Saving SBD - Proposal to Restore the $1 USD / $1 SBD Peg
SBD is currently trading for around $2.
Most people are aware by now that SBD has been consistently trading above $1. Way above $1 actually. Currently you can get about $2.04 worth of STEEM if you trade 1 SBD for STEEM on the internal market. You can get about $1.97 worth of BTC if you export 1 SBD to Poloniex and exchange it.
So why is this a problem?
If a shop owner wants to sell a shirt that costs $12 USD to make, and they want to make an $8 profit, they will want to to list their shirt for $20 SBD. If $20 is a fair market price for the shirt, and SBD is trading for $2 - then why would a customer pay $20 SBD for the shirt if they could go to an exchange and get $40 USD instead? The shop owner can either hope for a customer who is willing to pay $40 for their shirt, or lower the price to $10 SBD to equal $20 USD.
Say the shop owner is successful, and they sell 100 of their shirts in a month at $10 SBD. Then let's say that by the end of the month when they go to cash out, SBD is back to $1 USD. The shop owner would now have $1,000 SBD worth $1,000 USD. This is their payment for 100 shirts, which cost them $1,200 to make. Instead of making an $800 profit off the sale of 100 shirts, this owner just lost 200 bucks (and their time).
An alternative is for the shop owner to constantly monitor the price of SBD, and change the price of their shirts based on the current market price, as well as cash out any SBD as soon as payments are made. This is a lot of work for a shop owner though, and then they are spending their time dealing with currency fluctuations instead of selling shirts.
A robust STEEM/SBD marketplace is a key to mass adoption.
The STEEM/SBD ecosystem would benefit greatly by having hundreds/thousands of shops that accept STEEM or SBD as payment.
The fact that STEEM/SBD can actually be used for something is a major key towards mass adoption of the platform and currency. Users would have something tangible that they could do with their "magic internet money", besides just sending it to an exchange and cashing it out.
SBD was intended to be a stable currency.
Shop owners will have a much easier time selling their goods and services for STEEM/SBD if one of them is a stable currency. This was one of the main reasons to have SBD in addition to STEEM.
Having a stable SBD currency allow shops to accept it as payment without having to worry about drastically fluctuating prices. Then they can focus on selling more widgets to their customers (i.e. us).
(image credit @steemitguide)
Holding SBD at $1
The free market decides the price of STEEM, but SBD is supposed to be held at 'around $1'. There are various tools in the witnesses' tool-belt to aid with this, and the whitepaper has given guidance on how to use those tools. They are limited in what they allow witnesses to do though.
What we have found is that the tool-belt allows the witnesses to do a pretty decent job at pushing the price of SBD up when the peg starts to trend below $1, but it does not provide very good mechanisms to push SBD down when the peg starts to trend above $1.
Proposed Solution
A proposed solution to deal with the problem is to allow users to "reverse convert" STEEM to SBD. This would allow the user to take "approximately one dollar worth of STEEM" (based on the 3.5 day witness price feed average), and convert it into 1 SBD.
This process would destroy the STEEM tokens, and create new SBD tokens - in the exact same way that SBD is destroyed and STEEM is created when users convert SBD->STEEM today.
How would this fix the peg?
If SBD was trading for above $2, users would be able to convert $1 worth of STEEM into 1 SBD, then sell it for $2. They would end up with an extra $1, and this will put downward pressure on the price of SBD.
This would continue until enough new SBD reaches the market to push the price back to $1 again. For as long as SBD remains above $1, users will continue to convert STEEM->SBD and push it down.
But what about the debt?
One big fear about this process is that too much SBD could be created. Users may continue converting STEEM into SBD until the level of SBD debt becomes too high.
With the current 10% debt limit that is in place, this should not be a major problem. This will likely serve as an upward bound on the amount of SBD created, although even if it does not - the blockchain's liability will be limited to 10% of the STEEM marketcap.
