There have been a lot of conversations and questions about SBD:
- How does SBD work?
- Whether to keep it or get rid of it?
- Whether to try and enforce the peg or not?
- Whether to use price feed biases / APR to support the peg?
In this post I want to try and explain the economics behind how SBD works, and try to clarify some of the things that are being discussed. I will also explain the two pull requests that I submitted for hardfork 20.
What is SBD?
SBD (often referred to as "Steem Blockchain Dollars") is one of the two tokens that are currently supported by the Steem blockchain (STEEM and SBD). Similar to STEEM, SBD shares many of the benefits that the Steem blockchain has to offer such as three-second confirmation times, and zero-fees on transfers.
SBD (also like STEEM) gets it's value based on the market, i.e. what traders are willing to pay for it. If there is more supply than demand, the price goes down; if there is more demand than supply, the price goes up.
The original design behind SBD was that the price should be kept as close to $1 USD as possible. In order to achieve that, mechanisms were built into the Steem blockchain (including several tools that are made available to the witnesses), to help achieve a stable $1 USD price.
~$1 USD Worth of STEEM
The primary mechanism that is built into the Steem blockchain in order to help keep SBD close to $1 USD is that the blockchain supports a "conversion" mechanism, which allows anyone to convert 1 SBD token into "approximately 1 USD worth of STEEM".
The way the conversion process works is that when someone initiates a conversion of SBD, it removes the SBD from the user's active/available balance, and moves it into their conversion balance. It sits in their conversion balance for 3.5 days. At the end of the 3.5 days, it takes the median price feed value from the 3.5 days (the price of STEEM supplied to the blockchain by the witnesses), and uses that price to create $1 worth of STEEM in place of the SBD token.
(Once a conversion is started, it cannot be canceled.)
Because traders can buy SBD from the market and convert it into ~$1 USD worth of STEEM, this helps to ensure that the price of SBD does not dip significantly below $1. (If it did, a trader would see an opportunity to buy it, convert it, and make a profit.)
Leverage
If one SBD token is going to be worth "~$1 USD worth of STEEM", then one SBD token is going to be worth a different amount of STEEM, depending on the USD price of STEEM.
- If STEEM is currently worth $1.00 USD, then 1 SBD token = 1 STEEM token.
- If STEEM is currently worth $0.10 USD, then 1 SBD token = 10 STEEM tokens.
- If STEEM is currently worth $10.00 USD, then 1 SBD token = 1/10 STEEM token.
This can provide an economic benefit to STEEM holders if SBD is printed at a lower rate than it is redeemed via conversion, since the blockchain will end up producing less STEEM tokens in order to pay out the same amount of rewards.
For example, if STEEM is currently valued at $1.00, and 5,000 SBD tokens are printed today to pay users $5,000 in rewards, that is 5,000 STEEM tokens worth of rewards. If however nobody converts those SBD tokens into STEEM until much later, say when the price of STEEM is up to $10, then the blockchain would have only had to generate 500 new STEEM tokens in order to pay out those rewards.
The same mechanism can work in reverse however. If the blockchain prints a whole bunch of SBD tokens while the STEEM price is at $10, and then nobody converts them until the price goes back to $1, then it would have to print 10x as many STEEM tokens in order to pay out the same amount of rewards.
(In other words, it is a double-edged sword.)
One can make the argument though that since the general trend of cryptocurrency markets (over the long-term) is to go up, that in the long-term, this double-edged sword should work more in favor of STEEM than against it.
Steem and SBD Supply
If you go to steemdb.com, you will see three numbers related to the supply of STEEM/SBD: current_supply, current_sbd_supply, and virtual_supply.
- The
current_supplyis the number of STEEM tokens (both liquid and powered up) that are in existence. - The
current_sbd_supplyis the number of SBD tokens that are in existence. - The
virtual_supplyrepresents what thecurrent_supplyof STEEM tokens would be if the entire supply of SBD tokens were instantly converted into STEEM at the current market price and added to thecurrent_supply.
SBD Debt Ratio
There is a number that is often talked about, and that is the SBD debt ratio. The debt ratio is the number of SBD tokens in existence (current_sbd_supply) divided by the marketcap of STEEM.
The marketcap of STEEM is calculated by taking the virtual supply of STEEM (virtual_supply) and multiplying it by the current STEEM price.
For example, if there were currently 5M SBD tokens in existence, with a virtual supply of 100M STEEM tokens, and a current STEEM price of $1 USD, then the debt ratio would be 5M/(100M*1) = 5%.
SBD Print Rate
A lot of times people ask why am I getting STEEM rewards instead of SBD? The reason is because of the SBD print rate rules. (The print rate rules were added as part of hardfork 14.)
The way "default" (50/50) payments work, users receive half of their rewards as Steem Power, and the other half as "liquid". Typically the liquid portion is paid out in SBD, but not always. It can also be paid out in STEEM.
The blockchain has rules for when to pay the liquid portion in SBD vs. STEEM, and they are based on the SBD debt ratio (defined above). Based on the debt ratio, the blockchain will pay out the liquid portion of rewards as:
- When the STEEM/SBD debt ratio is between 0% and 2%: 0% STEEM, 100% SBD.
- When the STEEM/SBD debt ratio is between 2% and 5%: linearly changes from 0% STEEM, 100% SBD to 100% STEEM, 0% SBD.
- When the STEEM/SBD debt ratio is greater than 5%: 100% STEEM, 0% SBD.
Note: These numbers are changing as part of the planned HF20 changes, which will be explained in more detail below.
SBD Debt Limit (i.e. 10% "Haircut" Rule)
As part of hardfork 14, a rule was also added to the Steem blockchain to help ensure that a significant drop in STEEM price would not allow SBD to have a catastrophic effect on STEEM.
If for example we were at a 10% debt ratio (with no debt limit in place) and the STEEM price dropped from $10 to $1, then the virtual supply of STEEM would double - that is 100%/year inflation instead of the intended 8-9%, which would be really bad for STEEM holders. If the price continued to spiral from $1 down to $0.10, the yearly inflation for STEEM would be 1,000%. This possibility of extreme inflation from drops in price poses a serious risk to STEEM holders, which is why a protection mechanism was put in place.
