Here's how I understand it as a regular person who is not an economist:
SBD is basically like a note (it's actually a smart contract) that says you will get a dollars worth of Steem at a later date. When the ratio of SBD value to Steem reaches 10% the system stops creating new SBD - this recently happened due to the low price of Steem.
The result is to stop there being an imbalance between the two because it could potentially result in the value of SBD in existence exceeding the value of Steem which could cause an economic crisis of sorts.
That is why the mechanism exists. As soon as the "debt" represented by SBD falls to below 10% of Steem then the SBD payouts will return.
Corrections: stop at 5% but not 10%; after 10% one SBD won't be able to be converted to as much STEEM as 1 USD (hard-coded).
@abit Thanks for the correction:)
Nicely put! If SBD breaches 10% a conversion would require more steem than is what is in existence and crash the system. Therefore the SBD can only remain pegged as long as the price of Steem doesnt get "too low"...
Not quite, the system won't "crash" until that ratio hits 100% , and the conversion actually creates the steem - and we have more mechanism's in place to reduce SBD debt before that ..
But hopefully these changes have just reversed the trend :)
Yes hopefully they have! :)