr.Green]

Essentially, you're proposing to build a system where 1BTC = 1USD. When the Fed prints a new $Gazillion, the same amount of BTC will flood the market. The Fed would control BTC which defeats the purpose of Bitcoin and makes it dependent on constant human intervention whereas now it needs no human input at all. Robots could use Bitcoin to trade between themselves.

[shads]

Stable exchange rate is definitely not desirable.  Stable purchasing power of a bitcoin is though, i.e. no excessive infaltion or deflation... Made the following post elsewhere but it got buried, it's appropriate to this discussion so will repost:

----------------------------------------------------

The hard limit on supply of bitcoins is the biggest problem IMHO.  The deflationary spiral threat is well documented so I won't repeat it except to point out that it gives bitcoin far more characteristics of an asset rather than a currency and provides a disincentive for circulation.

Monetary policy should be internally regulated and dynamic.  I'd propose something along the lines of a feedback loop where the rate of coin generation is proportional to the incentive to hoard coins.  Thus if you have excessive deflation more coins are produced, if you have inflation less coins are produced.  The hard limit would disappear and the real world value of the coins stays relatively stable.  The difficulty is that you can't tie it to any externality like exchange rates because then you need gateways to those externalities which creates points of potential manipulation.

My first thought was to tie it to the inverse of the rate of circulation which is easy for any node to calculate.  The more people are hoarding, the more new currency is added to the market thus devaluing the hoarded currency or at least finding an equilibrium and removing the hoarding incentive.  But that would need to balanced with a disincentive to spam transactions or the rate of circulation could be manipulated (and probably choke the network if the effort was big enough).  My next thought is to tie it to the number of unique coins that have been transacted in the block (or the average of the last n blocks) compared to the total generated.  Each coin can only be counted once no mater how many times it is transacted thus preventing spamming with circular transactions to manipulate the rate.  Very large holders could still have an effect by ensuring their coins were moved at least once every block so perhaps it could actually be a one way test:

if circulation > threshold --> create normal number of new bitcoins
if circulation < threshold --> create normal number of new bitcoins + (threshold - circulation) * factor

Obviously not a fully fleshed out idea but hopefully greater minds can add to it...

-----------------------------------

[o]

First off, what follows is NOT a proposed change to bitcoin. Nor is it really an idea for a new blockchain. Bitcoin has forced me to think long and hard about the nature of money and the experiment described here is one of the things that still screws with my mind.

Suppose one coded a bitcoin variant that works as follows.

Difficulty still varies up and down to target a set number of block being generated in a set time period. However, the coinbase amounts are not following a hardcoded decreasing pattern to target a fixed final amount of issued currency, but are adjusting up and down to target a fixed exchange rate, for example pegging the currency to the dollar. (Please don't get stuck at this point on how undesirable this is, I'm not advocating for it, just trying to convince myself whether it would work.)

Exchange rate is determined by demand and supply. We have no control over demand but some control over supply (not perfect control, since we can't control when hoarders will choose to sell, but assuming some miners sell their coins soon after generation, we have control over this portion of supply). In order for the network to know what the coinbase amount for the next block should be it needs to know what the exchange rate is. Therefore the current exchange rate is also placed into every block. If the exchange rate in a block is incorrect for the time when the block was generated, the block is rejected. If the exchange rate goes above one (Fiatcoins become too valuable), then the coinbase transaction is increased and if it drops below one (Fiatcoins become too cheap) then the coinbase amount is decreased. This is analogous to a central bank increasing and decreasing the money supply via interest rates which in turn affects the exchange rate of the currency.

One important point is that this may well work, not because the feedback loop thus created is particularly effective, but because it creates an expectation of what the exchange rate "should be". If a large group of people believe that the exchange rate will tend to 1:1 in the long term they will buy when the rate dips below 1 and sell when it rises above 1. The built in mechanism can only affect the the exchange rate over long periods, but the expectation that the protocol will eventually force the rate back to 1 leads traders to keep the rate at unity, even in the short term.