The SBD debt limit that is set at 10% (often called the 10% "haircut" rule) ensures that no matter what happens to the STEEM price, the SBD debt ratio will never be allowed to exceed 10% of the STEEM marketcap.
It does this by reducing the liability of SBD conversions if/when the debt ratio exceeds 10%. If a user converts SBD to STEEM while the debt ratio is over 10%, then they will get back less than their ~$1 USD worth of STEEM. This transition happens gradually, and has a linear relationship to the distance the debt ratio is over 10%.
For example, if the debt ratio is at 10.01% the converter will get very close to ~$1 USD worth of STEEM. At 10.02%, a little less, and so on. By the time it reached a 20% debt limit, SBD conversions would result in ~$0.50 USD worth of STEEM.
Price "Manipulation"
Witnesses were given tools to help adjust supply and demand for SBD if the price of SBD is consistently above or below $1.00. Witnesses are instructed not to use the tools to respond to short-term market conditions, but rather focus on long-term market trends.
The views of when these tools are appropriate to use, and how to use them under different scenarios is a heavily debated topic among the witnesses.
Price Feed Bias
One of the tools that witnesses have the option to use is a price feed bias. Essentially they can intentionally tell the blockchain that the price of STEEM is higher or lower than it actually is.
- If they tell the blockchain that the price is lower than it actually is, then SBD->STEEM conversions will typically results in more than ~$1 USD worth of STEEM. The blockchain will also generate less new SBD tokens when paying rewards from the rewards pool.
- If they tell the blockchain that the price is higher than it actually is, then SBD->STEEM conversions will typically results in less than ~$1 USD worth of STEEM. The blockchain will also generate more new SBD tokens when paying rewards from the rewards pool.
It should be noted that if already very few users are converting SBD into STEEM due to SBD trading above $1 USD, that decreasing the conversion output will have little effect on the supply and demand.
It should also be noted that artificially increasing the SBD production can result in higher yearly inflation numbers than estimated in the whitepaper, which could be viewed negatively by stakeholders and potential investors.
APR
Another tool that witnesses have is "APR". APR allows witnesses to pay SBD holders interest for holding SBD, which is another way to stimulate demand.
One concern that is often brought up regarding APR however is that since a majority of SBD is stored on exchanges, it is primarily a benefit to the exchanges holding the SBD, which weakens much of the intended impact.
Lack of Downward Pressure
With the current tools that are available to the witnesses, there is limited ability for witnesses to put downward pressure on the price of SBD, if/when the market is valuing it significantly above $1 USD.
One of the ideas that has been proposed to help address this is to allow "reverse conversions", i.e. allowing someone to convert ~$1 USD worth of STEEM into 1 SBD token. For those interested, there is discussion on the idea here.
Hardfork 20 SBD Changes
SBD Print Rate
One of the changes that I submitted for hardfork 20 was to update the print rate rules to print SBD in place of STEEM for longer. Under the new rules, the print rates would change to:
- When the STEEM/SBD debt ratio is between 0% and 9%: 0% STEEM, 100% SBD.
- When the STEEM/SBD debt ratio is between 9% and 10%: linearly changes from 0% STEEM, 100% SBD to 100% STEEM, 0% SBD.
- When the STEEM/SBD debt ratio is greater than 10%: 100% STEEM, 0% SBD.
TLDR: The print rate rules are being shifted from 2%-5% to 9%-10%.
The pull request for the change can be found here:
https://github.com/steemit/steem/pull/2503
There is some concern about the economic risk of increasing the print rates to allow more SBD tokens to be printed. This is a valid concern. The truth is there is some risk to the change.
If we start allowing SBD to be printed all the way up to 10%, then it will allow us to get right up to the 10% debt limit. Any reduction in STEEM price after we reach that point would result in us passing the 10% debt limit.
While there is some risk here, I believe the risk to be relatively small.
- If SBD holders are concerned about the risk, they can sell their tokens before it gets to the 10% limit. If there is significant selling (putting downward pressure on the SBD price) then traders will be incentivized to buy SBD at the low price and convert. If it reaches a point where 100% of the newly printed SBD is being bought and instantly converted, that is essentially the same effect as if the blockchain was just printing STEEM instead of SBD.
- If SBD holders are not concerned about there being sufficient risk, and continue to buy/hold SBD as it approaches and extends beyond the 10% debt limit, then they are knowingly taking a risk that they may not get their $1 worth of STEEM via conversion.
In other words, the risk is on the SBD holders, and it is their choice how much risk they want to take.
What is most beneficial about this print rate change is that it shifts the leverage equation significantly more in STEEM holders' favor:
- During times when the STEEM price is low, the debt ratio will be higher. Under the new rules, it will print more SBD (in place of STEEM) during these times of low STEEM prices, which increases the amount of SBD tokens that will be printed at a lower price and redeemed at a (theoretically) higher STEEM price.
- During times when the STEEM price is high, it will print SBD for longer, allowing us to get closer to the 10% debt limit. The closer we are to the debt limit, the more the leverage equation works in STEEM holders' favor if the STEEM price drops, since there is a hard cap on how much STEEM it will be allowed to print.
Beneficiaries
The other change that I submitted as part of hardfork 20 was to update how beneficiaries are paid. Beneficiaries are a feature that was added in hardfork 18, which allows users to share their author rewards with other users, and for third-party user interfaces to take a small portion of the author rewards form every post/comment that is posted via their site.
Collaboration between users and application developers being able to make money by developing apps for Steem are two things that I think are mission critical for the success of Steem in the long-run. This is why I feel that improving beneficiary payouts will be a huge win for Steem.
Currently the way that beneficiary payouts work is that beneficiaries always receive their portion of the payout as 100% SP. This means that if the author selects 50/50% payout and receives half of their rewards as "liquid payout" (typically SBD), then even though the author is receiving SBD - the beneficiaries are not.
The pull request I submitted updates the logic so that beneficiaries are paid out using the same setting as the author. This means that if authors receive 50% SP and 50% SBD, then the beneficiaries will also receive 50% SP and 50% SBD.
