According to the white paper p. 45 it says direct conversion would not be possible to prevent timing attacks. A real market is also discouraged see "Minimizing Abuse of Conversion".
When searching for internal market I could only see posts describing your option 2. It seems like I missed something.
Do you know where I can read more about this?
Also could you send on the console and console command if you have it?
Conversion != selling on the market: through conversion you increase STEEM supply and destroy SBD supply, but through internal market - not. On internal market you buy or sell what is already exist.
I got my questions answered in slack:
The paper talks about blockchain conversion while a market of steem <-> SD does not offer abuse of conversion. Abuse of conversion: Trading large volumes without changing the price.
Direct conversion of SD to Steem move sd and steem around while option destroys them. The internal market seems to be a new feature.
Internal market has existed since launch. Just no steem dollars to trade yet.