Strengthen The Peg
The peg has seen better days...
Right now, the market is valuing SBD at well below $1 USD. This might present an opportunity for users who can afford to buy SBD now and sit on it and wait until the market turns around. But for others, it will simply mean a significant amount of lost value from what amounts to a very high fee for exchange. I've taken some time to reflect on the economics of the Steem Dollar, and whether it is possible to safely tweak the mechanics involved in order to strengthen the peg.
Conversion Waiting Period
One of the major factors that enables the market to continue pricing of SBD well below USD is that one of the primary mechanisms used to create the peg is not quite up for the task. It can be made much more robust with a very simple change from a 7 day waiting period to a 3 day waiting period for SBD to STEEM conversions.
Seven days can be an eternity in the world of cryptocurrency. It is a huge barrier for most users.
Without stability, individuals across the world could not have low cognitive costs while engaging in commerce and savings.
-Steem White Paper
Users have to take a big gamble as it currently stands, to make use of the conversion function. They must factor in the price of STEEM in 7 days and whether it will be more or less than the average price during that period. It's not reasonable to expect users to be able to make an informed decision, so they are essentially rolling the dice.
Dali by AJC1, on Flickr
Also, all the benefits of keeping a liquid asset are lost during this time frame, which is a barrier for many users and will only become moreso as SBD has more utility beyond a store of value (ie, when marketplaces begin to flourish). They will also miss out on a week's worth of interest, which might be negligible but does decrease the attractiveness of conversion.
If redeeming SBD through the conversion function becomes a more viable option, the market should be forced to respond by pricing it closer to parity. If the market fails to respond, SBD holders will still have the option of paying higher fees for convenience and certainty by accepting the market rate. Regardless of what they choose, more options will benefit SBD holders and ultimately what's good for holders of the token is beneficial for the entire platform.
Risks of Shorter Conversion
The white paper lays out that the 7 day period is designed to prevent abuse. The two relevant points of failure that it highlights are corruptions in the price feed and timing attacks.
In the case of the price feed, it is up to the witnesses to maintain the integrity of the price feed. I think they do an outstanding job, and they have every incentive to continue to do so. And the risk of timing attacks and market manipulation are somewhat mitigated by the size of the money supply and growing volume on the exchanges. In either case, it would seem to me that a 3 day period would be a sufficient deterrent.
There may be an increased risk of these attacks, but I think overall the benefit of a shorter period will outweigh the risk. I'd like to hear from people more knowledgeable than myself regarding this.
I'm the kinda guy that likes to take risks. OK, here I go . . ., by Mark McGuire, on Flickr
Additional notes:
The white paper lays out a process of adjusting the interest rate earned by SBD balances, in the event of the market price deviating from parity with the dollar. I have not personally noticed this happen, and if it were to happen I don't know that I would notice. It might help to make the current interest rate more responsive and visible.
If the debt-to-ownership ratio is under 10% and SMD is trading for less than $1.00 then the interest rate should be increased. This will encourage more people to hold their SMD and support the price.
-Steem White Paper
The current debt-to-ownership ratio is below the 5% target*, and SBD price is about 15% below $1. The interest rate should be adjusted upwards to compensate. And it should be made very clear, so that it can influence decision making.
Users should also be informed that their SBD balances are best kept in their wallet rather than the exchanges, where they will not receive interest payments. The incentive to keep SBD off the market should be made more clear. If user behavior patterns change in this regard, it may provide price support.
*: My estimate is around 4.75% currently. Perhaps a function of the very high levels of investment?
It gets complicated really fast. It seems like a delicate balance.
I was thinking about the same thing, reducing 7 days to 3 for faster market adjustment, and then I saw it posted as a suggestion... nice...
Awesome ideas bachhist! Do you think changing it from 7 to 3 days would fix our situation though?
@calva upvote this genius article writer.
What situation is that? :)
One where the current conversion rates are making the dollar peg unfeasible.
The dollar peg is always going to suffer slightly when theres heavy loss in dollar value for steem.
The same way youll always be able to get significantly more than a dollar when there significant increase in steem price.
I think it would help!
@calva poker
bookmarked to read later, i dont know much about this, but i'm trying to learn abit at a time
I agree 7 days might as well be 7 years in crypto.
I am amazed that nowhere in the wallet are we notified that holding sbd = interest. that's a pretty weird oversee or is it like that on purpose?
I don't know.
Nice post!
When is sbd interest paid? Is it only when You trade out? Is it paid in steem steem power or sbd? We do need better clarity on sbd interest. Just displaying the rate would be helpful. As more of these intro post generate sbd the external markets may continue to be flooded.