Of course having the exchange rate in every block causes technical issues. If everyone is getting their rates from the same exchange, then the network has a single point of failure. If we get our rates from different exchanges, then as long as there is still a functional exchange somewhere that is reachable by most miners, the network remains functional. However, if miners are free to use exchange rates from any exchange, then I can't reject any block that has a price that doesn't match the price at my reference exchange exactly, since the rate may well be different at other exchanges. I can however reject anything that deviates by more than a small margin, since arbitrageurs should keep the exchange prices close to one another.

The power of expectations is unbelievable. Give people a plausible reason to believe that the exchange rate will tend to X in the long term and it becomes a self fulfilling prophecy. Another example is the bitcoin test network. On a technical level the test and production networks are indistinguishable (aside from scale), yet bitcoins are worth almost $17 dollars each (right now, who knows what they'll be worth in 5 minutes) while test network coins are utterly worthless. Why are they worthless? Because we expect them to be.

This messes with my mind




 

Linking the Bitcoin to the external system is a horrible idea. The Bitcoin itself is a closed system so that it does not affected by any external environment. Their value is then only determined by the people who want them. Vast majority agreed with the same rule, then the system work. If variance is allowed, then tricks appear.

Consider that we must allow the variance of the exchange rate to a very small range, say, 0.00001. Due to the greediness of people, old people will want the exchange rate to increase so they will report a number toward their goal. Note that the system will still accept the price because of the rule. Then after the 100000 blocks, the price will be (1.00001)¹⁰⁰⁰⁰⁰. This example simply means that people have motivation to make trick and the system allow it to happen!!!

Stable exchange rate is definitely not desirable.  Stable purchasing power of a bitcoin is though, i.e. no excessive infaltion or deflation... Made the following post elsewhere but it got buried, it's appropriate to this discussion so will repost:

----------------------------------------------------

The hard limit on supply of bitcoins is the biggest problem IMHO.  The deflationary spiral threat is well documented so I won't repeat it except to point out that it gives bitcoin far more characteristics of an asset rather than a currency and provides a disincentive for circulation.

Monetary policy should be internally regulated and dynamic.  I'd propose something along the lines of a feedback loop where the rate of coin generation is proportional to the incentive to hoard coins.  Thus if you have excessive deflation more coins are produced, if you have inflation less coins are produced.  The hard limit would disappear and the real world value of the coins stays relatively stable.  The difficulty is that you can't tie it to any externality like exchange rates because then you need gateways to those externalities which creates points of potential manipulation.

My first thought was to tie it to the inverse of the rate of circulation which is easy for any node to calculate.  The more people are hoarding, the more new currency is added to the market thus devaluing the hoarded currency or at least finding an equilibrium and removing the hoarding incentive.  But that would need to balanced with a disincentive to spam transactions or the rate of circulation could be manipulated (and probably choke the network if the effort was big enough).  My next thought is to tie it to the number of unique coins that have been transacted in the block (or the average of the last n blocks) compared to the total generated.  Each coin can only be counted once no mater how many times it is transacted thus preventing spamming with circular transactions to manipulate the rate.  Very large holders could still have an effect by ensuring their coins were moved at least once every block so perhaps it could actually be a one way test:

if circulation > threshold --> create normal number of new bitcoins
if circulation < threshold --> create normal number of new bitcoins + (threshold - circulation) * factor

Obviously not a fully fleshed out idea but hopefully greater minds can add to it...

-----------------------------------

There is no such thing of coin in the system. Everything the system have is the transaction record and so does the balance in each public address of wallet. So you cannot determine whether a "particular Bitcoin" is circular or not. Consider someone with 100000BTC in their account and they spend 0.001BTC. They are hoarding Bitcoin, but the system has no way to tell because the 99999.xxBTC always move to different wallet address.

[hannesnaude]

Essentially, you're proposing to build a system where 1BTC = 1USD. When the Fed prints a new $Gazillion...

Are you going to measure it relative to some currency that could die?

Stable exchange rate is definitely not desirable.

Linking the Bitcoin to the external system is a horrible idea.

Please refer to OP. Specifically :

Please don't get stuck at this point on how undesirable this is, I'm not advocating for it, just trying to convince myself whether it would work.