The way the blockchain rules are currently defined - if the SBD debt is above 10% of the STEEM marketcap, users will get "less than one dollar worth of STEEM" if they try to convert SBD back into STEEM. This would remain unchanged as part of the proposal.
What this means is that as the debt level approaches 10% of the STEEM marketcap, there will be additional risk for holding SBD, since users may not be able to get the dollar back if they try to convert back the other way.
If SBD is still trading above $1 at this point, then more users will likely sell their SBD to avoid the additional risk - putting more downward pressure on the price.
If users still want to buy/hold SBD at this point, and the price continues to trade above $1 (even after the 10% limit is reached), then they can continue to generate even more SBD, just with the added risk that they will no longer be able to convert it back to STEEM and still get $1 worth.
Added Benefits
In addition to pushing down the price of SBD, allowing users to convert SBD->STEEM would increase the demand for STEEM as well, because more users will be buying STEEM to convert and make money via conversion. This will put upward pressure on the price of STEEM if/when there is high demand for SBD.
Plus, in the process of doing this they will be destroying STEEM tokens, which will be decreasing the supply of STEEM! This is beneficial to STEEM/SP holders, as less supply means the existing tokens become worth more.
Will this work?
I have discussed with several other witnesses and community members, and everybody I have talked to seems to think that this is a good solution to the problem. At this point, this is just a proposal though. Nobody from Steemit, Inc. has commented on or endorsed the idea.
For now, I am just looking for feedback.
If the consensus seems to be that everyone thinks this is a good idea and nobody sees any major issues with it, then I will recommend that it be considered for a future hard-fork.
Thank you for reading
Thank you for taking the time to read and consider my proposal. If you have any thoughts for or against the idea, please share in the comments below!
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Interesting idea.
I'm of the view that the Steem inflation is what caused the push into SBD. People saw their account values dwindle. I know there's been a lot of reluctance of these same people to sell their SBD (there were even challenges to do this for a while).
I think this will resolve itself in time, as people being to trust Steem again to hold value.
I agree with @timcliff that at this point the action in SBD has little to do with STEEM or Steem users. It trades more or less independently on the Poloniex exchange (and others, but Poloniex is the largest) and in volumes that are far greater than what Steem users are responsible for.
What drives the SBD price is the value that is attached to it by speculators as well as overall demand in the cryptocurrency economy for stable tokens (especially given the problems that have surfaced with the market leader Tether). We've seen the same sort of sudden and large surge of trading into BitUSD (bitshares dollar token), except that in that case the peg was held much better because Bitshares has the ability to create new BitUSD tokens as needed to satisfy demand (by shorting).
a friend of mine wrote an interesting article about this:
https://steemit.com/steem/@mathsinnature/rethinking-the-steemit-monetary-system-wallet
It may have been what started us down the path, but at this point I think we have gone way past that as the reason. STEEM has been doing amazing recently, and there has been plenty of opportunity for people to dump their SBD in exchange for either STEEM or BTC/USD. I've discussed with a lot of other people, and I think there is more of a fundamental market-force at play. Traders are willing to buy/hold SBD even well past the point that they are guaranteed their "1 USD worth of STEEM" in return. There seems to be way more demand than the current circulating supply can satisfy.
Agree
I think the best strategy is for the community to just sell there SBD for STEEM, as it is basically getting STEEM at half price, since SBD is only meant to be worth $1, not $2!
Do you think this supports Steem at a higher price? Should I be buying Steem if I believe in if? I'm kicking myself for not getting more at 0.06 but if this is the new bottom at 1.50 should I buy more and power up or buy more and hold?
It's a very good question, but I'm not a trader. Personally, I think that in the long-term there is a lot of upwards potential, but I have little clue what it will be doing in the short/medium term.
Hell yes it will. Image the crypto bubble pops and people want to sell crypto for a stable asset without using banks..... this could push a lot of demand for sbd which then will push steem.
As a trader myself in SBD Tim, I just fear for the law of unintended consequences here. Any changes could make investors flee the SBD on Bittrex for example. This is already a v.volatile instrument to trade! Perhaps your plan could bring some stability to the price in the long term, but not in the short term. Interesting plan :) Upvoted.
