If you consider the SBD asset in isolation you can reason the price dynamics based on typical supply and demand mechanics. i.e lower supply leads to scarcity and higher price, higher supply leads to abundance and reduced price.
What we saw earlier this year was more people choosing the liquid payout option and more and more SBD was printed. The demand here was because the open market rate of SBD was above 1 dollar. This was the manifestation of an increased demand for SBD.
In theory more supply should counteract the increased demand to balance the price but we saw that it didn't. This was probably for several other reasons but possibly partly due to the design of SBD where printing is capped at a percentage of the Steem supply.
I understand the point that one may argue that it is more important to protect the debt level of Steem (wrt SBD) to stop inflation of the money supply.
Back to my quesiton...
What are your views on the supply and demand mechanics for SBD when the open market price is above 1 dollar, What is the downward lever (if any) on the price pegging mechanism?
The continued printing is a downward lever, just one with limited intensity. As rewards are printed in SBD, users go and cash out those rewards, and the higher the price of SBD, the more capital inflow is required to keep the price high. Eventually one or the other must give. Still, "eventually" may be quite a while.
Also, you can't consider SBD as being entirely isolated from STEEM. As the supply of SBD increases, that represents more and more STEEM that is kept out of circulation. On the margin this should increase the price and market cap of STEEM, which in turn results in even more SBD being printed (see above).
It is possible to accelerate the feedback somewhat. For example my @burnpost initiative takes some of the SBD rewards and uses them to directly buy and lock-then-burn STEEM. When SBD was $10, this was quite powerful, as $1 worth of STEEM from the reward pool could be used to remove $10 worth of liquid STEEM from the market. At one time @burnpost was steadily and relentlessly removing $10000 worth of STEEM from the market per day. Over time that certainly adds up.
Still, this is absolutely not the ideal situation in terms of the utility of SBD as a stable value token (and indeed it appears to have demonstrated more temporary upward price instability than other pegged tokens). I don't think anyone would disagree there.
Thanks for this comment @smooth. I have been thinking about SBD quite a bit this year and I have been coming at all aspects of it from different angles. I really see it as a feature of Steem and I would love to see it work as intended. Just a few follow up questions while we are talking about it, which I will get to in a minute:
I know the following is a simplification but this is the picture I have in my head of SBD
I always thought of SBD as a simple asset. The key drivers to maintain the peg being
if the price is below 1 dollar on the open market, less is printed and interest is paid. People will hold the asset making it scarcer and and the price goes up.
If the price is above 1 dollar, no interest is paid and more is printed so people want to sell and the price goes down.
This of course ignores risk tolerances and some other characteristics of an open market monetary policy
Back to your comments, my follow up questions are the following:
As the supply of SBD increases, that represents more and more STEEM that is kept out of circulation.
1 - Would you say given the relative size of the Market Caps and Volumes of STEEM and SBD that this would have just a marginal effect if any?
When SBD was $10, this was quite powerful, as $1 worth of STEEM from the reward pool could be used to remove $10 worth of liquid STEEM from the market.
I have been thinking about the burnpost initiative from another angle and I always saw it as reducing the supply of SBD which would further increase the price of a scarce asset (based on supply and demand economics)
2 - Would the fact that it is reducing the debt on STEEM not have more of an affect on the STEEM price than the SBD price? (Again given the relative size and liquidity of the markets for the two assets)
Would you say given the relative size of the Market Caps and Volumes of STEEM and SBD that this would have just a marginal effect if any?
It is hard to say. The most obvious answer is that SBD has limited effect on STEEM given the relative sizes of the markets, and that is probably true to a large extent. But not necessarily entirely.
First, the market caps don't directly imply how much supply is actually available in the liquid price-setting markets. For example, a huge portion of STEEM's reported market cap is locked up as SP. Furthermore when SBD gets overvalued this serves to narrow the difference (a natural stabilizer). In addition, reported trading volumes on crypto exchanges are very suspect. Finally, the argument is somewhat circular. There is demonstrated huge demand for stable value within the cryptocurrency ecosystem (Tether, also rapid uptake of other solutions such as DAI) which dwarfs STEEM's market cap by about 10x and additional demonstrated huge demand for stable value outside the cryptocurrency ecosystem. Drawing some of that value (even a tiny fraction) into SBD could result in an upward spiral that lifts the market cap of both SBD and STEEM (potentially by a lot).
I see SBD as a 'product' of the Steem blockchain (along with others, such as value transfer, censorship resistant publishing, rewarding contributions, etc.). It is a product that has a vast addressable market, possibly dwarfing the others.
I have been thinking about the burnpost initiative from another angle and I always saw [burnpost] as reducing the supply of SBD
How would it do that when it immediately dumps its SBD on the liquid market? Secondarily, powering up (which @burnpost does) increases the STEEM market cap which further increases the supply of SBD (if only by a little). So overall I don't understand this idea at all.
Would the fact that it is reducing the debt on STEEM
I don't understand this question, including what you are referring to here with the word "it"
I'm also skeptical of the word 'debt' by the way, especially when used without further clarification. SBD has some properties that are analogous to debt but it isn't a perfect analogy by any means.
