For the last couple of months SBD (or Steem Backed Dollar) traded way above $1, thus creating a large avenue for speculation. This speculation unfolded both in the internal market and on external exchanges, like Poloniex or Bittrex.
The inconsistencies between what the price of SBD should have been and what the price of SBD actually was, created gaps sometimes bigger than 30% between the values of Steem across various marketplaces.
The temptation to jump over a fast 30% increase in short term profits is big, I admit it. But if you don't know what is the actual cost of this profit, you may create more harm than good. I'm convinced that many people had no idea what they were trading when they were selling SBD like crazy over the last few months.
What follows is my humble attempt of explaining what SBD is in the STEEM blockchain, what is its role and why we should see it as a store of value, and not as a liquid asset.
Tokens versus Convertible Notes
According to the Steemit White Paper, SBD is not a token, but a debt instrument. Its fundamental role is to increase the stability of the STEEM network:
Because stability is an important feature of successful economies, Steem Dollars were designed as an attempt to bring stability to the world of cryptocurrency and to the individuals who use the Steem network.
So SBD is a stability smart contract.
Steem Dollars are created by a mechanism similar to convertible notes, which are often used to fund startups. In the startup world, convertible notes are short-term debt instruments that can be converted to ownership at a rate determined in the future, typically during a future funding round. A blockchain based token can be viewed as ownership in the community whereas a convertible note can be viewed as a debt denominated in any other commodity or currency.
So when you hold SBD, you're actually holding debt, denominated in Steem and pegged to the value of USD. Generally speaking, selling debt is not a smart thing to do.
But it gets even more interesting. What happens if the amount of debt is bigger than what the network (or the economy) could support? In other words:
What Is A Sustainable Debt To Ownership Ratio?
And here we get to the core of it.
If the debt to ownership ratio gets too high the entire currency can become unstable. Debt conversions can dramatically increase the token supply, which in turn is sold on the market suppressing the price.
Now you understand why is important to keep a healthy balance between the debt and the issuance. In other words, to trade your liquid STEEM and use SBD as a store of value.
What happens when there is too much STEEM on the market? The debt to ownership kicks in and the SBD gets printed more. That's what happened after HardFork 16, which shortened the power down interval from 2 years to 13 weeks. Because of massive power downs, the market was flooded with STEEM, so the liquid rewards were paid in SBD only (which is still happening). But ideally, you should get your 50% liquid rewards in SBD and Steem, (and the remaining not liquid 50% in Steem Power). Until HF 16, this was the norm.
How much SBD is printed anyway? Well, according to the White Paper again, here are the numbers:
For every SBD Steem creates, $19.00 of STEEM is also created and converted to SP. This means that the highest possible debt-to-ownership in a stable market is 1:19 or about 5%. If Steem falls in value by 50% then the ratio could increase to 10%. An 88% fall in value of STEEM could cause the debt-to-ownership ratio to reach 40%. Assuming the value of STEEM eventually stabilizes, the debt-to-ownership ratio will naturally move back toward 5%.
So in an ideal world, for every $19 worth of STEEM you own, you should also own 1 SBD. Roughly. That will keep the debt to ownership ratio at about 5%.
I don't have the exact numbers, but I suppose once the power down pace will slow down significantly (which I think it started to happen) then we should see STEEM as a reward token again.
That should take out the pressure from SBD, and give back its role as a stability blanket.
P.S. If you think I misinterpreted the White Paper, feel free to correct me in the comments.
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):
Thanks for explaining. The complexities of steemit are still one of the challenges to growth.
"So in an ideal world, for every $19 worth of STEEM you own, you should also own 1 SBD. Roughly. That will keep the debt to ownership ratio at about 5%." Got it!
I've pondered on this very subject and have been unable to find a thorough explanation. This answered my questions. Much appreciated!
great stuff, Looks like this process could cause huge swings in the price of steem for now, as it is printed and not printed.
Thanks @dragosroua for explaining the importance of SBD.. i'll always try to match my SBD and steem ratio to atleast 1:19 ... Great post!
@dragosroua thanks for sharing it!! We all need to read this one article!!
Very good post as I was confused myself. Thank you and best of luck!
I am fascinated by your comprehension. How did you learn so much about Steemit?
After reading this, I wonder what made SBD go between $1.78 & $2.78 on Bitterex and Poloniex recently. My understanding is that the listing of SBD on crypto exchanges changes its function slightly and its price gets affected by supply and demand dynamics.
I wish I had sold my 100 SBD on Bittrex when it was over $1.7 and bought back when it is $1 now. I would have made 70 extra SBD from this move. Even if SBD is a stability token, I won't mind selling at high price and buying back at lower price. Missed opportunity!
