Thanks, @intrepidphotos for your response. I have a very good understanding of market pegs. I welcome debate but please keep the debate to the facts instead of whether or not one side understands economics.
I can tell you that no asset, priced to the USD stays constant in value. Look at oil, gold, and anything on the market. The reason for this is because the market value of the dollar changes as well as the market value of the asset priced to the dollar.
"all else being equal" statements are not reflective of the real world. They are textbook economics answers that reflect how the should world work instead of reflecting how it actually works.
If you want to peg SBD to always be worth $1, creating an infinite supply and demand at $1 will maintain the price. Any fluctuations in price will be arbitraged back to the $1 mark. If you price a free market asset in terms of another free market asset, you will not get a fixed price, regardless of how much you manipulate the SBD supply.
I welcome the debate as well; I am not trying to offend anyone, I am simply referring to the fact there is not a good understanding on this forum that SBD is a financial derivative of Steem, its not a primary currency like Steem. And to peg anything to a fixed value, it needs something to underwrite the value.
The simple fact is that one can't simply create an asset that has a price of 1USD out of thin air unless you can print USD themselves (ie the US Fed). If you want to attempt to tie the price of one good (eg 1 SBD ) to another good (1USD) you need to have a mechanism to do that, which requires something to underwrite the price (ie you can always exchange good A for a variable amount of good B equal to a fixed amount of good C - this links A to C though the market value of B) . There is simply no other way to do that. You cant just create "infinite demand " of an asset as you suggest. If that was the case one could just ICO a new new currency to themselves and fix its price as one ounce of gold . The obvioius issue here is without any demand at the fixed price no one will buy my new currency from me no matter how much I insist its worth an ounce of gold per token. The only inherent value SBD has comes from its algorithmic underwriting by Steem, in that it converts to 1SBD worth of Steem at any market price of Steem. If you have infinite supply of SBD (which is in your control unlike demand) then it will collapse the value of Steem to zero and essentially break the algorithmic link. This is why they cap it at 10% of the total value of Steem.
Lets look at a comparison between SBD's and treasury bonds. Both are a potentially interest bearing derivatives of a primary currency. If the government issued an infinite number of bonds and then there was a run on the bonds they could always just print money and pay all the bonds back. This would lower the currency value relative to other currencies but not necessarily collapse it as their liability is held in the currency that they have control over and can print.
Now lets compare that to the situation with SBD. The SBD mechanism would be equivalent to if the US government issued interest bearing bonds that were redeemable not in a fixed amount of US dollars but in a variable amount of US dollars linked to a fixed amount of a currency they have no control over such as Euros. So to make that clear the bonds would be redeemable not in a fixed amount of USD but by a variable amount of USD that was equal to the amount of Euro at the time you purchased the bond ( just like 1SBD is an interest bearing derivative of Steem that is redeemable for a variable amount of Steem equal to the 1USD at the time of redemption). In our analogy this would let European investors by US bonds with a direct hedge to the euro and take no currency risk. Similar to what SBD tries to achieve in eliminating fluctuations in the underlying asset though a peg to an external asset.
The issue if the US prints a large number of these bonds relative to the size of the total money supply it creates a stability risk for the underwriting asset which in this case is USD. When the price fluctuates down and some people start to want to redeem their bonds the US Fed will have to pay the bond holders back in an increasing amount of USD. This is due to the conversion of the bond to an amount of the underwriting asset (in this case USD), to get the fixed amount of Euro that the peg was against. So they can simply print more USD as that is in their control, then they sell it on the open market to buy Euro (in the same way the Steem block-chain can produce more 1USD worth of Steem on converting a SBD which can then be sold on the open market to obtain the physical 1USD). The issue here is that this lowers the price of USD relative to Euro (or Steem relative to USD) as more supply comes on, so the next bond holder that wants to convert they would have to print more USD to redeem the same amount of Euro (or issue more Steem to create 1USD).
This is not an huge issue if you only have a small amount of these financial derivatives outstanding relative to the money supply from which they are derived (which is why SBD are capped at 10% of the total market value of Steem). However if there is a large amount this quickly becomes a self reinforcing downward spiral where the price quickly asymptotes to zero.
If you have a look at my other post in these comments list it might be a little more clear.
I have pasted my primary comment from this forum below so you don't have to find it
"People don't seem to understand that you can't have it both ways. You can't hold a fixed 10% limit of SBD/Steem and then hold the peg. You could hold the peg temporarily if you had unlimited ability to print SBD, but as a debt instrument if you printed too much then after some downward movement if everyone called them at once for conversion to get their 1 USD worth of Steem , it would collapse the value of Steem. A hard pegged SBD is a stability problem for the instrument which has to underwrite the stability. This is why it was designed as a soft peg in the first place with a limit on supply as a % of the market cap of Steem. SBD goes down interest rates can bring it back up , in contrast if the SBD goes up it will increase author rewards value and increase conversion of user SBD into Steem, which in turn as the steem price goes up further increases the supply of SBD in payouts up which puts more downward pressure on SBD.
Fixed pegs just don't work; unless you match them directly with the underling asset (ie this would involve banking one USD in an fiat based account for every SBD , just look at the conjecture about Tether and if they are actually doing this). You can't just print money on a real world pair without having something backing it (just look at the relative value of a USD denominated bank account in Zimbabwe held with the new USD pegged Zimbabwe dollars) . Financial systems have to be stress tested for extreme fluctuation so the whole system does not collapse. The recent price spike and subsequent increase in supply of SBD and lowering of the price of SBD is a system that is working, not broken. This is how it was designed to work. Stability in currencies comes from having large stable GDP being transacted in that currency. Its the incredible volume of regular nominal monetary transactions and flows which creates the stability. You can't create a stable currency then invite commerce. You have to bring commerce to the currency, then when the nominal transaction based flows dwarf the speculative flows you will end up with a stable currency. So unfortunately its a little chicken and egg, and simply takes a long time to develop those transaction based monetary flows."