Very good point. Short term consequences are definitely an item for concern.
I just wish the Steem price would catch up and surpass the SBD price ... that time will come though through good organic growth :)
Hope so too :) I feel that it will eventually. Likely sooner rather than later.
Looking at the daily charts I fully expect it to hit $2 before I get home from my 3 week vacation in Israel :)
This post is soooo relevant right about now... What is up with the SBD USD peg? How will it get fixed?
There is very high demand for SBD right now, most likely to it (and STEEM) getting added to a new Korean exchange recently. I agree 100% that this post is super relevant right now! IMO, the fix is what I propose here.
Absent that, witnesses can play around with their price feeds to increase SBD production, but if they do this it harms SBD->STEEM converters. It can also end up causing additional inflation in the long-term. So based on this, I do not think it is a good solution (which is why I recommended what I put above).
Assuming this doesn't get implemented, and witnesses don't artificially increase SBD production, then we basically just have to wait for supply to catch up with demand - which may take a while. In the meantime, anyone who has SBD gets an extra bonus when they go to cash out :)
True, that bonus sure is juicy lol. I honestly think that one of the factors that is exacerbating the problems with the SBD peg is the fact that most bots request SBD for their services. I think the SBD demand can be eased if all bots accepted both Steem and SBD.
The great thing about your proposal is that it will lift up the steem price. As people will buy steem to then generate sbd.
Ona nother note sbd will be required by the masses when the crypto bubble pops and this really help steem be stable when sbd is the best way to get out of cryptos without having to use fiat.
You make a great point! Something to consider. I have added you to my following. Thanks
@digestingreality
You have a new follower also!
Thank you!
Yea has to be done just like you suggested.
Btw the $2 price is great indication for steem but ubare right sbd is more valuable to the platform if the peg is stable.
Followed.
I hope it just grows and grows!
I support the idea, because it's important to preserve SBD as a pegged asset. I just have one minor point to make.
This process wouldn't destroy or burn the STEEM. It would move it from the balance of a user into the virtual supply. The virtual supply must always have enough STEEM to cover conversion of all the SBD in existence.
Even if the price of SBD declines as intended, it won't eliminate any of that STEEM. Future conversions back to STEEM will move the STEEM back into the total supply.
It's not the same as burning SBD through promoting posts, where the SBD is removed along with the appropriate amount of STEEM from the virtual supply. It's similar to conversions of SBD to STEEM, but while SBD conversions reduce volatility of supply, this proposal will introduce volatility.
It's a minor point, but an important one to consider when looking ahead. If the STEEM price declines after creating these SBD, it will increase the debt load and potentially also the liquid supply. This could hypothetically work to put further downward pressure on an already declining price.
It's still a good proposal, in my opinion. But we need to be aware of all the ramifications, so that we can respond proactively if need be.
But USD isn't an asset...
Why not find a way to burn them instead?
Thanks @bacchist! Appreciate the support of the idea, and the clarification. You are right about it converting the STEEM into 'virtual supply'.
Yes, this is the biggest concern against the proposal. One that is really only addressed in a serious way by the 10% debt limit. Pretty much any proposal that solves the high peg by increasing SBD production though (whether it be via reverse conversion or a premium price feed bias) is going to have the same effect. The main difference is that the reverse conversion process allows it to achieve the 'result' much faster.
Since you brought up the debt limit... maybe we can amend the proposal to remove the debt limit "haircut", since it will introduce a vulnerability where bad actors can single handedly drive up the debt limit. A bad actor could force a haircut, pulling the rug out from under SBD, buy them for cheap and then resell them after the market normalized.
The concern you brought up is valid, but there is also market manipulation that can be done without the limit in place. In my mind a bad actor could cause a lot more damage if they had the ability to create unlimited virtual STEEM, and then unlimited 'actual' STEEM in reverse.
