Should we be concerned about STEEM-Backed Dollars and the inconsistent peg, or is it too soon to worry?
Over the past five and a half weeks we have seen the SBD price trend upward after consistently holding the peg near $1.00 since mid-November. Although this seems like a great advantage for anyone acquiring or holding SBDs, some have argued that losing control of the peg could end up being detrimental for the system overall. After a few conversations with witnesses, such as @bacchist, @timcliff, @jesta, and @gtg, I'm still undecided on whether or not we should be concerned.
Looking back at the Steem Whitepaper (which is largely outdated at this point), there was considerable thought given to the concept of "Steem Dollars" (SMD). But it ultimately boils down to one quote for me:
It is our belief that these rules will give market participants confidence that they are unlikely to lose money by holding SMD purchased at a price of $1.00
In perfect market conditions, the idea is to have a stable debt instrument that can be bought and sold for one U.S. Dollar. The primary emphasis on stability in the case of such an instrument is to not lose value when investing in it. If you were to purchase one SBD at $1.00, then you should not lose more than an insignificant amount of value at any given time in the future when that SBD is sold.
What happens if SBD is valued at $2.00 in the future?
If you bought them at $1.00, then you should obviously rejoice at your 100% profit! If they are given to you as a reward at a presumed value of $1.00, then again, this should please you. You're earning double "face value" of your SBDs and can sell them for an instant 100% premium.
The question is: Are there long-term negative effects of such a premium and what should be done, if anything?
First, we have to acknowledge that a few things are likely happening to cause the price of SBDs to increase steadily like they have been.
- Demand for SBDs is outpacing creation.
- There is a lack of SBD liquidity in the markets.
- The individuals/bots responsible for maintaining the peg are not performing their duties, are performing them improperly, or they simply cannot overcome the supply/demand and liquidity issues.
If the problem is either of the first two - or both - then the solution would be to increase the supply and incentivize selling on the open market in order to put pressure on prices and help to drive them back down. With the price of STEEM rising over the past couple of months, SBD creation has been on the rise. However, the price of SBDs has also steadily risen over the past month, despite more creation and distribution to content creators.
Whether or not we should be concerned about this rise in price depends on whether or not a higher price is actually harmful. Other than internal conversion rates being sub-optimal, there doesn't appear to be a negative impact on any particular aspect of the system or on the system overall. In light of that, any proposed solutions should be made with a long-term outlook for stabilizing the peg as opposed to a short-term reaction.
There have been a few solutions discussed that could help bring the peg back towards $1.00.
Right now, I do not believe that relatively high SBD prices pose an immediate concern. So, with that in mind, here are a few ideas that have been suggested.
- Implement a reverse conversion function in the Steem wallet (STEEM-to-SBD), as mentioned by @timcliff.
- Have witnesses set a higher bias, which would create and distribute more SBDs per post payout - a position supported by @bacchist and several witnesses.
- Do nothing, but continue monitoring prices and liquidity. (My current position.)
It should be noted that option 1 can be very easily manipulated and was seen as an avenue for abuse in the original whitepaper - and intentionally not created as a blockchain function.
If people could freely convert in both directions then traders could take advantage of the blockchains conversion rates by trading large volumes without changing the price. Traders who see a massive run up in price would convert to SMD at the high price (when it is most risky) and then convert back after the correction. The Steem protocol protects the community from this kind of abuse by only allowing people to convert from SMD to STEEM and not the other way around.
The blockchain decides how and when to create SMD and who should get it. This keeps the rate of SMD creation stable and removes most avenues of abuse.
Steem Whitepaper - Minimizing Abuse of Conversions, page 11
Is this a problem in need of an immediate solution? Is it necessary to hold the SBD peg at or near $1.00 at all times?
In my opinion, I don't think this is a serious issue right now. As long as SBD holders are able to sell the token for at least $1.00, then the peg "works." At prices above $1.00, buying SBDs carries much higher risk and should probably be avoided.