There is not AN exchange rate. Are you going to measure it relative to some currency that could die? What if all exchangers going from USD to BTC are murdered by the government and so ZLT exchanges are used? Likely in the future there will be regulated and unregulated exchanges with slightly different prices due to difficulty/risk of arbitrage. Or simply different prices because of different fees and methods of payment.

Firstly if these coins are a globally traded commodity, there will be a single price (up to a small approximation) at any point, just like for any other commodity. If markets are liquid and trading is friction free, the EMH guarantees this. Think of the gold price, oil price etc. If you were to actually go out and try to buy gold you may end up paying a slightly different price, but the difference is far less than 10%.

One argument for why the coins may have greater variation in price than is typical from commodities, is that arbitrage is made more risky by the fact that exchanges are unregulated (The exchange could up and leave with your money).  But if the risk of using unregulated exchanges is so great that no arbitrageur in the world can be tempted to take a 10% instant profit when it is on offer, then we can safely assume that the risk is so great that effectively no-one is using the exchanges.

As far as fees are concerned, any proportional fee can be taken into account resulting in an effective bid and effective ask being reported that allready takes the fee into account. Non-proportional or tiered fees are not as simple to handle, but the variation should still be less than 10%.

As long as there is at least one exchange somewhere in the world trading BTC for fiat, the BTC/USD exchange rate will exist. If for example Mt G*x, TradeHill and B7 are take down, but Bitomat still exists, then the BTC/USD rate is simply BTC/PLN * PLN/USD. If no exchanges exist anywhere, the block chain simply keeps going at some preset reward level. The currency still exists and transactions are still processed, there's just no feedback mechanism. But the expectation that the feedback mechanism will eventually re-emerge, means that there still is a feedback mechanism, namely traders trading on the belief that parity wil be the long term result.

Stable exchange rate is definitely not desirable.

Well I'd argue that in the early days of a cryptocurrency, a stable exchange rate is very desirable. Right now, many merchants are hesitant to accept BTC, purely due to the volatility of the market. At the same time, the BTC economy needs to grow if it is to become less volatile. A chicken and egg situation. I'm betting that BTC will bootstrap itself out of this, but it's not a safe call by any means.

One could design a currency that is initially pegged to some weighted average of fiat currencies, but starts to float freer and freer as time progresses, becoming completely disconnected after a pre-determined block number when the market is judged to be big enough to no longer be vulnerable to pumpers-and-dumpers and other speculators.

Similarly, you could specify that the exchange rate control mechanism only kicks in AFTER block X, since the market for the currency will initially be non-existent. This give exchanges time to arise. At the same time, the expectation that exchange rate feedback will kick in at a known block number will keep rates near the targeted level even prior to that block number.

[shads]

I take you point, lack of volatility is desirable, but what you were talking about is pegging which a very different think to stability.  The rate MUST be able to move free relative to fiats or will certainly fail.  You simply can't have a deflationary currency pegged to an inflationary one sooner or later there will mass rush to one or the other until the spread grows too wise, the suckers run out and a whole lot of people are left holding the ball.

The kind of stability you are talking comes from one thing and one thing alone, liquidity.  It takes a hell of a lot to move the forex market.  It took one small sale of a few million USD worth to crash mtgox.  If the market was more liquid that sale would have been absorbed and we'd have seen barely a blip on the chart.

[AntiVigilante]

This proposal has got to be a quantum fluctuation of the cosmic anus.

There is NOT one single price for bitcoin and items. Not on my watch. The only price that exists is the price for two people making a trade. Exchange disasters should have no effect whatsoever on private and community trades.

Do you understand the devastation that is caused when prices for food in Jakarta explode because some twit behind a monitor typed in some numbers?

Hell no.

Why in hell would you build the ability to allow BTC scalpers to screw us all at the touch of a button?

[hannesnaude]

This proposal has got to be a quantum fluctuation of the cosmic anus.

Oh FFS. I get so exasperated when people fail to read. OP. FIRST line

First off, what follows is NOT a proposed change to bitcoin. Nor is it really an idea for a new blockchain.

Why in hell would you build the ability to allow BTC scalpers to screw us all at the touch of a button?