The pull request can be found here:
https://github.com/steemit/steem/pull/2555
SBD Acts as a Long-Term STEEM HODL
One of the biggest benefits of SBD was explained to me by @smooth. If you take the price of STEEM, the price is based on the supply and demand for STEEM. It should be easily understood that when the supply of liquid STEEM tokens that are being traded is reduced, that this reduces the supply of STEEM, which helps increase the price.
Examples of things that decrease the liquid supply of STEEM include:
- Users buying STEEM and powering up
- Users buying STEEM and HODLing
What is interesting is that when liquid rewards are paid in SBD (instead of STEEM), those SBD tokens essentially have the same economic benefit as a user buying STEEM and not selling it, i.e. HODLing. For as long as those SBD tokens are in existence (not converted to STEEM) that is less liquid STEEM being traded/sold. Even if a user receives a SBD token and turns around and sells it right away, that is not putting any downward pressure on STEEM.
In other words, every single SBD token that is in existence right now is reducing the supply of liquid STEEM tokens on the market, which is helping to increase the price of STEEM.
A few thoughts in no particular order:
It does, however, offer an incentive for people to pull their SBD out of exchanges so they can receive the interest. This can have numerous benefits.
Another advantage of offering interest (when demand for SBD is weak) is that the interest can be removed when demand grows stronger. This partially addresses (as an alternative to STEEM->SBD conversions which have some doubters, and in any case don't currently exist) the issue of how to deal with overvalued SBD. If the interest is routinely set at zero then it cant be reduced, and any SBD weakness is only addressed by converting (i.e. permanently destroying) SBD. This makes the supply of SBD more unstable, along with its price.
Last year prior to the first SBD pump, in the absence of interest, the system supported weak SBD at about $1, by destroying about half of its supply (via conversions faster than printing). In the six months between the first pump and the second pump, the system again supported a weak SBD by keeping SBD supply stable (via conversions about equal to the print rate). In both cases had we used some APR to encourage holding SBD, the subsequent pumps would have likely been smaller, or possibly not happened at all (due to both the larger circulating supply and the ability to reduce demand by reducing APR), and the price of STEEM would likely have been higher (via the SBD=STEEM HODLing effect you describe).
Although not essential, a small change I would like to see (hint, hint) is to only pay SBD interest on the savings account. Since exchanges don't generally use savings, they wouldn't receive interest (and if they did switch to using savings, that would be a good thing too).
This is true if there is sufficient demand from someone else to hold the SBD and keep the value at or above $1. That hasn't been a concern for most of the past year, and it is likely that a well-functioning SBD would usually have a lot of demand because there is simply huge demand in the world (both crypto world and wider world) for stability. Even in the worst case though, when no one really wants the SBD, it gets quickly converted to STEEM, and the result is essentially identical to what would have happened if the SBD didn't exist in the first place.
This is a really good idea. While I am against having a large debt obligation for the platform (that increases haircut risk in a downturn) and therefore don't particularly want to encourage HODLing SBDs, this could be an important feature for the long term maturity of the ecosystem.
I'd personally prefer to see SBD function as a stable currency - In other words, it is intended to be spent, not HODL'd. If we want to see real commerce on the platform then we should be looking at the "Velocity of SBD" just like real economies look at the Velocity of Money as an indicator of economic health. In this way we'd require a smaller Circulating Supply and a smaller Debt Level - thus lower Ecosystem Risk.
I would say the two visions (spending and savings) are compatible. The interest shouldn't be extreme, so it shouldn't discourage people from spending, much like how traditional cash doesn't earn interest but putting the money in the bank it can.
You guys rock, this is probably the most coherent explanation of the relationship w/STEEM & SBD. When is the APR going to be rolled in? I haven't recieved any interest on my SBD Holdings yet!
Thank you for the kind words.
You should be aware that there is never any guarantee of getting any interest on SBD. The APR is 'voted' by witnesses, and currently the vast majority of witnesses (including me) are voting for zero. I personally believe we should enable some interest at some point in the future if and when the SBD supply has receded somewhat from the 10% limit AND the price of SBD is not significantly above $1, but other witnesses may (and probably will) disagree for a variety of reasons including those mentioned by @timcliff in the post. So I would only say to wait and see.
followed, I can see why at +10% debt ratio interest would be a bad idea anyway. Thx for the clarification!!!
Thanks for outlining the issues here @timcliff it is the sort of post that needs to be "pinned" up in the Steem Center
I do disagree with the HF20 changes you've made though, as I see it as a lifting of the Debt Ceiling and I think it makes the next Boom/Bust cycle bigger. This increases the risk of us facing a Haircut on future SBD Conversions during the next Bust while creating a lot of SBD Bagholders (that would hurt our Reputation and Adoption in the long run). If we had the HF20 Debt Limits in place for this last pump we would most certainly be facing a Haircut today.
That said, it is good to see that the Reverse Conversion possibility is being discussed seriously. I personally believe it is the only way to properly stabilise the SBD and remove the Asymmetrical Trading Opportunity that the SBD currently offers to Speculators. Thanks for the link to the GitHub discussion. I note there is nothing there since late June though. Is this a realistic chance of happenning or has the discussion died?
Yeah, I wish there were a way to save posts inside of your acct instead of digging through your blog or comment history....
I bookmark my favorites :)
My bookmarks are already vast, but I don't organize them into folders. That would help immensely! :0
Thx for the suggestion. ;)
Well, to be clear, what I would refer to as the "debt ceiling" (i.e. the "debt limit") is not being changed. The total amount of "debt"that the blockchain will be able to issue is still capped at 10%.
Whether it will increase the boom/bust cycle is purely speculative. With a significantly larger supply, we may actually see less price swings. (It could go either way.)
That is not true. If the change that I submitted to HF20 was in place, it would have no impact during the last "boom". When the price was high, we were way under the 2% debt ratio, so the blockchain was printing SBD the whole time. It only recently started printing STEEM in place of SBD, and the amount it has done during that time is fairly negligible compared to the current total supply.
