This post is intended to be an improved version of my earlier post, Why the proposed two-way SBD peg is a very bad idea, and the goal of this post is to alert the Steem community about how the proposed two-way SBD peg can be abused. In case you aren't familiar with the proposal, the proposed two-way SBD peg would allow people to convert SBD and STEEM in either directions over a 3.5 day period with SBD pegged at $1 and the conversion rate calculated from a 3.5 day average price of STEEM during the conversion period. Note: Currently you can convert SBD into STEEM, but you can't convert STEEM into SBD.
The accumulate, pump, and convert strategy (APC)
Phase 1: Quietly accumulate STEEM
The goal of phase 1 is to accumulate a lot of STEEM which will be converted to SBD in phase 3 while the STEEM price is pumped up. The technique used to accumulate STEEM in phase 1 is to avoid buying STEEM in the markets so your purchases don't increase the price of STEEM and to instead use dollars (USD) to buy SBD on the markets and then convert that SBD into STEEM. It is desirable to accumulate as much STEEM as possible in phase 1 because the STEEM acquired in phase 1 will provide the highest rate of returns.
Phase 2: Pumping up the price of STEEM
Unlike Phase 1 where a conscious effort should be made to not buy any STEEM on the markets, the technique of phase 2 is to use USD to buy a lot of STEEM on the markets with the goal of pumping up the price of STEEM. It is going to take a lot of USD to pump the price of STEEM up in phase 2, but that is a good thing because the STEEM bought in phase 2 will be profitable.
Phase 3: Convert STEEM into SBD at the pumped up price
Convert all the STEEM accumulated in phases 1 and 2 into SBD at the pumped up price. It is important to keep the price of STEEM pumped up for 3.5 days because your conversion rate is based on the 3.5 day average. To keep the price pumped up you will need to buy some STEEM at the pumped up price, and the STEEM you buy in phase 3 will likely result in losses, but it should be possible to find ways to keep these losses relatively small when compared to the profits on the phase 1 and 2 STEEM. For example, the STEEM purchased very early in phase 3 could be converted right away and benefit from having spent most of its 3.5 day conversion period at the pumped up price.
Expected outcomes
Phase 1 profit: The percent profit from the STEEM accumulated in phase 1 is calculated as (pumped_up_price - initial_price) / initial_price. For example, if STEEM were initially at $5 and it were pumped up to $20, then the percent profit would be ($20-$5)/$5 which is a 300% profit so if $50 million were invested in phase 1, then it would become 200 million SBD in phase 3.
Phase 2 profit: The profits from the STEEM bought in phase 2 will depend a lot on the markets. The percent profit on the STEEM bought near the start of phase 2 will be close to the profit percentages of phase 1. However, STEEM bought toward the end of phase 2 will only do slightly better than breaking even. For example, if STEEM were initially at $5 and it were pumped up to $20, then the STEEM bought early in phase 2 at $5.25 would result in a 281% profit while the STEEM bought toward the end of phase 2 at $19.75 would result in a 1.27% profit.
Phase 3 losses: The losses on the STEEM bought in phase 3 will depend a lot on the markets. The STEEM bought around the start of phase 3 could be converted right away resulting in only minor losses, but the STEEM bought toward the end of phase 3 might have significant losses if the price of STEEM drops significantly after phase 3 ends. However, after phases 2 and 3 are complete, there probably won't be too many people left with STEEM to sell below the pumped up price because for 3.5 days they already declined the opportunity to sell their STEEM at the pumped up price. Also, depending on how much time was used to pump up the price of STEEM in phase 2, the supply of STEEM people have available to sell is likely to remain scarce for at least another two or three days until the markets are flooded with a wave of powerdowns trying to sell STEEM at the pumped up price.
Conclusion
It seems pretty clear that the profits from phases 1 and 2 have significant potential to far outweigh the phase 3 losses, and this makes it possible for someone to abuse the proposed two-way SBD peg. If you disagree, then simply increase the amount of STEEM accumulated in phase 1 until you agree. The reason the APC strategy can work out this way is touched on in the following excerpt from the "Minimizing Abuse of Conversions" section of the Steem whitepaper.
"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."
Do you have a feeling for how easy it is to move the steem price? Probably should look at the available avenues.
I have a feeling also that if they place a large enough fee, this quickly becomes harder. They don't even need the fee to be that large to get people to use the reverse conversion either. Maybe the fee can be halfway between what you would make from arbitrage by naively converting and selling.