SBDs were intended to be a stable instrument that held the value of one U.S. Dollar. If it holds the value of more than one U.S. Dollar on free-market exchanges, then that's a positive sign for the STEEM currency and SBDs. It shows that there is confidence in and demand for the Steem currencies/assets. It's essentially an extension of credit to the Steem ecosystem, which is a positive sign.
However, these are just my views. I do believe that SBDs can play a huge role in a marketplace, even if we sometimes can't see their usefulness at the moment. But should we be concerned about the inability or unwillingness to hold a stable peg at $1.00? I'm curious to know what the rest of the community thinks...or even if this is something that is thought about in general.
**A Final Note on SBD Conversions
If you are not aware, it is not ideal to be converting your SBDs to STEEM. You will receive much less STEEM using the conversion function in your wallet than you would selling the SBDs through the exchange and purchasing STEEM. This will also put downward pressure on SBD prices and upward pressure on STEEM prices. If you wish to convert SBDS to STEEM, consider using the internal or external exchanges. It would be beneficial for yourself and both currency prices.
I think some patience is needed regarding the SBD markets. The supply issue of SBD has been remedied somewhat but the market still needs to be given time to cool down.
Up on this and also, ppl submitting 100% power up posts are missing an opportunity to convert earned SBDs to more Steem and to end up powering up ~33% more if SBD is 2 bucks.
What about the children ?
I just do a 50/50 split and sell that shit as soon as I get a good pile of it lol
Feels goooooood
Although it would be nice if it could maintain the dollar peg, at least a little more closely.
@shayne
I vacillate between freaking out and breathing into a small, brown paper bag or ignoring the ticking stream of index prices at the bottom of my screen.
Mostly because I just don't understand any of this.
That being said, I am absolutely grateful for your Real English opinions geared for true reading.
Srsly.
@ats-david, one of the things I don't see mentioned very often is that the SBD price imbalance started pretty much in tandem with the overall crypto markets starting to heat up and get frothy. Several of of the SBD price runups happened on uncharacteristically heavy volume. Leading me to believe that the "problem" may be due to neophyte traders jumping on the bandwagon and engaging in hysterical FOMO trading without having ANY idea what they are actually trading. They may even have thought they were buying Steem.
That would lead me to favor the "wait and see" option... if this current market correction chills things out a bit and SBD drops back towards parity, maybe that would tell us something. Understand that I am NOT an expert... however, it would seem to me that if we can establish that "Steem Dollars freak out when the crypto markets get frothy" there'd be a more solid ground to base any needs (or not) for adjustment mechanisms on.
While this post cleared up a few concepts that were fuzzy to me it also raised a few questions...
My understanding (which is questionable as I am fairly new to the cryptoshpere) is that the internal market has a trading price at almost half that of external markets for Steem (SBD to STEEM). Am I being deceived by posts of some bigwigs here?
What would the effects be with a 100% Steem Power post?Secondly, if this were to happen....
I hope my questions are clear and I don't sound like the complete n00b I am.
The listed price on the internal exchange roughly translates to the external exchanges if buying/selling SBDs and STEEM from your wallet, internally. However, the conversion function doesn't give you a premium like you would get on the external exchanges. You're still only getting approximately $1.00 of STEEM, despite the price being near $2.00.
None. When you do a 100% SP post, no SBDs are created. Don't do that. Take the SBDs as long as they are trading at such a high price. It's good for you and selling them is good for trying to maintain the $1.00 peg.
The fog has lifted....thanks for the info @ats-david!
@ats-david
I'm with you on this one cause actually had I not known @timcliff when I read his post about pegging it I was a bit shocked that he's proposing it and I thought - what happened to the free market? Let the market do its move - but knowing @timcliff always have good intent and consistently have shown that - maybe there's something I missed on that too intelligently written post.
As for pegging it - would it not make it almost like of that fiat money? Why peg it? Control? - why worry about the merchants having to keep watching the movement of the market - I thought .. but anyway these are all honest questions - there are many things that I still don't know of - so @timcliff I hope you don't get offended with these questions and enlighten us please. Thank you
One thing to keep in mind is that originally the rule that limited SBD conversions to 10% of the STEEM money supply didn't exist, so the system described in the white paper does not correspond to the system as it is today.