The limit creates an existential/systemic vulnerability to market conditions already. I've posted about this in the past:
https://steemit.com/witness-category/@bacchist/witness-petition-do-not-abandon-the-peg
It has little benefit to offset the risk it represents. It is intended to mitigate the risk of a rising debt load that threatens to create destabilizing amounts of liquid STEEM. But in this case, the sickness isn't much worse than the cure.
You stated that your rationale for not using a positive bias to address the peg was that you wanted to preserve the "1 USD worth of STEEM" contract. Since the debt limit/haircut formally breaks that contract, you might want to consider whether that is something we can dispense of as well... or at least raise, to the point that it won't be an immediate concern as soon as SBD production halts at 5% debt load.
Moving it to even 15% or 20% will limit the vulnerability from bad actors if your proposal goes through, as well as allowing time for the throttling of SBD rewards to bring the debt load into a manageable range before the haircut.
I see your point. It is one of those things that has it's trade-offs. It just depends on which positives/negatives you weigh more heavily.
I do see the limit as different than a price feed premium, as it is coded in the blockchain - thus part of the 'contract'. The fact that it is not very well known/communicated is a different issue, but not one of violation IMO.
I am definitely open to discussion about the 'right' numbers. I suspect the ones we have today were largely arbitrary choices, and there may be better limits to have in place that would accomplish the same goal of mitigating risk without having as much of a negative side effect.
I do think though that wherever the limit is, there will be a natural tendency for the peg to get pushed down as the debt level reaches 50% of the limit (currently 5% debt) and definitely even more so when it reaches 100% of the limit (currently 10% debt).
To a large extent, regardless of where the limit is, I think the biggest risk in the whole thing is getting to 50% of that limit, and then seeing a 50% price drop in STEEM. Unfortunately wherever we place the limit, I think that risk will always be present so long as the limit is in place.
Likewise the ability of witnesses to feed any data they want as the alleged price is also coded into the blockchain. If stakeholders don't like it they can vote those witnesses out. So far we seem about evenly divided between voted witnesses using a premium (and doing so with at least some rational basis, not just feeding garbage or clearly-malicious values) and those not, so no clear stakeholder preference, but I'd still argue none of this violates the smart contract in the code.
Hi @smooth, glad you're back (heard you took a holiday)... I don't mean to chase you all round Steemit but I need you to check your Chat messages please. Thanks!!!
It is a valid point, and I know that you didn't mean it literally, but I think the idea that the witnesses can put in 'garbage' and cause the conversions to produce less than $1 USD worth of STEEM without getting voted out is a precedent I feel we should avoid. Not to say there aren't valid reasons for the 'garbage' but it does undermine trust in a part of the system that relies heavily on trust.
Maybe. When one considers "existential/systemic" vulnerabilities as @bacchist claims, there is a reasonable argument that should override other tradeoffs (at least others that do not also involve such systemic risks).
That being said, one can question whether his claim is correct. I have some similar concerns.
I see existential/systemic vulnerabilities if there is no debt limit :)
I should also point out that if this proposal goes through, the calculation should be independent of the haircut. IE, if the debt load surpasses 10% and SBD -> STEEM conversions produce less than $1 of STEEM, it should never cost less than $1 of STEEM to create 1 SBD. That would be a catastrophe.
Agree 100%
Agree on your entire comment, but just to clarify on this one point, this is simply leverage, and works in both directions (both up and down) and, in general, the leverage ratio is quite low (1.1x at the most). In fact I would argue that in most circumstances that low of a leverage ratio is reasonable to ignore. The extremely poor liquidity pre-HF16 might have been a circumstance where it wouldn't be, but even that I'm not sure about. A situation with bad liquidity and declining demand is probably just about as bad with 1x leverage as with 1.1x.
I don't think we should be playing the role of central banker by trying to manipulate the currency to our desired target. Rather, I believe we should let the market work and it will eventually find what it determines is a fair price.
That's a valid philosophy but it isn't what SBD is.
