This is from the revised white paper—
Steem Dollars are created by a mechanism similar to convertible notes, which are often used to fund startups. In the startup world, convertible notes are short-term debt instruments that can be converted to ownership at a rate determined in the future, typically during a future funding round. A blockchain based token can be viewed as ownership in the community whereas a convertible note can be viewed as a debt denominated in any other commodity or currency. The terms of the convertible note allow the holder to convert to the backing token with a minimum notice at the fair market price of the token. Creating token-convertible-dollars enables blockchains to grow their network effect while maximizing the return for token holders.
So it's a debt instrument, right? Which means people are buying debt, with the hope that Steem will go up to convert later? Or what?
That stuff flies like a rocket, right over my head! You can trade your SBD on the internal market for Steem. You want the Steem to be cheaper so you can get more Steem at the time of the trade but in the long run you want both to go up together. I guess you pay off the debt that is produced automatically via the 50/50 payout by trading it for Steem. Very confusing to non-economics majors!
I'm glad I'm not the only one it parts the proverbial hair on. I think.
So, the whole peg to $1 USD thing. Please correct me if I'm wrong, but isn't the intent of the $1 USD peg to keep the SBD from ever being worth less than $1 USD, rather than keeping it from ever climbing? And isn't it in addition to that the SBD will always be worth at least $1 in Steem?
Yes, that is true at this point in time. But I believe in the past it also meant that it wasn't supposed to be higher than 1 USD.