When SBD is created, its initial backing is supplied by the post's reward STEEM. Any fall in the price of STEEM will result in a rise of the virtual supply (and conversely, any rise in the price of STEEM will result in a fall of the virtual supply).

Here to you refer to virtual supply so I wanted to presume no new vests are created after the initial creation of SBD, but then you wrote:

• Any losses you get from a decline in STEEM market cap are socialized by creating some more backing STEEM, essentially all other STEEM holders subsidize 100% of "your" losses.
• Any profits you get from an increase in STEEM market cap are socialized by destroying some of the backing STEEM, essentially all other STEEM holders split 100% of "your" gains.

Ah so the supply of vests is adjusted when the SD (aka SBD) are converted to STEEM.

But I don't understand, then why do I have to sell my SBD on an exchange when you could just transfer the backing vested to me? Who gets the backing vests then, or is it impossible to ever retire the SBD so then why do we need the backing vests?

And thus the trusted oracles for the exchange rate control the creation of new money supply.

In response to those rewards, steem are created and placed in the vesting fund. Those created steem are what backs SBD

So then why create initial supply of vests before the SBD are converted to STEEM? What purpose does that premature estimate serve? Surely coinmarketcap.com needs to account for the market cap in SP+STEEM+SBD any way, if they want accuracy.

The vesting fund is SP balances.

The vesting fund apparently also includes the backing for SBD.

Are liquid STEEM also backed by specially tagged vests, or are they accounted for separately? I realize it is just irrelevant backend semantics though, i.e. doesn't reflect on the math whether STEEM are named "STEEM" or "vests with a special tag".