In the system as it existed then, with SBD already being for example 10% of the money supply, whales could potentially convert another 10%, and then if STEEM drops 75% (not even that huge a drop; we saw 95%+ last year), convert back, obtaining 80%! Obviously this is hugely unstable.
In the system as it exists today, if someone were to convert STEEM into SBD and produce a large amount of SBD, it would no longer be fully convertable into STEEM, either immediately or after a price drop. The whales in the above-described situation would end up with 50% less STEEM than they started with, obviously not a very attractive 'exploit'!
I think @timcliffs proposal bears consideration, but for now I think wait and see is okay. You mentioned that it has been 5 1/2 weeks of SBD overvaluation, but due to the effect of the hard fork, rewards (and therefore SBD supply) were minuscule for the first few weeks. It is only in the last two weeks or so with the reward pool stabilizing and the STEEM price increasing that we've seen more SBD produced. And even then it still takes time for people receive rewards and eventually decide to cash them out.
Would increasing the default payout to 75% SBD instead of 50% eventually put downside on the SBD price? Or am I thinking bass ackwards?
It could help by increasing the supply, but in my opinion, I think we still need to wait a little longer to see what the effect will be from the recent price spike and SBD creation. If prices are still high in a month or so, then we should probably start discussing the options. But even then, we would need to look at the market conditions in general to get an idea of what the causes are. If it's simply a matter of strong market trust/confidence instead of supply/liquidity, there's not much that can be done about it.
That SBD doesn't hold the peg almost at all during a price spike is a problem that could use addressing. There will always be price spikes. We shouldn't expect them to break a pegged asset.
That said, this issue started before the price spike, so it is more difficult to characterize the underlying causes.
I don't agree there. We can create a trillion SBD. It can always be a matter of supply if that's what it takes (though not exclusively that)
It could, but I think the idea of offering a higher SBD option (75% or 100%) to authors would be better. It would make the supply responsive to demand because people would tend to choose more SBD when SBD is above $1 and less SBD when it is below $1.
I think Option 3 is the best right now. I would like to see over a longer period of time if things stabilize around $2 or if the increase in many cryptos has lead to an increase in SBD price and then the price of SBD decreases back to the peg
I never worked for the FOMC, but seems if they changed the default payout to 75% SBD and 25% SP (temporarily) , that might put added pressure on the SBD price. However like they are fond of saying at the Fed, sometimes market policy is like pushing on a string...
Good post. There is definitely a good argument to be made about 'just leaving it alone' (for now) and I think you did a great job articulating it.
Just a few small things regarding the wording here. Users can use the internal market (or internal exchange - depending on what you want to call it) to exchange/trade SBD for STEEM. The internal market (as far as I know) is usually fairly close to market value, and is not tied/related to the peg. What users don't want to do is convert. This is the process that takes 3.5 days, and provides "approximately one USD worth of STEEM" based on the witness price feeds.
Yeah, my understanding was that you generally get better prices on the external exchanges. But I can change that. I don't want to scare people out of using the internal exchange entirely!
Internal or external is usually very close to equivalent in value. I would choose based on what you are trying to do. If you want to cash out SBD to fiat, go ahead and use external because you're going to need to go external to get to fiat anyway. If you want to use that SBD to get STEEM to use or power up, then use internal (fast, no fees, no risk of funds being lost due to exchange problems or transfer errors).
Either way, your advice to not convert under these conditions is the most important point. Not only does it hurt the user (who gets less) but it hurts the system since it takes SBD out of circulation.
Wow. Up until reading this post and its comments, I did not know there was a conversion tool for SBD to Steem! I always thought there were just the internal and external markets... Something new learned yet again, thank you!
Steem price needs to stabilize for a while in order for us to reach any solid conclusions in regards to where SBD is heading. The current bull market obscures pretty much any statistical significance.
