How SBD are actually created?
Are they a completely different currency, or are they just a derivative from another currency?
In the initial STEEM plan, as far as I understand, the value of one SBD should have been always $1. And by reading the white paper, I understand that for one SBD, $19 worth of STEEM will be printed. For instance, if SBD is to be pegged to $1 and if STEEM trades at $1, then for each SBD there will be 19 STEEM printed.
When I say "printed", I mean the STEEM inflation, which at the moment is 9.5% per year. This inflation is allocated towards the rewards pool, witness pay and SP interest. Since witnesses and SP interest is getting paid only in STEEM, the printed SBD will be allocated only to the rewards pool.
Let's get back to the 1 to 19 thing. In financial lingo, I think we can also define this rapport like "there is a 5% debt-to-ownership ratio". Well, this ratio is not set in stone, it can be modified by witnesses, via their price feed bias.
If they increase their bias, it means they shift the reward allocations towards SBD. There will be literally more SBD "printed". Your rewards may see more SBD than STEEM, even if you choose 50/50 in the payment type. Also, by doing that, they will increase the debt-to-ownership ratio.
If they decrease their bias, they shift the rewards pool towards STEEM. There will be literally less SBD "printed". You may see more STEEM than SBD, even if you choose 50/50 in the payment type. Also, by doing that, they will decrease the debt-to-ownership ratio.
How exactly SBD can be traded?
Here is where it gets interesting.
if one SBD is "pegged" to the dollar, it means the holder of 1 SBD is somehow guaranteed to get "1 dollar worth of STEEM" whenever he decides to sell
So, in other words, there is a future guarantee that at some point, the SBD holder will get at least "the pegged amount" worth of STEEM tokens. SBD is basically an oversimplified futures contract.
Ok, let's try to build on that.
Suppose we have not a $1 peg, but a $10 peg.
Suppose a SBD holder hopes, or, I don't know, he's sure he will get back $10 worth of STEEM in the future, for just one SBD token. And for that, he's willing to pay $10. In fiat, or in whatever crypto currency he is comfortable with (we'll see below why this is important).
Suppose also the price of STEEM is $1.
So for 1 SBD to be bought with $10, we will have 1 SBD = 10 STEEM.
Now let's see what happens if the price of STEEM changes drastically.
Case 1: STEEM goes down 50%. 1 STEEM = 50 cents. In this situation, if the peg holds, 1 SBD will be exchanged for 20 STEEM.
The SBD holder gets back the same value, but more STEEM tokens.
Case 2: STEEM goes up 50%. 1 STEEM = $2. In this situation, if the peg holds, 1 SBD will be exchanged for 5 STEEM.
The SBD holder gets back again the same value, but less STEEM tokens.
The above is always true if the transactions are made internally, via the price feed set up by witnesses.
But what happens if SBD trades in other ecosystems, outside the internal market? In this case we will face normal supply and demand.
A person may simply want to buy this futures contract, called SBD, because he believes it will appreciate in the medium term. It's a free market, right? As a result, the price of the futures contract may go up simply because it's in high demand.
But what will happen then on the internal market?
At least 3 things:
- witnesses may want to counteract this external price increase, by adjusting their price feed bias, creating more SBD, to increase the supply.
- as a result, the debt-to-ownership ratio in the STEEM ecosystem will increase.
- if the price of SBD increases, then people who are getting rewards in SBD (and they will get more SBD than STEEM, as a result of the price feed bias increase above) they will be inclined to sell at a higher price, outside the internal market, for fiat.
Right now, the current debt-to-ownership ratio is already at 10%, not 5% as it was designed in the original white paper.
The "suction" effect of a high SBD
So if somebody hopes or expects the price of STEEM to go up, he will normally wants to get a hold of more STEEM, right?
He has 2 options: buying STEEM directly, or buying SBD, the futures contract. Now, if he decides, for whatever reason, to buy the futures contract, instead of the collateral (STEEM, in our case), then something very interesting will happen.
We will basically see a reversed situation of the Case 1 described above. It's reversed, because instead of decreasing the value of STEEM, you increase the value of SBD. As a result, you get more STEEM tokens. Problem solved.
But if witnesses are reacting and start to update their price feed, then we will have a higher debt-to-ownership ratio. So, if the rewards are paid entirely in SBD, for instance, as a result of the price feed bias, then less STEEM will be printed. You will receive just the futures contract, not the actual token.
But, and here's where it gets really interesting, as a result of a small supply of STEEM, its price may go up.
