Falling STEEM/SBD Price - Proposed Solution to the SBD Debt to Marketcap Ratio Problem

There are two concerning things happening with the price of Steemit currencies right now. The price of STEEM continues to fall. Many people are worried it will never find a bottom. The amount of SBD debt has also passed 5%, and the system is now paying out author rewards in STEEM instead of SBD. If the debt level reaches 10% of the marketcap, the system will no longer pay conversions at a rate of "approximately one dollar worth of STEEM" per SBD.

I want to show that while one of these (the falling price of STEEM) is probably causing the most alarm - it is actually not as big of a deal as people think. I believe the other problem though (increasing level of SBD debt) is a larger concern. I will show why, and offer a potential solution that the top 19 witnesses and community could implement together - which will hopefully address the problem.

The Falling Price of STEEM

To start with - the biggest item of concern on most people's minds is the falling price of STEEM.

Everyone has heard that STEEM has very high inflation, and users should convert to Steem Power to protect against it. Do people really understand what that means though? To put it in another way, the price of STEEM is meant to go down. Granted it is going down faster today than it should/will under 'normal' conditions, but that is mainly because of several factors which make today's situation kind of unique:

• The network is in a distribution phase, which means it is purposely inflating STEEM at a faster rate than 'normal'.
• Many of the early adopters are powering down and cashing out to capitalize on their initial investment, as well as fund projects that they believe will add value to the project in the long-term.
• The July price spike caused the network to produce a lot more SBD than the platform was arguably 'worth' at the time. There is now a very large amount of debt that the network must pay back.
• There is still not a very big demand for STEEM/SP yet, because the product is not ready for mainstream users, and there is not much to combat the inflation by generating more demand (like through advertisements) other than speculative investing, and users wanting to work their way up to dolphin/whale status.

The Rising Price of SP Vests (Wait, Rising??)

There is another way to look at the price, which is the value of vests. This is really what users should be most concerned with, because if you are holding SP, this is what you have.

To help explain how the vests work, here is historical vest price information:

• On 7/6, 1M VESTS = 197.368 STEEM = $45.987
• On 7/20, 1 MV = 1M VESTS = 229.192 STEEM = $804.005
• On 10/29, 1 MV = 1M VESTS = 410.581 STEEM = $65.412

What does that mean? Well the short answer is that if a user had bought around $46 USD worth of STEEM on 7/6 and powered it up, and left it in their wallet (and done absolutely nothing else) - they would actually have around $65 worth of STEEM in their wallet today. (Being held as Steem Power.) Yes, their SP would actually be worth more today than it was when they powered up! (Despite today's lower price of STEEM.) That is how vesting works. As a side note, if the user had been actively curating the whole time - they would have generated even more SP/vests.

Most of the stress about the price is coming from users (myself included) who bought in between 7/20 and today, while the price was being inflated. (My biggest cash investment by the way, was at right around $800/vest.) Depending on whatever the price was when those users bought in, they likely have less in their account today than they did when they bought in. These users are wondering if we will ever see STEEM reach the "good old days", where the prices will be in line with what we saw during the July spike.

Will We Ever See the "Good Old Days" Again?

I will not go into that much here, because it has been covered in a lot of other posts, but my personal opinion is that STEEM / vests will eventually reach new all-time highs, once:

• The site becomes fully ready for mainstream users.
  (Major community issues/strife resolved, new features added, etc.)
• We do a big recruitment push to get tons of new users (and keep them).
• We implement some form of "attention economy" based advertising program, which will create demand for the supply of STEEM, using Steemit's massive and engaged user-base as a selling point for people who want to pay for our attention.

(Note - this does not constitute investment advise. Please consult with a professional advisor and/or do appropriate research before making any investment decision.)

The SBD Debt Problem

The existing SBD debt is a big cloud of doom looming over the price of STEEM today. At some point that debt needs to be cashed in for STEEM, and if the price of STEEM keeps falling - more and more STEEM will need to be created in order for it to pay back that debt. Also, if the debt level passes 10% of the total marketcap, the system will no longer honor the "1 SBD = approximately 1 USD worth of STEEM" contract. It will start paying users less than what $1 SBD is worth, to prevent the system from collapsing.

This fear is one of the contributing factors to the downward pressure on the price right now, and it will only get worse as the SBD debt to marketcap ratio continues to get worse.