Yes and no. By design SBD should not be affected much by a bull market in STEEM. There could be some small deviations but not 2x. Things are not working great, but they may still stabilize in time.
Steem has tripled in the last month. Bitcoin nearly doubled.
That is 6X the SBD has to work against in the time of a month. Production for that is just too small, especially after the hardfork with nearly nil payout for weeks.
The hardfork is another matter altogether. But price volatility including extreme volatility is a fact of life in cryptocurrencies. If the peg mechanism can't deal with it, then it just doesn't work very well, and considering improvements is reasonable. By contrast, BitUSD (Bitshares pegged USD) recently had a 10x increase in supply (along with almost a 10x increase in BTS price) in a very short time and held the peg reasonably well. So differences in the mechanism do matter.
Steem - and steem and SBD are so close it does not make a difference for that purpose - has a 50 times market capitalization then bitUSD. Daily trading volume of steem is 5 times higher then MC of BitUSD.
You can't compare them in regards to peg stability.
I'm not sure what you are talking about. Bit USD and SBD have similar market cap, as do BTS and STEEM.
Will more user traffic clear out the situation? I believe a more stable Steem price will stabilize SBD in the long run as well.
No way to know. We're at a point now where we are constantly entering uncharted waters (including the passage of time since the hard fork supply disruption), so we'll just have to wait and see.
I'd guess the problem starts when those folks buying at 2x+ learn that they have made a mistake and begin to dump.
If the amount of sbd is not enough to crash steem on a wholesale dump by those that are trying to cut their losses, then we just keep telling folks to not buy into the pump.
So, provided this isn't an attempt to sabotage the platform, I say let them run the price to whatever they want.
As long as the price doesn't go below a dollar then holding something that only loses 50% might not be a bad thing.
I mean, imagine if btc moved the decimal one place to the left, wholesale panic would set in, but your sbd won't go below a dollar.
Why we want to track the usd and not a milligram of gold is my current question.
The dollar is going down, it is only a matter of bankster last gasp efforts that it has lasted this long.
The way I see it is that SBD is good for people who don't understand crypto,etc..now try explain that 1 SBD is worth $2, if we can't keep the peg its best to remove it altogether i think.
I don't think we need to worry about it too much right now. It certainly shouldn't be removed because of a temporary loss of the peg. It actually provides great utility/value for the ecosystem once it becomes more widely accepted as a currency within a Steem economy. I think we should wait until businesses start joining the community and see how they accept the two different currencies and whether or not the use cases can be proven.
The purpose of the SBD is to provide users in the Steem ecosystem with an alternative to cashing out of the system entirely due to a relatively volatile crypto token - STEEM. If SBDs can prove to be stable over the mid- to long-term, then I don't see why it wouldn't be used or preferred as the primary currency for business within the Steem economy, as it was intended. I plan to accept and use it for my business as long as it's relatively stable. I'm sure many others will do the same.
It was shock to me that the SDB price wasn't 1 dollar. I am still not pretty sure of what exactly this means, but I will stay cautious. At least for now it hasn't been anything bad.
I appreciate your breakdown of SBD and holding the peg. As someone who is mostly blogger rather than understanding the way steem works, I appreciated how easily this was understandable to a lay person like myself. Thank you!
Additionally if you have time, I have posted some blogs if you would be kind to take a gander.
https://steemit.com/@kajalpats
Thank you!
Congratulations @ats-david!
Your post was mentioned in my hit parade in the following categories:
Yeah I agree it is not an immediate problem at this moment. I do feel if we can't get it pegged to a dollar and hold it there is might be better to get rid off it. As far as I know, that was it's only function and now all it does is take away investments into steem.
Seems to me STEEMIT GROUP is on their GAME.
@ats-david Your posts in every post make me inspired. thaks
I am not significantly concerned yet about this issue and I agree with you that nothing should be done (yet) except monitoring of the situation. However, it certainly is a problem, and if STEEM is to become a mainstream currency, the SBD must always be stable around the $1 mark.