I will agree on the more broad point though that allowing SBD to be printed up to the 10% debt limit does increase the chance that we will pass it. That was fully acknowledged and stated in the post.
The thing though is that doesn't necessarily translate into SBD holders being "bag holders". Again, that really gets into speculation. If SBD holders fear that they will become bag holders - they should have the opportunity to sell their SBD before that time comes.
I'd say that there is a realistic chance, but not anytime soon. (Unlikely before SMTs if that gives a time perspective.) The main hang-up right now is that there is still not consensus that we should move forward on the idea. Consensus often takes a lot of time to build.
"Consensus often takes a lot of time to build" - how true! Even truer in naturally "egalitarian" communities with no legitimate leader. In a classical system, say the Facebook developer APIs, the community of FB developers, even if their input would be listened to, would logically follow whatever FB decides. In a blockchain environment the witnesses have less inclination to follow STINC and even less to follow any one of them. If they were to disagree, why would, say @jesta's opinion be better than @gtg's ?
That is something unprecedented and very interesting to watch - it makes blockchain eco-systems both more stable and slower to evolve. However my concern is that, in a space that moves at high speed, shouldn't we prefer more flexibility and faster adaptation speed to stability?
And wouldn't that imply that strong (and good) leadership would be a benefit? At any rate, governance remains a major challenge
I would disagree slightly. That may be the case, or it may not. It is still somewhat speculative in that it depends on the extent that SBD remains overvalued and therefore isn't being converted. That in turn depends on both market expectations and on the actual effect of printing more SBD (increasing numerator, assuming SBD is overvalued and not being converted) vs. less STEEM (potentially increasing denominator, if this results in a higher STEEM price than otherwise, as seems likely). Overall the effect on the probability of reaching 10% is not clear to me from first principles.
I'll concede to that. There are certainly some market conditions where the change will make it less likely to exceed the debt limit, and others where it will make it more likely.
The recent downward trend has been one of the closer calls we have had as far as actually hitting the limit, and I'd go so far as to say that with the change in place we probably wouldn't have gotten as close (due to reduced downward pressure on STEEM).
It seems to be on hold at least until after HF20, if nothing else due to limits on developer time and attention.
I don't agree with you in assuming you know exactly what would have happened in some counterfactual with HF20 rules. That's always a very tricky question and a doubtful claim.
Indeed if you look at the graphs you can see that SBD was dropping in price much faster than STEEM right up until the point where the print rate started getting reduced (at 2%). If that had not happened it is quite possible that SBD would have returned to par much sooner, and its supply stabilized instead of continuing to grow. In fact, it is even possible that the pump might not have happened at all, or would have been much smaller and/or shorter, if speculators saw more supply continuing to print in the future instead of less.
Without necessarily debating on what the exact numbers should be, structurally the 5-10% null zone aka void in the current design where printing stops but SBD remains fully backed (giving speculators a one way bet, if one with some limits) is a clear economic flaw to me. It's even worse that not only does SBD printing stop but it is replaced with STEEM printing (adding to more direct selling pressure on STEEM). An alternate rule where, when the market cap is too low, instead of printing STEEM in place of SBD, it prints nothing (a reward holiday until the STEEM price/market cap recovers) would at least not suffer from the second part of the flaw.
So, SBD distracts traders from trading STEEM. By having that, SBD becomes an easier target for speculation and market manipulation because of its smaller market capital ($16.5 million), thereby breaking its peg. Which is exactly what happened twice, during the mega pump months ago and last year. Unfortunately, witnesses didn't use the tools at hand (except a few, including myself, thus no impact at all) and they decided to let things run their course, i.e. having a broken peg lasting for months. In those situations, the recurrent question was, if the peg cannot be maintained, do we still want to keep SBD? The debate was heated...
Another point is, while people were excited and trading SBD during the pump, nothing much was happening to STEEM's price, it remained relatively stable, then slowly caught up with an uptrend and a pump of its own. I think that happened because the crypto market was bullish and had nothing to do with SBD. All the altcoins were going up anyways.
Fast forward to the recent prices. The whole crypto market is down, SBD and STEEM are no exceptions. However, SBD's price is higher than STEEM! Maybe because people are trading more STEEM since rewards aren't paying them SBD anymore?
It's hard to determine the real reasons behind market behavior, it's highly unpredictable and doesn't necessarily follow the theories we like to believe. I remain skeptical how a $16.5 million market cap (SBD) would influence a $275 million market cap (STEEM).
We'll see what happens if/when reverse conversion is implemented. Until then, I'm not sure SBD will hold its PEG all the time, which defeats its purpose.
P.S. Forgot to thank you for writing this post, it's very informative and clears a lot of things.
If you are saying that people buying SBD takes away demand from people buying STEEM, I would say there is really no evidence to support that. In fact, during times when SBD was pumping, a lot of users were turning around and buying more STEEM with it.
Highly speculative. A lot more plausible theory is that SBD has a relatively safe floor around $1.
A lot of your theory seems to be based on the idea that traders are making an either-or choice between SBD and STEEM, and demand for one reduces demand for the other. I disagree with the premise, but it is not really something either one of us will be able to substantiate.
I would go so far as to say that without reverse conversions (or some other mechanism to support the peg in the other direction) that the peg will not hold. It is not implemented in a way that will provide a stable value token.
Despite not living up to it’s original purpose though, there are still other benefits to keeping it around (even as-is) such as the ones highlighted in the post (leverage and effectively HODLing).
Honestly that makes no sense.
The two have very different properties and appeal to different markets. This is a bit like saying carrying toothbrushes in your store distracts people from buying sunscreen. They're hardly related at all.
Actually you seem to suggest this in the rest of your comment, so mostly I guess I'm not getting your core message.
EDIT: I see now you were quoting from @timcliff. I don't think what he wrote was equivalent at all to how you paraphrased it. You are describing two different effects.
There is a learning process here. We're all approaching this for the first time. In my top level comment I've noted that the issue with not using the tools may have started earlier, when the SBD supply was allowed to collapse to unhealthy levels rather than supporting it with a bit of interest. That by its nature (small supply, slow print rate) facilitates pumps; once the pump happens it is too late to go back and "undestroy" the supply. I agree the system is still deficient without reverse conversion or something like it though. (Which implies we ought to be looking at introducing a bit of interest soon.)