Well, with the recent SBD trading above $1, I think it simply boils down to there continued to be more demand for SBD than supply. As I mentioned in the post, the current SBD printing mechanism doesn't really have sufficient tools to put downward pressure on the price during cases where there is excess demand. There was a link in the post to one idea of something that could be implemented to support that.
Let me elaborate on my point a bit further:
If you consider the SBD asset in isolation you can reason the price dynamics based on typical supply and demand mechanics. i.e lower supply leads to scarcity and higher price, higher supply leads to abundance and reduced price.
What we saw earlier this year was more people choosing the liquid payout option and more and more SBD was printed. The demand here was because the open market rate of SBD was above 1 dollar. This was the manifestation of an increased demand for SBD.
In theory more supply should counteract the increased demand to balance the price but we saw that it didn't. This was probably for several other reasons but possibly partly due to the design of SBD where printing is capped at a percentage of the Steem supply.
I understand the point that one may argue that it is more important to protect the debt level of Steem (wrt SBD) to stop inflation of the money supply.
Back to my quesiton...
What are your views on the supply and demand mechanics for SBD when the open market price is above 1 dollar, What is the downward lever (if any) on the price pegging mechanism?
The continued printing is a downward lever, just one with limited intensity. As rewards are printed in SBD, users go and cash out those rewards, and the higher the price of SBD, the more capital inflow is required to keep the price high. Eventually one or the other must give. Still, "eventually" may be quite a while.
Also, you can't consider SBD as being entirely isolated from STEEM. As the supply of SBD increases, that represents more and more STEEM that is kept out of circulation. On the margin this should increase the price and market cap of STEEM, which in turn results in even more SBD being printed (see above).
It is possible to accelerate the feedback somewhat. For example my @burnpost initiative takes some of the SBD rewards and uses them to directly buy and lock-then-burn STEEM. When SBD was $10, this was quite powerful, as $1 worth of STEEM from the reward pool could be used to remove $10 worth of liquid STEEM from the market. At one time @burnpost was steadily and relentlessly removing $10000 worth of STEEM from the market per day. Over time that certainly adds up.
Still, this is absolutely not the ideal situation in terms of the utility of SBD as a stable value token (and indeed it appears to have demonstrated more temporary upward price instability than other pegged tokens). I don't think anyone would disagree there.
Thanks for this comment @smooth. I have been thinking about SBD quite a bit this year and I have been coming at all aspects of it from different angles. I really see it as a feature of Steem and I would love to see it work as intended. Just a few follow up questions while we are talking about it, which I will get to in a minute:
I know the following is a simplification but this is the picture I have in my head of SBD
I always thought of SBD as a simple asset. The key drivers to maintain the peg being
This of course ignores risk tolerances and some other characteristics of an open market monetary policy
Back to your comments, my follow up questions are the following:
1 - Would you say given the relative size of the Market Caps and Volumes of STEEM and SBD that this would have just a marginal effect if any?
I have been thinking about the burnpost initiative from another angle and I always saw it as reducing the supply of SBD which would further increase the price of a scarce asset (based on supply and demand economics)
2 - Would the fact that it is reducing the debt on STEEM not have more of an affect on the STEEM price than the SBD price? (Again given the relative size and liquidity of the markets for the two assets)
It is hard to say. The most obvious answer is that SBD has limited effect on STEEM given the relative sizes of the markets, and that is probably true to a large extent. But not necessarily entirely.
First, the market caps don't directly imply how much supply is actually available in the liquid price-setting markets. For example, a huge portion of STEEM's reported market cap is locked up as SP. Furthermore when SBD gets overvalued this serves to narrow the difference (a natural stabilizer). In addition, reported trading volumes on crypto exchanges are very suspect. Finally, the argument is somewhat circular. There is demonstrated huge demand for stable value within the cryptocurrency ecosystem (Tether, also rapid uptake of other solutions such as DAI) which dwarfs STEEM's market cap by about 10x and additional demonstrated huge demand for stable value outside the cryptocurrency ecosystem. Drawing some of that value (even a tiny fraction) into SBD could result in an upward spiral that lifts the market cap of both SBD and STEEM (potentially by a lot).
I see SBD as a 'product' of the Steem blockchain (along with others, such as value transfer, censorship resistant publishing, rewarding contributions, etc.). It is a product that has a vast addressable market, possibly dwarfing the others.
How would it do that when it immediately dumps its SBD on the liquid market? Secondarily, powering up (which @burnpost does) increases the STEEM market cap which further increases the supply of SBD (if only by a little). So overall I don't understand this idea at all.
I don't understand this question, including what you are referring to here with the word "it"
I'm also skeptical of the word 'debt' by the way, especially when used without further clarification. SBD has some properties that are analogous to debt but it isn't a perfect analogy by any means.
Thanks for those clarifications on burnpost. It makes more sense to me now.
Well, with the recent SBD trading above $1, I think it simply boils down to there continued to be more demand for SBD than supply. As I mentioned in the post, the current SBD printing mechanism doesn't really have sufficient tools to put downward pressure on the price during cases where there is excess demand. There was a link in the post to one idea of something that could be implemented to support that.
Does that answer your question?