OK, bright spark. This is exactly what I was after. Lets assume that this system exists, the coins are trading at 1:1 and the market expects this to continue for the foreseeable future. You are one of the "BTC scalpers". You have significant, but not infinite means. Please explain in detail how you would go about "screwing us all at the touch of a button".

Waiting in anticipation.

[hannesnaude]

OK. Seems clear that many people have severe difficulty seeing past the ideological implications of what was hypothesized above and answer the actual question: "Irrespective of how undesirable this is, is it possible in principle?" So I came up with an alternative phrasing that may be easier to parse if phrases like "pegging to USD" make your neocortex seize up. 

Hypothetical scenario. 20 years from now. All 21 million bitcoins have been mined. The bitcoin economy has matured and bitcoins have a "stable" value in the sense that they don't vary wildly from day to day but are simply deflating at a fairly constant rate. Now a second blockchain is started up. Lets call these coins BTC2. BTC/BTC2 exchanges exist, but since these exchanges deal only with cryptocurrencies and run on the future version of tor, they are effectively impossible to shut down. The BTC2 network uses the data from these exchanges to vary supply in order to target a parity exchange rate with BTC.

Unless someone can put forward a cogent explanation why this won't work, most people will accept that it will work in the long run. Then few would sell a BTC2 for less than 1 BTC and if someone did it would be quickly snapped up by one or more of the many who would be willing to buy a BTC2 for less than 1 BTC. And similarly for buying a BTC2 for more than 1 BTC.

Would this work? And does it constitute an attack on BTC? If BTC and BTC2 are doomed to trade at parity forever, then any new BTC2s produced are effectively part of the BTC money supply. Any merchant that accepts BTC would accept BTC2 as well and while one network won't honor coins from the other, they would be equivalent in practice. And therefore, if and when large quantities of BTC are produced it would cause both BTC and BTC2 to inflate.

There, now it is stated without any reference to the much despised government money. Now could someone please explain why this won't work.

NOTE: Explaining why something is undesirable and why it won't work is not the same thing. Nukes are undesirable, but they work

[shads]

whether it's BTC/USD or BTC/BTC2 what your proposing is still pegging one currency to another.  That means neither currency is free float to it's real value.  BTC is value is always going to be deflated due to diminishing supply and unless the population starts to decline that will always be the case.  If you peg them via a feedback loop between BTC2 supply and BTC value you will always have the two floating a nearly fixed ratio to each other.  End result, even it there's a compelling reason to abandon one currency entirely for another it won't happen.  That is why I proposed a solution where the supply of BTC2 is part of a feedback loop related to it's demand.  The feedback loop is closed, the currency is free to float relative to it's utility value (the rate of circulation) and not relative to any other currencies that have artificial external influences.

The most important impact of a decentralised currency is a juxatposition with fiat currencies to highlight their inadequacies the the ways they are used as political tools by a small minority.

[hannesnaude]

whether it's BTC/USD or BTC/BTC2 what your proposing is still pegging one currency to another.  That means neither currency is free float to it's real value.  BTC is value is always going to be deflated due to diminishing supply and unless the population starts to decline that will always be the case.  If you peg them via a feedback loop between BTC2 supply and BTC value you will always have the two floating a nearly fixed ratio to each other.  End result, even it there's a compelling reason to abandon one currency entirely for another it won't happen.

So, you're saying that it is undesirable. Errrmm

Not sure if I mentioned this before  , but I understand that it is undesirable. In fact I went as far as to call it an attack on BTC. What I'm wondering is whether such an attack could succeed (at devaluing bitcoins).

[wumpus]

Apart from the ideological problems, I'm pretty sure that adding more complexity to the system will add more weird fluctuations (due to unexpected feedback loops and correlations), not stabilise the exchange rate.

[AntiVigilante]

I would say go build it. It could be an interesting experiment.