There is a lot of discussion/disagreement about whether or not having this 10% limit is good or bad. On the one hand it is a precaution against a "black-swan" event like @dantheman has described, which could cause the price of STEEM to spiral downward out of control (to zero); but on the other hand, it creates doubt for investors that holding onto SBD is a stable investment.

My opinion on this is that we do need this built into the system as a "last resort" safety mechanism, but it should be one of those things that never actually happens. In order to make SBD a stable investment, I think the most important thing we can do right now is ensure that is the case.

Proposed Solution to the SBD Debt Ratio Problem

For the Witnesses:

1. The top 19 witnesses should pick a day on which they will begin implementing a "significant discount" in their price feeds. The date should be publicly announced, and the community should know about it in advance.
2. There should be an agreed upon debt level (I propose 3%) at which point the "significant discount period" will end.
3. During that time, witnesses should adjust their price feeds such that a SBD->STEEM conversion results in anywhere from $1.05 to $1.30 worth of STEEM being produced.
4. Once it ends, the price discounts should be updated to return the price of conversions back to a $0.95 to $1.05 level.
5. Witnesses should also use the SBD interest rate (as suggested by @smooth) to add increased demand for SBD if needed during this time.
6. Witnesses will need to monitor their price feeds very closely. If the increase in liquid STEEM produces too much downward pressure on the price, to the point that the debt to marketcap ratio starts getting worse and not better - then a decision should be made to end the "significant discount period", and reduce the discount back to a $0.95 to $1.05 level. The interest rate can be kept at a high level (or even raised higher), to continue to prop up SBD demand as needed.

For the Community:

1. I know a lot of the users in the community will not like this metaphor, but similar to a time when a country is at war, they encourage their citizens to support the country's economy for the "good of the country". We need that type of mood right now in the Steemit community. The situation we have today as a result of the July price spike, is a big hole that we need to dig ourselves out of, if the price of STEEM/SBD is going to recover.
2. Let me be clear though, I am not asking users to invest more money into STEEM/Steem Power. You can if you want to, but that should be for purely market based reasons (if you think it is a good investment).
3. What we need is users who are holding onto SBD which they essentially received as "free money" for participating in the site, to use the "significant discount period" to convert their SBD into STEEM and either Power Up or use it to buy more SBD on the exchange.
4. Users are also encouraged to use the "Power Up 100%" option during this time for their posts as much as possible.
5. Basically what we are trying to achieve is to reduce the SBD to marketcap ratio to a sustainable level, without dumping all of the converted STEEM directly onto the exchanges.

The Risks:

• The biggest risk of this comes from the fact that there will be a significant increase in the amount of liquid STEEM being produced by the blockchain, as the virtual supply of STEEM (debt) is converted into actual STEEM.
• Some users will not want to power up and would prefer to cash out their SBD for BTC/fiat (which should be allowed if that is what they want to do). In addition, many traders who are holding onto SBD for purely investment reasons will use the "significant discount period" to get a good conversion rate, and sell their STEEM that is produced on the exchanges.
• If users rush to the exchanges and try to sell, it could put an even more significant downward pressure on the price of STEEM than there is today.
• If the price of STEEM gets pushed down at a greater rate than the debt level is decreased, then this could actually make the debt to marketcap ratio even worse, rather than better.

The Potential Positive Effects:

• Reducing the SBD debt level below 5% of the marketcap will return the system to its normal state of paying out author rewards in SP/SBD instead of SP/STEEM.
• Backing away from the approaching 10% of marketcap debt level will bring a sigh of relief from investors, who are currently concerned that the entire system is going to collapse.
• There is a good chance that potential investors will notice that we have addressed one of the major instability problems that they were worried about, giving them new confidence in the future of the project.

Closing Thoughts

I want to stress the fact that this is a proposal and that no changes are being made at this time. I am hoping that the rest of the community (including the other witnesses) can review this proposal and provide feedback. This is not a sure thing, and there are definitely real risks. It needs to be carefully considered and vetted before taking any action. If there is a general consensus that this is a good idea though, and would likely work - then I think the top 19 witnesses should move to adopt the plan within the next few weeks.

Thanks to everyone who provided input on this, including those who have been presenting opposing views. I want to highlight the help I have received from @lafona, @james-show, @liberosist, @bacchist, @dragosroua, @arhag, @good-karma, and @gtg in Steemit.chat, as well as through the various posts that they have created. Also to the many other members of the community who have been contributing to the conversation via their posts and comments about the topic.