So it would effectively work like SMTs in terms of economic impact on Steem, with all money passing through Steem.
Does the internal conversion process create a form of smart contract where the Steem is held for conversions back the other way, similar to OpenLedger assets on Bitshares? Or is Steem actually burned/lost in any way with redemptions later being filled with new Steem?
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In a sense, SBD is a smart contract but it is hard coded (I guess in Bitshares that is the case as well). The STEEM that backs outstanding SBD is accounted for in the blockchain
virtual_supplycounter. When SBD is created (currently when posts are paid out, but if conversions could do so then via those as well), the STEEM is moved to virtual supply and when SBD is converted back to STEEM it moves back out of virtual supply and into total supply.