What you say is the logically the same as to say that steem has to be more stable (to what?) then Bitcoin.
Too far away to worry about now I would say.
I thought your character looked familiar? It's Baraka Obama!
Great article, I have been using the internal exchange to purchase , glad that you pointed it out to use a wallet. Great read and info
Resteemed
You can buy internally, but you might be able to find better prices on external exchanges. Just don't use the conversion function right now. It does two things:
Thank you for this detailed post. I just signed up yesterday and Im still trying to wrap my head around how everything works. Im looking forward to your next update.
Can someone explain why people would buy SBD if the price was above 1$? Speculation? I that case it seems like foolish speculation. Are there any other reasons?
In theory if there were more supply of SBD than STEEM at your target price, and you wanted a lot of STEEM, you could buy SBD and convert it to STEEM.
But in this case it seems like foolish speculation. There are much more efficient ways to short bitcoin.
If you want to increase your steem and think the steem price plummets down to where it was a month ago then buying SBD at 2$ would still yield a 30% win in steem.
Brother God Bless You Very Nice
Its all too early to tell, although it is always good to do the breakdown and speculate future endeavors like you have in this post. Time will tell, but everything is a gamble, I guess the most important question when it comes to investment is... When are you ready to cash out and be satisfied with your decisions?
I think a big part of the problem is the surge in interest for crypto in general. People are buying up coins without understanding them. They think SBD is just another altcoin to speculate on and driving the SBD price up is a good thing. If we do too much and we are in a bubble it will make things worse when it pops. Think the more cautious approach here might be the best.
Great post, I guess if one wants to hold SBD longer term then one needs to have confidence in the Federal Reserve Note or USD, even if one considers their own 2 to 3% inflation nonsense then the peg against the SBD is not a great proposition long term as the buying power is being eroded (stolen) over time.
I personally believe in free market or Austrian economics. Tampering with markets can only work for so long before Natural Law kicks in an rebalances things as the Federal Reserve is finding , no doubt.
Followed upvoted and promoted, Amigo
There isn't really a good reason to hold SBD longer term if it is working as intended. As you say since it is designed to be pegged to USD and USD is explicitly designed to devalue at 2% per year, holding it long term is pointless. Holding SBD is the equivalent of sticking cash in your mattress, hardly a brilliant investment strategy. You would want to actually invest your money instead of holding it in a cash equivalent, beyond what you need for routine expenses.
Yes amigo, my point exactly. As I am new to the steem community I am curious as to why I would want to chase the steem dragon, other than to ride the wave.
Not saying I am ani-crypto but I am a long term player and fundamentally a contrarian by nature so I am naturally skeptical with following the crowd. But at the same time dont want to miss out, I guess I want my cake and be able to eat it to.
Thanks for your response amigo.
Followed and appreciated
SBD isn't an investemt, the same way as dollars aren't.
But in short/mid-term time frame they can give you stability and that can be important.
Yeah, that's how I see SBDs...as I do with the USD. I'm not accumulating either one in order to make profits off of holding them. Short- to mid-term, I should be able hold to them and pretty much not lose. But it's certainly not a way to actually gain, given inflation.
To make gains, you'd need to invest those SBDs or Dollars into something with positive returns that cover the losses from inflation. If you're not at least covering that, then you're losing.
That being said - the inflation for USD is typically low enough to make your realized gains relatively easy to achieve.
Agree
True , thanks for weighing.
Followed
"Tampering with markets" is a strange thing to say about influences of a central bank on a dollar, when the dollar per definition is not a market-born thing.
It is so strange I can't even find a comparison.
How can the dollar be market born? It is not anything real!!!
Why should anything that is not real be acknowledged?
thank you for all this info
If you are not aware, it is not ideal to be converting your SBDs to STEEM on the internal exchange. You will receive much less STEEM using the conversion function in your wallet than you would selling the SBDs through the exchange and purchasing STEEM. This will also put downward pressure on SBD prices and upward pressure on STEEM prices. If you wish to convert SBDS to STEEM, consider using the internal or external exchanges. It would be beneficial for yourself and both currency prices. great idea and this will no doubt help the system and the person itself.