Got it?
And this game may play for a while...
At this moment, I confess I have limited knowledge of where this game could end up.
I just did my best to translate my understanding of the current inner workings of the STEEM ecosystem, to the best of my abilities.
Thoughts?
I'm a serial entrepreneur, blogger and ultrarunner. You can find me mainly on my blog at Dragos Roua where I write about productivity, business, relationships and running. Here on Steemit you may stay updated by following me @dragosroua.
https://steemit.com/~witnesses
If you're new to Steemit, you may find these articles relevant (that's also part of my witness activity to support new members of the platform):
Buying SBD is one way to speculate on a falling Steem price as a method to acquire a lot after Steem price has dropped because there's no slippage assuming no price biasing by the witness (more Steem just gets created when the SBD is converted). Buying SBD when it's lower than a dollar just makes sense in most cases, assuming you don't expect a complete implosion on Steem prices.
But given how far Steem would have to fall right now to make SBD worth acquiring at it's current value, it just doesn't make sense as a motive for buying SBD I think. The only thing that makes sense I think is someone trying to do a pump-and-dump on SBD because of the low liquidity.
The liquidity is especially low right now because Poloniex gateway is down, leaving most of the SBD available for trading on bittrex. The volume has mostly been on bittrex and that's where the high price is being driven. But the volume levels versus available amount of SBD there is highly suspect:
Bittrex's hot wallet only has 2.4m SBD as of the time of this comment (maybe they have a cold wallet I don't know about): https://steemit.com/@bittrex/transfers
BUT:
Coinmarketcap was reporting volumes as high as $40 million USD equivalent SBD on bittrex over earlier days during the SBD pump. That's a whole lot of churn of a 2.4 million SBD available for trading.
I have noticed that the volume number has been dropping over the past few days, which makes me wonder if the pump isn't about to end.
First, thanks for taking the time to comment here, I really appreciate it (also thank you for the upvote, quite unexpected).
As for witnesses not reacting, I did my best to adjust my bias, but I'm only one out of 100 and not even in top 50.
I am with you 100% on the volume thing. I have been fantasized about the following theory, though, I don't know if it's real, but, at some point, it may make sense.
Let's start with a volume of $40 million equivalent of SBD. Bittrex says all transactions incur a 0.25% fee. So for trading $40 million, one would have to pay $100,000 in fees. That's just for changing hands of SBD for BTC in Bittrex (moving around SBD between STEEM accounts is free, as we know). So $100,000 for moving around $40 million.
If the profit made by pumping SBD twelve times higher is relevant, I think this cost is very small. Proxying capital through an overvalued SBD can lead to profits probably 10x higher than "normal" STEEM buying.
I'm not saying this is what's happening, I'm saying this is plausible.
But whoever did this probably made a lot of money.
oh ok now some things are more clear to me. ty for explanation
I need more coffee.
Hey @dragosroua I have a question after reading this post. Can the peg be changed from $1. As its mention in the whitepaper it is pegged at $1. then how can it be chnaged.
By witnesses agreeing to a hardfork supporting the change
So, we have an effort to push up SBD in order to get as much STEEM as possible before the next HardFork cements SBD closer to $1 and STEEM shoots up to $10 instead? #conspiracy
I don't know if this is a #conspiracy, but if it will happen like that, then it will all fall into places. Kinda.
That would be scandalous and give Steemit a big black eye that wouldn't go away soon.
Let's hope not!
Steemit should be a scam free zone!
How would this qualify as scam? There are two options to invest and some people chose the one with higher risk and higher potential.
As usual @dragosroua, very good analysis and synthesis. Appreciate your work here
You did a surgical explanation dear friend, i have little steem but i hope steem appreciates more in price with time and get out of the shadow of SBD
A very simple but great explanation. specially with the example.
I am trying to wrap my head around it also (as is everyone else).
Interesting point you make. The question is why is it so important to have something pegged? Who cares? As @aggroed wrote in a post last night, we dont have much in the way of merchants on here and they are the only ones who care about a volatile currency. Since they can take payment in other forms, why not let it fly.
Is the ecosystem hurt if SBDs were to fly to $25 or $50 or $100? Would that make any difference overall?
I am not sure of the answer but I am inclined to say it doesnt really matter.
I don't really think so. What I think I understood in the last couple of weeks is that the role of SBD as a "pegged" asset switched from "stability" to "futures". So it's not much the effort of keeping it at a certain price that gives it value, but the mechanism that sets the debt-to-ownership ratio in the entire system.