Maybe I didn't clarify what I meant with "SBD distracts traders from trading STEEM". It's because of the liquidity of rewards paid in SBD. Users could exchange it readily instead of having to wait for power downs. When the pump was happening lots of users were cashing out their SBD to pay their bills, instead of buying STEEM. I know that because many of them have msg'd me complaining how things are dire for them nowadays since SBD is back to ~$1.
I'm reasonably certain that a lot of people cash out whatever they receive, be it SBD or STEEM. If they are writing you about their lives being dire then clearly they are using rewards as a form of income to support their living expenses (which implies "cashing out").
Indeed, Steemit has become a source of income for people in Africa, Venezuela and other economically stricken countries. No wonder we see a lot of undesirable methods (spam, scams) probably driven by exasperation to earn a buck 😥
When SBD does its job properly and stays around $1 then I can definitely see the point of it. It would act as a tether so that any earnings could be assured to be kept.
However, when it runs up to $10 or something like that then I just don't see why we keep it around at all. It seems like we could get paid in Steem like we are now and not need something like SBD.
There are several other economic benefits besides just being a stable value token, as explained in the post.
There is very little support for it running up to $10, aside from some speculators who hold a bunch of it and are more interested in getting huge windfall from seeing it pump repeatedly than building the best Steem possible. Everyone else wants to see it work better and say around $1, as you say. The work that @timcliff has done to make improvements (as described in the post) are small steps toward that goal.
The high SBD price lift the floor of Steem and was basically the architect behind the Steem rise, with Steem high supply, you need something to eat away the supply and a way for users who can't get by BTC to buy Steem, its a really a philosophical point of view but we should remember the charts and the sentiment it brought....The argument that it gives Steem holders an advantage with the increase ratio still remains to be seen, it is one that can bring an unexpected shock, BTC won't always go up as we have seen, moments of shock and uncertainty brings the volatility traders in this space loves... Lets see how things works out, if it does not I can point to many reason why it did not but as for now its all speculation...Long-term investors o§er a downward-sloping demand curve to other market participants, whereas speculators trade off the cash flow from holding the asset against the expected capital gains from aggressively exploiting temporary deviations of the price from the long-term value of the asset.
We seem to mix up long-term and short-term sentiment flow with Steem price but as our user base grows and the affluence that comes with it, Steem prices would increase, lets work with a floor rather than speculating and hitting ourselves in the foot by killing enthusiasm and sentiment
That's highly unlikely considering the entire crypto market was on a massive bull run. And when crypto turned down, so did STEEM despite SBD still being very overvalued for months. In fact STEEM underperformed a lot of other cryptos including during the period when SBD was overvalued. In my opinion people believe this largely because of the post hoc fallacy (coupled with looking at STEEM and SBD as being much more of a closed system than they are, instead of small parts of a much wider and bigger cryptocurrency economy). But I would agree with you that it is all speculation, so we can't ever know for sure.
SBD being worth $1+ does help the price of STEEM via the HODLing effect that @timcliff describes, but it doesn't have to be $10 (which then destroys the utility of having a stable token rather than yet another speculative token since people can, and did, lose 90% of their money holding it). Some small premium or even par value is enough.
Steem prices would rise, I am sure on that once our user base increase and affluence that comes with it would help...Retention rate and good sentiment are other factors... The HODLing effect has some merits to it and I would go as far as saying the bidbots certainly play a huge part in the later half....
I remain a critic of Stablecoins so excuse me, I do however see a use for them primarily as a hedge for countries who would like exposure to USD but can't hold them because of political reasons like sanctions, casing point Turkey/ Venezuela but the merchant adoption theory I can't buy into it...
Steem remains the King, it would probably been trading and holding steady 10 dollars if it has the supply of SBD... I watch the trading on varying exchange, it takes triple the BTC volume to move Steem prices but as user growth trend higher things should plateau and then take off but for now we should really think twice about debt ratio but lets see how it goes
Good work by you and Tim, I see you working hard on this, lets hope it goes as plan but speculators would be speculators, they see an opportunity they gonna go for it, we should encourage user who has it in moments like these who wants Steem to make the most of it
I would say we agree more than disagree about use cases. Merchant adoption of cryptocurrencies (whether stable value or not) seems to be mostly a solution looking for a problem but people wanting to hold stable value for a variety of reasons is a demonstrated huge market.
It is fair to be skeptical of stablecoins (in some ways I am as well) but I would say this is more than anything an ongoing experiment. The are big challenges but also big opportunities.
A couple questions that I could probably look up myself but since you're here and I'm lazy:
What happens to conversions already in process when the haircut happens? Do they convert at the rate of the enacting time, at the rate of the fulfillment time, some way of averaging it over the 3.5 days?
Is the rewards pool based on the actual Steem supply or the Steem-equivalent supply of Steem and SBD? (What Steemworld calls "virtual supply" and Steemd has as the larger number in "current supply.") If it's the latter what effect does SBD holding have on the pool and the overall economics especially if SBD remains near $1 while Steem continues to fall?
It will be based on the median across the 3.5 days.
It is based on the virtual supply.
It's not possible to give an answer that is correct under all cases because the difference between what the virtual supply would be depends on what happens to the STEEM price. (The short answer is that it depends.)
If you look at the leverage section of the post, there are scenarios where more users holding SBD could cause the rewards pool to increase, and there are other situations where it could cause the rewards pool to decrease.
Good job!
Reads like a white paper.
You could make another post out of this with the calculations. I am curious what the debt ratio is right now and the percentage people will get for the conversions.
I thought the inflation rate was set in stone?
This blockchain system is very complicated. lol
Well the inflation rules are set in stone, but they are written in a way that assumes the SBD tokens are redeemed at the price they are printed at (which never happens in reality). The result is that the actual inflation can be higher or lower than the rules.
The debt ratio right now is 6.38% and conversions will pay 100% (since 6.38% < 10%). Recently, as in the last few days, the ratio has been slowly declining as the STEEM price is stable to increasing and some SBD is being converted. Over the past few months it was increasing.