I also keep track of SBD/Steem price in the internal market to buy Steem at good price so that I get more and have more SP. I shared my point of view on selling Steem Dollars here!. Please do leave your comment so that I may correct misinformation, if any. Thanks!
Once out of the internal market, SBD is subject to supply and demand, so it may get pumped and dumped like any other coin. But that happens only if there is enough supply on those exchanges, or, in other word, if people from the Steemit community sell their SBD. If there is no supply, then nobody can pump and dump and SBD will be influenced only by the price feeds published by witnesses.
I'd rather have Steem and SP (and not SBD) as rewards then. It's easier to power up, liquidate, trade and increase the amount of Steem by buying on dips and selling at peaks and buying at dip again.
Hi @dragosroua,
I needed some solid knowledge on SBD and remembered commenting on this post so I used Google to find this post and get back here. I need some clarification.
I took accounting and finance course two weeks ago and reading this post with that knowledge helped me understand what the post said initially. Honestly, I did't get it the first time.
PS: If selling SBD can cause harm to Steem's price, why doesn't Steemit Inc. keep SBD limited to Steemit wallets and list only Steem on exchanges? (provided SBD stays convertable to Steem).
this cannot be done, both tokens are freely exchangeable.
for you it shouldn't have any impact
you will just have less SBD. The balance between SBD and STEEM is important at a higher level.
I think it's only about liquid STEEM. SP cannot be traded unless powered down.
I disagree with this part of your essay:
Whether you get your rewards as SBD or as liquid Steem depends on the price of Steem. If the Steem price is high, you get paid in Steem Dollars. When it is low, you get liquid Steem.
Here is an explanation of this from 9 months ago:
https://steemit.com/steemit/@ausbitbank/why-am-i-getting-less-steem-dollars-and-more-steem-sbdprintrate-what-it-is-how-to-check-it-how-you-can-help-100-sp
It wasn't the amount of Steem on the market that was crucial - it was the price. (and notice that the increase in supply of steem on the exchanges did not depress the price because speculators stepped in).
If you carefully read both articles, @ausbitbank's and @dantheman's you will see they talk about market cap, not only the price. Market cap is a function of supply * value. If the supply grows too fast that usually impacts the value, so the final price will be lower (this happened a lot after HF16, following massive power downs).
The Market Cap includes Steem that is locked up as Steempower. So it doesn't matter whether that steem is drawn down and on the exchanges or locked away in Steempower. And of course new Steem is generated at a constant rate.
The crucial component is the price of steem. If it drops, the rewards are made in liquid steem, and if it rises the rewards are made in steemdollars.
Yes, it does: it drops the price. If you dump too much Steem on the market, its price will go down.
According to my calculations, in the Coinmarketcap site, the total market cap is derived only from the circulating supply of Steem. Feel free to share your calculations as well.
But the price hasn't dropped though, that's the point. It's increased from the 7000 satoshis it was just prior to HF16.
You were complaining that people were being paid in Steemdollars - but people are only paid in steemdollars when the price is high. If it was low, as you claim it is from HF16, then we'd be paid in liquid steem!
He he, I'm not complaining about anything, I'm just pointing out that the reward ratio was different.
And yes, the price of Steem dropped significantly after HF 16, which happened around 8 months ago. An uptrend in the price of Steem was observed only after 3 months since the HF 16 implementation, when all the big whales already had their first power down cycle.
P.S. How's that market cap thing? It still includes all the existing Steem, or only the circulating supply?
P.P.S. I'm just debating, don't take it personally :)
But that shouldn't have made any difference, should it? It hasn't changed the supply in circulation, has it?
Your thesis is that HF16 increased the supply and tanked the price. But the price is higher than it was, despite the increased supply on the exchanges.
HF16 also removed the inflation in new supply. That was what was depressing the price before.
The way it has been designed, people won't be paid in liquid steem until the price crashes back down to 7000 satoshis. And we can go back to that by reversing HF16 and increasing the rate of inflation again... Is that what you are arguing for?
I powered up cause I think the steem coin will go up in value in the future
So that's how it works... And I thought why Steemit needs 2 currencies. Thanks for the useful info.
I don't get why it is debt
Thanks, it helps!
Very interesting information. I transfer my SBD to an exchange and sell them when the price reaches a certain point and buy SP with it.
Really helpful! You've got me thinking. Now I'm going to have to go read more on SBD...
Very good and informative post, thank you @dragosroua!
Upvoted & Resteemed!
Very interesting, I never understood the role of SBD in the ecosystem and I still don't claim I can. I guess it's more stable than STEEM itself as it is supposed to be pegged at the dollar.