I mean people are going crazy about Bitcoin futures starting to get traded tomorrow, and we already had a futures contract under our own nose.
The "under out nose" part keeps growing.
People do not realize that steem is a de-centralized exchange already and will operate that way with the tokens that are created via SMTs.
The more we learn about this blockchain, the more exciting it gets.
Ah I see! That is why nowadays I am getting less STEEM on author rewards but still get the same amount of SBDs. I used to wonder why is that so, but now its clear :)
i'm on two fences right now, wanting to improve my steem power for curation rewards and then saving a bit of SBD on the side for bigger things that will help my blogging improve and new kit updates -- i've been putting all my SBD i get back in because steem was priced so low, i'd like to get to around 5/10k account value and then re-evaluate then.
sounds like a strategy :)
Thank for that article. Added it to favourites to have a compilation of Steemit basics.
Initially I didn't mind if the price went up and wasn't pegged but you do make some valid points pertaining to the maintenance of the Steem ecosystem. My thoughts have been swayed.
Great post :) thanks
This is a great explanation. I will have to read over it again a few times I think but this is the best explanation I have yet seen of how the steem dollar actually works.
Thanks, glad it’s helpful :) It took a while for me too to internalize all this. And I still have a lot to learn.
I hadn't thought about the linked value like you described. I understand that the system adjusts how many SBD are created if the ratio of Steem to SBD goes over 10%. I am not sure how this factors into the equation.
AFAIK it's not the "system" but the price feed bias set up by witnesses. Initially it was 5%.
If it ever gets to 100% then we will get STEEM by an SBD proxy. Much like people who will trade Bitcoin futures will never hold Bitcoin, but a contract about Bitcoin.
Happy to see un român , with so nice post ! 😁✋
Keep going !
Happy to see un român as well, with such an encouraging comment :)
Ține sus munca bună!
I wish you o seară frumoasă alaturi de familie.
Sarbatori fericite !
Aidoma :)
it's an interesting ride to be sure ;-)
I'm trying to build my stock of SBD back up again so I can actually do something instead of just watching.
And I'm not sure which road to take at this point - cash out some SBD and have a good Christmas, or convert to STEM and hope for a better Christmas next year...
Knowing me, whichever way I go, it will be the wrong way hehe
It's hard for me to get my head wrapped around this to be honest.
What is the price feed bias regarding - the relationship between Steem and SBDs or the relationship between fiat and steem or something else? Or both and more?
What I find really strange is that witnesses have so many live controls. If I got you correctly, this means that if different witnesses have different settings, you can get a significantly different mix between STEEM and SBDs?
There was recently a post that was supposed to be 50%/50% by another user that was paid out almost entirely in steem instead with a minuscule portion paid in SBDs. Does this mean a witness messed up?
I think the a high price for SBD is good for the short term if you want to pick up some steem for cheap but I'm curious what would happen if someone would really pump it, to ridiculous levels.
Amazing analysis of Steem tokens and SBD...hats off!
Great explanation, I've learned a lot about the steem economy!
I am not sure I understood everything, but what would be your suggestion?
Buy more steem or keep SBD? In your opinion and from your knowledge
Thanks
thanks for explains. At first it is a little bit misunderstanding
Very good analysis of Steem that will allow us to speculate the future of this cryptocurrency
Great new to Steemit.thanks sir
You got a very good understanding of intricacies of Steem financial ecosystem and well explained them using examples...
Well done @dragosroua
i get 9 steem in just 1.4 sbd....
This is pretty complicated and hard to understand. Thank you Dragos for the detailed analysis, it made me think of changing my hobby :)
Thank you for this. I'm not sure I completely understand it, but it does help.
I am not sure where I heard it, I think I saw it in the TradingView comments, but one of the reasons SBD went to the moon was that Korea was buying it up so as to power up their new steemit accounts. Have you heard anything to that effect? Cheers, jts
Thank you, it is more clear to me now.
really understand it quite well with that 1:19 thing so thing could go for a little long than expected
Interesting to learn about how things work here on steemit i need to start following you for more such posts and knowledge
Let's hope for the best, I didn't know all these technical knowledge so thanks for the post... Anyway this exactly what I told my brother:
But I didn't say "Problem Solved at the end"... I said desperatly "It's A PROBLEM!!" because I always convert most of my SBD into STEEM already!!
So pretty much someone/group is pumping sbd right now?