Current price of SBD is now $2. I think SBD price doesn't need to stuck on $1. Free it to fly :)
I think we should wait and see. Demand will be met, eventually.
great...resteem and upvote for you....
I do enjoy the high price. But I also see value in keeping it pegged so people can market their stuff easily using it as currency.
If it's so valuable why not peg it at $2 instead of one?
Why not $3? or $4? Or maybe even $5?
What it is pegged to is arbitrary (in fact Dan once suggested considering changing it to peg to silver). The point is that it doesn't hold well to a peg right now, whatever that peg happens to be.
Sounds good to me. And it will drive steem to higher value.
I won't worry at the moment. Do not forget that the steem price tripled just a short time back.
The top price is quite stable. Just now the satoshi price plummets, but then BTC is rising like on steem ;)
Still -16% in one day (currently on Polo) shows that the peg is working. Speculators are going for a steem/SBD change. They cannot do that forever without losing a lot of money.
The SBD creation has increased and SBD are being sold. The price will go down finally. And if not - well content creators are all get quite a bit richer then normal, so thats okay too ;)
Ok, but wouldn't it be good fiscal policy then if the idea is to push SBD back to 1 dollar? Downward pressure on SBD right? Not sure if this is a misprint or if I'm confusing something.
Yes, you would be putting downward (sell) pressure on SBDs, helping to push prices back down towards the $1 peg. Right now, everyone acquiring SBDs should probably be doing this.
Right, guess I just misunderstood what you meant by your next two sentences:
So what you were actually saying here was the the conversion/trade itself would beneficial and doing it via exchange would make more direct economic sense for the person making the trade. I read it completely different, as "try not to convert directly, because selling it for a higher price on the exchange will be better for the currencies". =)
Well, you certainly don't want to use the conversion function. But selling it on the exchanges at a higher price is good. It's good for your wallet and it's good to get those SBDs out into circulation.
Just checking to see that I'm following here: For my own personal economic reasons, or because it's not good for the currencies? The way it looks to me, it would be good for the currencies to take the bid or lower on SBD, but maybe that's not at all what happens in conversion.
Both. When you use "convert," you are destroying SBDs. This decreases the supply, which can put upward pressure on prices.
When you use the "convert" function right now, you're losing out on the premium that SBDs currently have. You'll only get approximately $1.00 of STEEM even though SBDs are trading closer to $2.00.
When you sell those SBDs instead, you're likely putting downward pressure on prices. And if you're buying STEEM, you're increasing demand for them and likely putting upward pressure on prices.
Got it.... Maybe there needs to be a change to the user interface then. I can imagine there's a lot of conversions taking place right now considering everyone seems so bullish.
Is there any place that shows the price SBD are trading at on the internal exchange?
Does anybody have an idea what is going with steem the past 10hours?
i wish i understand crypto world like you do
Too Soon
ats-david, i'm very like your post and i'm always follow it's pls follow me ,thanks
I don't think we should worry yet I think we should worry when steem it gets over populated
What exactly does "biases" when it comes to witnesses mean?
Well but I buy some SBD and also in rewards count it seems that steemit give the right live value for SBD and steem too
My thought is that if the witnesses try to gauge the steem price by modifying their witnessing votes, they are basically doing what the Federal Reserve in the USA is trying to do. They are trying to set an artificial rate, in order to achieve a market objective. What they will invariably do in the end is overshoot reality, over-produce SBD and SBD will then get into below $1 range, and they will have to then adjust their projections in reverse... or we rely on the market behavior of conversion on the platform which probably would stop the reverse behavior of a glut below $1. Because of that, I think #2 is a good idea.
Also, why can't we get 100% SBD payout? It would help solve this issue. I would just move it to the exchange, buy STEEM and send the STEEM back, but it would be worth doing.