Steem Dollars can almost always be converted to $1.00 worth of STEEM.
Cryptocurrencies are unique in that they are the only digital asset that is not someone else’s liability. They are
fungible, decentralized, and as valuable as the network of users that support them. Historically they have suffered from
very high volatility and are mostly held for speculative purposes.
Steem borrows a concept from the startup world known as a convertible note. Convertible notes come in many forms, but the basic
idea is that they are worth $1.00 of shares at a future price. STEEM Backed Dollars (SBD) convert to a crypto-currency rather
than to shares in a company. The price used to convert SBD to STEEM is derived from a reliable decentralized price feed.
Earn Interest on Savings
SBD pays users who hold it interest. This interest rate ensures that SBD can be safely held with minimal opportunity cost. The
actual interest rate can be changed by consensus of the active miners. This gives Steem the flexibility to adjust the interest rate
to be appropriate for market conditions.
Where does Interest come from?
Steem creates new SBD to pay interest on existing SBD. This increases the debt-to-equity ratio of STEEM. STEEM creates financial
incentives for 90% of all virtual STEEM to be vesting for at least a year. The virtual STEEM supply is the amount of STEEM
that would exist if all SBD were converted to STEEM at the current feed price. The impact of creating new SBD to pay interest is
to increase the virtual STEEM supply and reduce the percent of vesting STEEM. As the percent of vesting STEEM falls the rate of
return paid to vesting STEEM automatically increases to attract new long-term capital.
If we ignore the accounting details, the economic impact of paying SBD interest is to transfer value from holders of non-vesting STEEM to
SBD holders. This value transfer benefits both parties because holders of SBD are effectively extending credit to Steem. This credit
gives STEEM holders leverage that increases their profits when STEEM rises and increases losses when it falls.
Decentralized Price Feed
A price feed is produced by 21 active miners. Once per hour the median published feed is logged. The median of all feeds
logged over the past week is used to determine the rate at which SBD converts to STEEM. With this process it takes 51% of
active miners colluding for 3 and a half days to meaningfully corrupt the feed. It is safe to say that STEEM holders with a
vested interest in the future value of STEEM will be very pro-active in voting for reliable miners to produce feeds.
Conversion Requests
When a user requests a conversion from SBD to STEEM their request is delayed for 1 week and then executed at the future
moving median exchange rate. This process ensures that no one can use the feed delay against the network.
Conversion requests will primarily be used by speculators looking to buy large quantities of STEEM without moving the market.
Liquid Market
Most users will prefer to use the internal market to perform instantaneous trades between STEEM and SBD. The internal market will
track the real-time price of STEEM much more reliably because professional traders can take advantage of arbitrage opportunities.
To further enhance the quality of the market, the STEEM network rewards individuals who provide liquidity by leaving orders
on the book.
Merchants
SBD is a perfect token for merchants to accept because it is backed by a liquid market and can be reliably converted to
$1.00 worth of value in their bank.
Default Risk
No system is perfectly secure against default. A hyper-inflationary collapse of the STEEM access token could create a situation where all
SBD must be converted to STEEM at a value less than $1.00. The STEEM network minimizes the likelihood of this happening by economically
incentivising 90% of all STEEM to be committed for at least a year. This means the debt-to-equity ratio of the STEEM network is normally
under 10%. Even a 50% fall in the value of STEEM would only result in a 20% debt-to-equity ratio which is still conservative by financial
industry standards. The Steem network automatically increases incentives for long-term investment in STEEM as the debt to
equity ratio increases.
this is among the most valuable posts ive found for those who want to understand more fully the idea of SBD and how they work.
they could of course read the white paper or sift through it to find the SBD section, but most will not see the need to.
in fact, id go so far as to say that the steemdollars aspect of steem should have a mouseover message that lets users go directly to this post to explain.
does this have to do with the high dilution? people tie up 90% of the supply because they will not get diluted then?
does this mean when you buy vesting stake you are promising not to make them liquid for one year and in return get voting stake (and interest in terms of steem)?
Steem Dollars serve as the official currency of the Steem community. When holding Steem Dollars you do not have to concern yourself with the inflation and/or volatility associated with Steem. The STEEM currency is an accounting tool that is both volatile and diluted by 50% per year. Its sole purpose is to facilitate changes in ownership between Steem Power holders.
So does that mean we are wasting our time and not making money ?
Interesting.
I downvoted the post not because I disagree with the post or think it is not a quality post but because I do not think that the interests of Steem are served by every platform or devteam update or request for community feedback pulling thousands of dollars from the reward pools that go to ordinary users. The reward consensus algorithm also disproportionately rewards these posts since they are the only thing that 100% of Steem users have in common (aside from being human, etc.).
I fully agree. One of the biggest pitfalls of Steem could be that it is a self-marginalizing technocracy. A platform like this requires diversity and culture, and should reward out of box thinking, not group think.
I don't understand these two sentences: "The impact of creating new SBD to pay interest is to increase the virtual STEEM supply and reduce the percent of vesting STEEM. As the percent of vesting STEEM falls the rate of return paid to vesting STEEM automatically increases to attract new long-term capital."
What does the percent of vesting STEEM determine in the math of rewards and inflation?
Hi @dantheman Will you clarify what you mean by this?
"The STEEM network minimizes the likelihood of this happening by economically incentivising 90% of all STEEM to be committed for at least a year. "
Why a year? and not two years?
Thank you for the post, I'm not clear about SBD, how can I make conversion request ?
Comment on why the SBD prices are different now? @dantheman
One of the better explanations. Thanks
By reading your post I totally understand about the different among US$ and SBD. Thanks
Regard from Aceh
Thank you sir @dantheman. I have learnt.
Thanks for the break down.