Analyzing the markets would be very important to anyone who wants to execute the ACP strategy, and I don't want any mistakes I might make in estimating numbers to distract anyone from the main point I want to convey which is that the two-way SBD peg has a very real potential to be abused. With that being said, I'll try for a super quick rough estimate about how much someone would need to spend to pump the STEEM price 100%, a 2x pump. I took a look at the open orders on binance and it would take around $100,000 in total to increase the price of STEEM by 10% on binance.com in all of the STEEM/BTC, STEEM/ETH, and STEEM/BNB exchanges. I didn't look at the other exchanges, but binance has about 4% of the total volume so a very rough guess is it may take $2.5 million in total to increase the price of STEEM by 10% across all markets. Also based on open sell orders on binance, it looks like the next 10% increase would take less than $2.5 million, and the next 10% increase would be even less than that which suggests it may be possible to get a 2x pump for maybe $15 million to $25 million; however, there are probably a lot of people who don't have open sell orders who would still want to sell STEEM at some point during a 2x pump so perhaps a better estimate is it might take around $50 million to get a 2x pump of STEEM. If it took $50 million to pump STEEM 2x and the average price you paid during the pump was 1.5x then the profit on the phase 2 STEEM would be around 33% of the $50 million or around $17 million. If you accumulated $50 million STEEM in phase 1, then the profit on your phase 1 STEEM would be $50 million, and so your total phase 1 and 2 profit would be around $67 million. It is difficult to imagine a scenario where you would lose more than that in phase 3. For example, even if it took some ridiculously large amount like $100 million to keep the price of STEEM pumped up at the 2x price for 3.5 days and even if STEEM instantly dropped to some ridiculously low amount like $0.01 at the end of phase 3, they you still would only lose $50 million on the STEEM you purchased in phase 3 so your total profit would be still be $17 million even with the ridiculous phase 3 numbers used. However, the key point to make is that the profit can be increased simply by adding to the amount of STEEM you accumulate in phase 1 because if you had accumulated $150 million worth of STEEM in phase 1 instead of $50 million, then your profit would have been $117 million instead of $17 million. I'm not sure how a fee would stop this abuse from happening because even if you imposed a 10% fee on STEEM to SBD conversions the profit from abusing the system would have still been $12 million instead of $17 million (or $102 million instead of $117 million).
Thanks for the current analysis.
The fee would only help if the SBD price was higher than 1 USD maybe. And maybe they would turn this mechanism off once 1 SBD is near 1 USD?
By the way, do you see this as something that can be done repeatedly?
Yes, I can definitely see it being done repeatedly especially after powerdowns remove the scarcity of liquid STEEM and bring the price back down to a non pumped up level. The cycle concept you've mentioned in some other posts could possibly be used to create an artificially low pumped-down price to maximize the amount of STEEM you can accumulate in the next phase 1 when converting the massive amounts of SBD you got from your previous phase 3 into STEEM. Every time you repeat the APC strategy could be more profitable than the last time because each time you could use your profits to accumulate even more STEEM in phase 1.
This thought crossed my mind when I learned of the potential ability to convert STEEM back to SBD. Seeing that STEEM is more valuable than SBD right now, and with this two way system, I can see a lot of people taking advantage. You'd think the witnesses planned on this happening but who knows what they think. Interesting idea you got there though!
STEEM being worth more than SBD isn't a problem with the proposed two-way SBD peg to $1. STEEM could be worth $100 and the proposed two-way peg could still work well. However, if you owned SBD and SBD was worth more than $1 then as soon as some people became aware of the two-way SBD peg going into effect then people who were still holding SBD thinking it were worth more than $1 would lose money, but that isn't an issue with the proposed two-way SBD peg either because that is the only reason the witnesses are considering the proposed two-way SBD peg because they want the SBD to be a stable currency pegged at $1. The big problem with the proposed two-way peg is that it would enable people to buy and sell huge quantities of STEEM without directly impacting the market price and this could enable the proposed two-way SBD peg to be abused.
So would it be wise to hodl STEEM and not SBD then? I've been sitting on my SBD because I've been used to getting more STEEM out of it, and I've been waiting to purchase STEEM because I'm hoping it goes back down a bit, but that may not be the case. If I'm reading this correctly I should probably try to get more STEEM, especially if SBD is going to be pegged at 1USD
The two-way SBD peg at $1 is just something the witnesses are considering so it may or may not happen. However, if the two-way peg does go into effect then SBD would likely go to and stay pretty close to $1 so if you think the proposed two-way SBD peg is likely to be implemented, then it would make sense to sell SBD now before it goes to $1. However, even if they don't implement the SBD peg there are lots of reasons to think SBD will go back down to $1 anyway so if I was holding a lot of SBD right now I would probably be in a hurry to sell it at its current price of $3.
Thanks for the information :)
Ahh ok, that makes sense. I am still new to all this and definitely trying to understand how all of it works. Thanks for the distinction
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Nice post, thanks for sharing.
Nice one
Thanks