Maybe you should right up your own post. I thought Tim was the only person on here who understood SBD's. lol
I though SBD's were supposed to be printed if the debt ratio was below 10%.
For a while SBD was increasing extremely fast.
The current rules print SBD only up to 5% ratio (with the rate reduced above 2%). At 10% is where the "haircut" rule kicks in (SBD become convertable into progressively less than $1 worth of STEEM as the ratio increases beyond 10%).
In HF20 @timcliff implemented a change that boosts the limit for printing up to 10% (with rate reduction starting at 9%). That should be active in a little over a month I believe.
Could you show me where is the haircut in the source code?
I found these lines in database.cpp which convert from SBD to STEEM, but I can't see the haircut of 10% there. Thanks.
It is done by adjusting the price feed
https://github.com/steemit/steem/blob/a6e50bed01bbfbb05938669d713c31977849ec12/libraries/chain/database.cpp#L3120
Thanks. Now it is more clear 😉
Sir is there any way to contact with you ?? I need to talk with you about some issue which is already sended to @smooth-a account as a memo. Please take a look on that.Thank you
Really useful explanation. Thanks!
Nerdy question: I’ve seen both Steem Backed Dollars and Steem Based Dollars each many, many times. But recently have been seeing Steem Blockchain Dollars.
Anybody know what @dan was calling them in the early days?
They were originally called Steem Backed Dollars, and were re-marketed / renamed when they published the bluepaper.
Appreciate the explanations @timcliff; some things are a little clearer to me than they were before.
The thing I am not quite clear on is how this "pegging mechanism" can effectively work when SBD is widely traded (and speculated in) by people who are — in effect — "external" to Steemit.
If you're a "speculator/gambler," the only thing you'd see is a token with a relatively small market cap that you can pump up in price without having all that many resources. Seems to be what happened back in December/January when SBD spiking coincided with getting listed on a Korean exchange. I'm sure a lot of those traders were never anywhere CLOSE to our community here... they were just "speculators."
Alternately, would you argue that "the pegging mechanism works" because we're back at near 1 SBD = 1 USD, even if it took seven months? Am I just misunderstanding the timeframe involved in what "works" means?
As @timcliff noted in his reply, you are absolutely right. But at the same time I don't think it is completely wrong to say that it 'works' in a sense, since it did not only return to $1 but it did so largely by the intended mechanism of printing more and more of it until the price declines.
In the short term, yes speculators can move the price (absent additional mechanism to peg it more strongly), but the higher the price goes, the more capital inflow is required to hold it there against the steady "drip, drip, drip" of continued new supply, and that ultimately becomes unsustainable. While sometimes slow, even a steady drip can eventually produce the grand canyon.
Or another way to say that is the speculators are not entirely external to Steemit, because Steemit users can and do "cash out" their rewards. When they do so, it requires a speculator to inject additional money to buy those newly-rewarded SBDs at the inflated price, or the price must decline.
Thanks for the explanation @smooth; appreciate you taking the time. Steemit/Steem seem like interesting experiments, in their own right.
My interest in the SBD peg primarily comes from a commercial interest. It's functionally difficult to use a currency to trade goods and services if it fluctuates wildly.
Quoting from one of my other replies here:
As noted by @timcliff in the post, perhaps other changes can be made in the future to reduce the upward spikes. Even without changes I do think it is possible (though hardly certain) that the price may become more stable over time as the system matures.
No, you are correct. As I mentioned in the post, there is little that can be done to hold the peg from going higher, unless additional mechanisms (such as reverse conversions) were to be implemented.
Thanks for the feedback @timcliff; yours and @smooth's replies helped clarify a bit further. One of my hopes is that an economy of sorts will eventually develop here, where people trade goods and services using Steem/SBD. If the fluctuations are too crazy, that's tricky to execute.
Check out: https://steemeconomy.com/
=)
Ah yes, I saw your announcement about it the other day, and that was an exciting development. I can't help but think that an "economic base" will also help the value of Steem grow.
This is an awesome and in-depth review. Kudos and followed.
This is a great article. I'll admit there is so much information I probably only retained about thirty percent. SBD still needs some more robust way to keep th 1$ peg but from this I can tell that the witnesses have spend a large amount of time thinking about this.
Great explanation here body keep up
Reducing market liquidity does not increase the price. It just makes it easier to manipulate.
I don’t agree on the first part, but there is truth to the second. To prove the point - if every single STEEM token except for around 1,000 tokens were “locked up” it is very likely that the price of STEEM (given no changes in demand) would go way up.
Well reducing the supply does limit the amount of walls above, but it (imo) also reduces the demand because who would want to engage in a trade with massive slippage because no liquidity? :)
A healthy market is a liquid market, with volume.
And lets assume your hypothetical everything bar 1000 tokens are tied up, and the price also jumps incredibly high, would there be investor confidence to maintain those levels when a single entity could come along and crush the market by flooding it with tokens?
Markets react to diverse forces, and not all of them are in your point. But thanks for the reply!
Tokens are divisible. There could still be (but we can't know in a vacuum whether there necessarily would be) plenty of liquidity in 0.001 STEEM units.
Perhaps the liquidity would be there, but remember the supply external to this hypothetical (every token locked up) exchange. :)
Hmm, I actually misread this and thought your reply was to a different comment.
I would agree with you to an extent, but it depends on how and why the tokens are locked up. If investors believe they will remain locked for along time (even if not guaranteed) that is quite different from believing they will come on to the market tomorrow.
No problem, and yes. 100% agreed there. But that was not stipulated in the hypothetical presented by Tim. :)
I resteemed this article for #japanese community. I think Steem and Steem dallars are well thought out and designed in cryptocurrency.
Awesome!
thanks for the post - I have a better understanding of this platform now
I was asking myself too why I was getting Steem instead of SBD, but now many things became clear. Thank you for the explanation and keep up the good work :)
Thank you very much for the detailed explanation. Definitely makes a lot more sense to me now!
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Hey @timcliff, do you mind If translate your Full post to portuguese?