SBD is a managed pegged asset. It is essentially managed by people who are not literally central bankers but metaphorically are in that they perform similar functions, as described in the Steem white paper (for example, setting interest rate policy). It literally isn't possible to avoid doing so because there is an interest rate parameter and a decision must be made what value it should take (potentially including 0%).
In fact, the interest rate on SBD can even be negative to uphold the peg if needed. This may help to get the peg back to 1:1 quite rapidly.
It could, in principle, but that function is not implemented in the Steem blockchain.
In the STEEM world, I agree with you 100% - but that was not the intention behind SBD. Based on what is in the whitepaper, the intention of SBD was for it to be a stable currency, and the blockchain is designed to allow 'manipulation' with the intention of 1. holding the peg, and 2. honoring the 'approximately 1 USD worth of STEEM' contract via conversions.
Surprised this isn't in roadmap suggestions unless I've missed it...
SBD well over $2 now.
I could be wrong on that but I feel like the price is pumping because people want to invest in steem but they don't want to buy a currency where the whitepaper said there is 100% inflation.
Even in our own community people still believe steem is hyperinflationnary.
Imo it was very bad to the price to not update this whitepaper, the damage has been done now...and steem will need some solid PR/marketing to reinform people on this currency.
It would be really nice to be able to push the price of steem up when SBD is pumping, to me that's logical since they are inextricably linked.
It should have been. SBD had been pegged slightly below $1 USD for so long, that it wasn't on the radar. Unfortunately the post is past 7 days old.. There are other avenues for getting changes on the dev team's radar. With the SBD peg way off again, this idea is getting more attention. We'll see if it becomes enough of a priority to justify dev work.
@shenanigator
I would tend to agree with you because that is the whole point of cryptocurrency, in my opinion. Free markets, less control without a central bank equals a more fair system and community!
Yes and that is why STEEM is the currency. SBD is a pegged asset, not a crypto currency.
@justtryme90
Makes a lot of sense! I appreciate your thoughts on this issue.
That's silly. STEEM and SBD were born from human beings that designed the system. So there is actually full manipulation from its inception. If such inception is projected to give bad outcomes, it must be corrected for the sake of the investment people has made on it. There is no escape to manipulation, since it was already manipulated by its human creators. Markets can go wrong. Good thing is that changing the protocol is sort of democratic/elitist so I have no doubt it won't do any silly changes (hopefully)
a friend of mine wrote an interesting article about this:
https://steemit.com/steem/@mathsinnature/rethinking-the-steemit-monetary-system-wallet
This article made a lot of sense. If we want a stable SBD we need mecanisms and incentives to push the price in both directions and currently there is no incentive to dump SBD. I don't know all the implication but to me this seems to be a good idea.
A negative interest rate on all SBD can help with the peg. Should not be too hard to implement in an update I hope...
This would only be a temporary measure of course when the peg is out of wack by lets say 20% or something.
There is an incentive to dump SBD but it is a slow, plodding one, as more and more SBD is created to pay rewards and none is ever destroyed (because the only mechanism for doing so, conversions, are strongly disincentivized when SBD is >1 USD). This proposal would speed up the process so the supply and peg can better track demand in a useful time period, rather than potentially over months or years.
If we are going to have a price stable currency, it should have price stability. Otherwise it's a failure.
But do we really need that? My opinion has been that it's great addition to ecosystem: people can build marketplaces. But so far we haven't seen any serious movement to that direction.
Another missing feature is privacy. People aren't going to buy and sell stuff with a currency of almost zero privacy. It's not even on a roadmap.
Right now SBD is beneficial to the ecosystem because there is so huge demand for a price stable cryptocurrency. But that might not be forever. In that case SBD might become an extra feature that's more of a nuisance than actual benefit. It just creates extra risks to the ecosystem.
But on the other hand, if we want to keep SBD, we have to find a way to create more of it to answer the market demand.
Another possibility, in addition to OP, would be to move to a Bitshares-like system. Just remove the liability from the blockchain and give it to the users.