Only, I think I do understand the criticism posed by AntiVigilante. Which is the criticism of globalized markets in general. Say you could peg hannesnaudecoin to the Dollar, then commodities priced in the Dollar but sold in Jakarta might be placed out of the reach of people there because of some seemingly irrelevant event in U.S. markets. This could be true even for commodities produced in Jakarta. Which, is a rather perverse but common effect of global markets. The strength of having a global currency that is not so 'pegged' is that it can have any value whatever for those you wish to trade in it, and so be as responsive as it needs to be to serve local markets. It is only by virtue of being trained to value things in Dollars that we also try to value Bitcoin in Dollars. Which is something that I think will change over time.

There are also those who think it is a good idea to try and peg Bitcoin to gold, which I suppose is also something you could try and do with hannesnaudecoin, making it a kind of gold certificate effectively. But this is how paper currencies started, which leads inevitably to fractionalization. In other words, the peg does not really hold. It sounds nice in theory, but the theory depends on human psychology which does not really work the way you imagine.

That's only the half of it. But yes that's the thing that throws my bat signal to plaid.

But more importantly Bitcoins can several exchange rates at the same time. Hell we could have it reference 8 currencies at once using octonions (complex numbers to the 8th dimension). We could even use a logarithmic scale. All we would have to do is require that the amount of time a trade would required to process in be based on logarithms.

Not only does Bitcoin avoid the global fixation it dances entirely at the other end of the street. And I for one cannot fathom what value there would be in a currency that doesn't serve everyone as necessary.

[Mike Hearn]

I think it would technically work. I agree that it's likely to lead to weird edge cases and exploits that would allow gaming of the system. Bitcoin has quite a lot of those already and they're some of the most common (technical) criticisms levelled at it.

Rather than pegging it to an arbitrarily selected currency such as the USD, I think what you really want is to peg it to a standardized basket of goods. Ie, define the exchange rate as how many baskets you can buy starting with only a given quantity of coins. This is fairer and more direct, but is probably harder to calculate and is open to arguments about the definition of the basket.

It's somewhat reminiscent of Keynes' Bancor proposal that dates from the end of the second world war. The wikipedia article claims it was intended to be pegged to gold, but the version I recall reading actually had it be a basket. I'm not sure which was really proposed as the article does not give citations, unfortunately. The Bancor was actually intended to discourage systematic trade imbalances, something that would have radically changed the face of world commerce over the last 50 years if it had been implemented.

I think the current volatility is rather unavoidable given that Bitcoin is a rather new type of thing so people aren't sure how to price it. There'll probably continue to be these "storms in teacups" after each wave of press coverage until eventually we notice that being covered on TV news or in the Economist doesn't impact the exchange rate anymore, because everyone who cares has already encountered Bitcoin and decided how much they value it.

[vector76]

Trying to maintain a peg by changing the rate of creation of BTC can only maintain the peg in one direction.  If BTC rises relative to USD or whatever else, the increase in supply will bring it down, but if BTC falls relative to USD, you can only change the creation rate to zero, you can't withdraw currency.

It's easy to confuse supply as rate of money creation with supply as amount of money outstanding, and I think this is the error you have made.  You have complete control of the former, but the latter can only be expanded/inflated.

If retailers decide to withdraw from the BTC world and people decide to shed their holdings because of the falling value, there is nothing to stop it from falling to near zero.  Some miners may quit and the security might weaken, which could further weaken confidence.

This can happen with or without your currency peg, I'm just saying the peg does not prevent it.

[ahtremblay]

I think in 20 years, governments will peg their currencies to BTC for the increased stability.

[cunicula]

Trying to maintain a peg by changing the rate of creation of BTC can only maintain the peg in one direction.  If BTC rises relative to USD or whatever else, the increase in supply will bring it down, but if BTC falls relative to USD, you can only change the creation rate to zero, you can't withdraw currency.

It's easy to confuse supply as rate of money creation with supply as amount of money outstanding, and I think this is the error you have made.  You have complete control of the former, but the latter can only be expanded/inflated.

If retailers decide to withdraw from the BTC world and people decide to shed their holdings because of the falling value, there is nothing to stop it from falling to near zero.  Some miners may quit and the security might weaken, which could further weaken confidence.

This can happen with or without your currency peg, I'm just saying the peg does not prevent it.

Former Fed Chairman Allan Greenspan had an illustration for that: "It is like trying to push on a string."

+1 Chodpapa