We at the brazilians community were talking about this, and i was going to try to write an explanation why SBD stopped being printed, but your explanation is complete, so...
Let me know If you allow me to do that.
Thanks.
Go for it :)
Please just include a link to the original post as reference.
Thanks, i Will let you know when i post It, If you want me to.
Sure
hey tim, thanks again for authorizing me to post the translation of this post.
Just finished posting it: https://steemit.com/pt/@phgnomo/sbd-explicado
Portuguese speakers community says thank you!
A lot of people is confused about this multi token system and I was also searching info about real purpose of SBD. Thanks for keeping it clear Tim, you have my resteem!
Wow! This is really heavy reading for me! I have to read it twice!
Thanks so much for your very good effort to bring some essential information to more people’s attention.
Cheers.
Caught this on acidyo’s resteem. Thank you for explaining this. I voted your witness as a result. It was one of those burning questions I needed an answer for. I was just too lazy to ask, clearly the fire was not hot enough. Hehehehe.
I learnt a lot from this post.
Cool, thanks!
Thank you for this post, I'm bookmarking it. It's such a good 'go to' guide, especially for someone like me who is always trying to understand more about crypto in general from the layman's view.
tim cliff our savior. thank you for this perfect explanation.
Again, Tim - always doing such an awesome job contributing excellent, applicable, and well-designed content. Thanks for watering it down for us. :D
Very I'm depth explanation!! Does help out to understand the ins and outs of the system
Long and well explained post about SBD. I will pay better attention to market now. Peace
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God, thank you for this!
I have not read one single post moaning about no sbd being given in rewards, people seem to like steem and sp, like I do, be gone with sbd, it is of no use to me, or most people.
If you receive payment in SBD and want STEEM, you can always trade for it on the internal market.
One of the main benefits is that it helps your STEEM be worth more as explained in the post.
I lose money by converting it, hence why I have not invested on here, simplify rather than make things harder, sbd makes zero sense to me, sp and steem do.
Don’t convert then. You can just trade it for the market value worth of STEEM on the internal market.
You have a valid point with that, as do I with it is of little worth or assistance within the system that is.
The worth is explained in the post: leverage and HODLing effect.
It benefits you via the HODLing effect (see last section of the post) even if you never use it. Your STEEM is worth more and your rewards are higher as a result, as long as others hold the SBD, and there are certainly people who do want it.
You mined your stake, we hold differing opinions, you are entitled to yours.
His has little to do with how smooth or anyone else acquired there stake. It is simple math / economics of supply and demand.
You are starting to sound like a politician now, and to be fair, I hate them fuckers for taxing me/us, I get it that you want to maintain the status quo, though me being the "customer" that has the money to invest, we used to be called the people to respect, as in the customer is always right yes? I know the world has gone insane, and the customer is now disrespected, so hey, I will make my own blockchain, and then we see who wins, forced versus do what you want!
You are projecting a lot of stuff on me that doesn’t really apply. Really my goal is plain and simple - to make the STEEM price go up. Regardless of how your current position as a user places you - our objectives should be aligned in that regard.
I am projecting nothing on you, I stated I will not be investing whilst sbd exists, I want nothing from you, I never will, leave the victim hood at the door step, and have a free fucking video.
If you did not like that one have another, hey they are free
Please go ahead and make your own blockchain. There are only a few thousand of them already, we definitely need another one.
Actually, though, I do agree with the marketplace approach you suggest and don't discourage people from trying. If you think your idea for a blockchain is better, then indeed we should "see who wins". If it really does turn out to be better, then we all win.
There was nothing political about @timcliff's reply either. It is absolutely the case that who mined what has nothing whatsoever to do with SBD functionality or economics. If you can't address the substance of the matter without resorting to personalizing the debate then you likely have either a poor grasp of the issues or a weak position.
Well I have a strong position in the real world, I have owned and run multi-national companies, I sit on 100 acres of owned land in a country 5 over from my own, if that is a weak position I will take it all day long, as far as steemit goes, like I said, I will not be investing whilst there are different currencies, plus all the bickering that goes on on here regards self voting, bidbots etc etc, That is simply the way I feel, and it has nothing to do with mined or not mined.
I respect both of your opinions, and fully understand why people want to keep it the way it is.
I dont understand the point of keeping SBD at 1$ price. I find it better the way it was before.
Thank you for sharing this post, because it cleared many doubts.
Great write up... as always!
Thank you for this precious post! :-)))
Thank you very much for sharing and collaborating in Steem.center wiki! A link to your post was included in the page Steem Dollar (SBD): Links. Welcome, thanks and good luck again!
Thanks for sharing your thoughts on sbd and hard-forks that will occur soon @timcliff
It's helpful expecially for artists like me
Looking forward for a brighter Future thru steemit
Thanks and hopefully you'll enjoy listening some of my artworks created thru music
@ timcliff Thank you for this usefull informations
Manipulating a currency (sbd) never works - It never has.
Pegging against the dollar, a fiat currency makes no logical sense to me.
Sbd - 'a bridge too far' in the steemit infrastructure in my opinion.
When hubris meets free markets, only one ever wins..
But I'm stupid, what would I know?
lol
Hmm... I about to always having mixed feelings about SBD, too. The main issue is that as Steem begins to gather widespread attention, SBD confused and weakens the idea of Steem. It's too much for newcomers.
Sooner or later SBD probably has to go, but for now there's a strong case for needing it as a precautionary measure.
against what?
SBD addresses the biggest and most valid criticism of stable tokens, which is that they try to make an impossible promise of a guaranteed value, something, as you say, the market may not support. SBD doesn't do this. The 10% "haircut" rule (described in the post) says that in the event Steem as a whole isn't worth enough, SBD drops off of the dollar peg.
I agree. be gone with the useless sbd.
Is SBD exist further...
I don’t understand
There is no sbd produce in steemit. Is sbd exist or not.
The reason STEEM is currently being printed instead of SBD is explained in the post.
Why instead of sbd?
It is explained in the post.
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Thanks for the overview, quite definitive.
this is a detail explaination from you. so,as a newbie, now we have a new knowledge about SBD. that's part of steemit that we still learn about.