10% p.a paid every 30 days on the sbd you keep in the wallet...that's as much as i understand and know. paid in SBD yeah.
I don't know if it is intentional or not.
Thanks :)
Im actually writing a pretty detailed model about how SBD and SBD interest acts as a corrective mechanism in the steem economy... im kind of working on a grand unified model of how everything in steem works...
The problem is that when you peg up SBD, youre devaluing SP... potentially quite a lot... there has to be a balance between the steem in "the vault", and the amount of steem currently outstanding to steem dollars.
GIven the fall in the price of steem and the corresponding rise in the amount of debt payable out of the vault, proping up SBD too much would reduce the steem value of SP.
I don't see how that would be the case. But I will hear you out.
read this post first... https://steemit.com/economics/@chiefjay/where-does-the-money-come-from-part-2-of-my-steem-economic-model
I am actually going to get into SBD in my next post about the economic system, but long story short. Steem backed dollars are backed by steem in the vault described above. The very same steem that gives vests the steem value you see in the UI.
When the price of steem goes down, the steem value of SBD goes up. The debt represented by the steem value of all SBD in circulation can only safely go up to a certain amount of the total amount of steem in the vault.
I think the econ system has a way of correcting that. It has something to do with the split between sbd and vests paid for blogging and curation, but im still working on figuring that out. But basically until the system can catch up and put more steem in the vault to compensate for the higher steem value of SBD, its going to penalize SBD conversions to keep the amount of debt within a certain percentage of the money in the vault.
There really is no vault with STEEM in it, as far as I can tell...
There is a reward fund, and while I'm not entirely sure how it works, I think a lot of what you're trying to figure out has to do with that.
Also, where are you getting your numbers for D to ownership ratio? You get that the debt part is sBD, and the debt to ownership ratio increases when the price of steem decreases, right?
Yes... I was doing it with the value of the SBD in circulation, denominated in STEEM vs the liquid STEEM supply.
@Bacchist
For those less knowledgeable about the volatility of Crypto Currency I figured this picture would be worth a thousand words to help fully illustrate your point further. Below is a picture of just 2 days of activity as it pertains to the must traded Crypto Currency on one of the world's largest exchanges of Crypto. The exchange Poloniex currently also has the highest traded volume of both STEEM and SBD, which it chooses to price seperately.
The currency in this illustration is ETC (Etherium Classic) because it has the highest trade volume by far. It's trade volume in 24 hours was equal to over 40,000 Bitcoin (or at current rate) = aprox $26.3 million USD. With in a 48 hour period the high/low prices fluctuated around 50% in just 2 days time. During a single 24 hour period the Price was still at a 33% variance in the high/low pricing.
Even 2 days can be an eternity in the world of Crypto. 7 Days may as well be 7 years if trade volume is high and investor confidence is unstable.
Try to imagine the following scenario :
You go out of town for a single day on vacation from work only to find out in that 24 hour period, upon your return all your money in your wallet and even the bank was worth 50 cents on the dollar...
Confused and afraid of losing everything you own, you settle with the market as is stands and sell all your shares the very next day. You're happy taking a 33% loss on your assets instead of a 50% loss. All of which you must live with because you decided to leave for a day or 2 on vacation, away from your computer and the world of Crypto...
The below picture is a real picture of the above nightmarish scenario on a real life exchange. The above scenario was not fiction but indeed fact as illustrated below.
You're correct that cryptos can be and often are quite volatile.
But Poloniex didn't just arbitrarily choose to price STEEM and SBD separately. They are two completely different tokens, with different purposes within the Steem economy. SBD is intended to be a stable currency with a value that tends to be very close to $1 USD. On the other hand, STEEM is more volatile by nature and not intended to be held long term.
Quite true. That much I did forget to mention. There is a huge difference between STEEM and SBD that may not be readily apparent for those who did not read the white paper. While SBD is trying to be pegged to the USD as close as possible, STEEM was never meant to be quite as static. Thank you for adding that to help clarify. :-)
but what does this mean? Should we all hold on sbd because it's lost value selling below 1$?
It's honestly a big guessing game right now. SBD seems to have stabilized out a bit, but is still sitting at about 17% less than 1 USD after being listed for about 10 days give or take. It's priced at about 83 cents right now on Poloniex after doing the math last time I checked.
STEEM on the other hand fell roughly 12.5% in the past 24 hours, but I have a feeling some of that was due to the hard fork a couple days ago. Steemit now makes you wait 7 days before SBD will convert to STEEM after a request to make the conversion.
now? steemit always request 7 days for a direct conversion....[ replying to the other comment
Need more users do dilute
meep