I 'll save this post. Thanks !
Thanks for clarifying. Now it makes more sense why we might not want to print all inflation in SBD form. I like the idea of being able to print SBD with Steem... interesting.
Great explanation, it's really useful to have an up to date overview of where we are at. I would like to hear some further thoughts on the last section
The central thesis here is about supply and demand economics for Steem. It doesn't mention the supply and demand economics for SBD, which contributes to increased price spirals for SBD when the value is above 1 dollar.
What are your views on this?
Can you clarify the question?
Let me elaborate on my point a bit further:
If you consider the SBD asset in isolation you can reason the price dynamics based on typical supply and demand mechanics. i.e lower supply leads to scarcity and higher price, higher supply leads to abundance and reduced price.
What we saw earlier this year was more people choosing the liquid payout option and more and more SBD was printed. The demand here was because the open market rate of SBD was above 1 dollar. This was the manifestation of an increased demand for SBD.
In theory more supply should counteract the increased demand to balance the price but we saw that it didn't. This was probably for several other reasons but possibly partly due to the design of SBD where printing is capped at a percentage of the Steem supply.
I understand the point that one may argue that it is more important to protect the debt level of Steem (wrt SBD) to stop inflation of the money supply.
Back to my quesiton...
What are your views on the supply and demand mechanics for SBD when the open market price is above 1 dollar, What is the downward lever (if any) on the price pegging mechanism?
The continued printing is a downward lever, just one with limited intensity. As rewards are printed in SBD, users go and cash out those rewards, and the higher the price of SBD, the more capital inflow is required to keep the price high. Eventually one or the other must give. Still, "eventually" may be quite a while.
Also, you can't consider SBD as being entirely isolated from STEEM. As the supply of SBD increases, that represents more and more STEEM that is kept out of circulation. On the margin this should increase the price and market cap of STEEM, which in turn results in even more SBD being printed (see above).
It is possible to accelerate the feedback somewhat. For example my @burnpost initiative takes some of the SBD rewards and uses them to directly buy and lock-then-burn STEEM. When SBD was $10, this was quite powerful, as $1 worth of STEEM from the reward pool could be used to remove $10 worth of liquid STEEM from the market. At one time @burnpost was steadily and relentlessly removing $10000 worth of STEEM from the market per day. Over time that certainly adds up.
Still, this is absolutely not the ideal situation in terms of the utility of SBD as a stable value token (and indeed it appears to have demonstrated more temporary upward price instability than other pegged tokens). I don't think anyone would disagree there.
Thanks for this comment @smooth. I have been thinking about SBD quite a bit this year and I have been coming at all aspects of it from different angles. I really see it as a feature of Steem and I would love to see it work as intended. Just a few follow up questions while we are talking about it, which I will get to in a minute:
I know the following is a simplification but this is the picture I have in my head of SBD
I always thought of SBD as a simple asset. The key drivers to maintain the peg being
This of course ignores risk tolerances and some other characteristics of an open market monetary policy
Back to your comments, my follow up questions are the following:
1 - Would you say given the relative size of the Market Caps and Volumes of STEEM and SBD that this would have just a marginal effect if any?
I have been thinking about the burnpost initiative from another angle and I always saw it as reducing the supply of SBD which would further increase the price of a scarce asset (based on supply and demand economics)
2 - Would the fact that it is reducing the debt on STEEM not have more of an affect on the STEEM price than the SBD price? (Again given the relative size and liquidity of the markets for the two assets)
It is hard to say. The most obvious answer is that SBD has limited effect on STEEM given the relative sizes of the markets, and that is probably true to a large extent. But not necessarily entirely.
First, the market caps don't directly imply how much supply is actually available in the liquid price-setting markets. For example, a huge portion of STEEM's reported market cap is locked up as SP. Furthermore when SBD gets overvalued this serves to narrow the difference (a natural stabilizer). In addition, reported trading volumes on crypto exchanges are very suspect. Finally, the argument is somewhat circular. There is demonstrated huge demand for stable value within the cryptocurrency ecosystem (Tether, also rapid uptake of other solutions such as DAI) which dwarfs STEEM's market cap by about 10x and additional demonstrated huge demand for stable value outside the cryptocurrency ecosystem. Drawing some of that value (even a tiny fraction) into SBD could result in an upward spiral that lifts the market cap of both SBD and STEEM (potentially by a lot).
I see SBD as a 'product' of the Steem blockchain (along with others, such as value transfer, censorship resistant publishing, rewarding contributions, etc.). It is a product that has a vast addressable market, possibly dwarfing the others.
How would it do that when it immediately dumps its SBD on the liquid market? Secondarily, powering up (which @burnpost does) increases the STEEM market cap which further increases the supply of SBD (if only by a little). So overall I don't understand this idea at all.
I don't understand this question, including what you are referring to here with the word "it"
I'm also skeptical of the word 'debt' by the way, especially when used without further clarification. SBD has some properties that are analogous to debt but it isn't a perfect analogy by any means.
Thanks for those clarifications on burnpost. It makes more sense to me now.
Well, with the recent SBD trading above $1, I think it simply boils down to there continued to be more demand for SBD than supply. As I mentioned in the post, the current SBD printing mechanism doesn't really have sufficient tools to put downward pressure on the price during cases where there is excess demand. There was a link in the post to one idea of something that could be implemented to support that.
Does that answer your question?
Thx 4 that post
Im new to all this, so this post has been very informative. Thank you!
i am a noob but still wanted to ask that now as sbd are not being printed and the supply is also not that if any pump occurs will it be able to sustain at a dollar mark
I don't have an answer
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STOPVery well explained. Through this post it became easy and quickly understood. I appreciate it. Thank you for your valuable post.
Steem is the best blockchain ever! I've never experienced an online community where my desire to create has been so uninhibited. I'm free to create content as I wish and others are free to read it. The beauty is in the simplicity and uncensored nature of this system that affords us a place to be free and explore.
Great article. Upvoted and Resteemed. I wish I had more Steem Dollars, Steem and Steem Power.