What happens if there is huge demand for Steem dollar?
Here is a little thought experiment: What if people around the world realize that Steem dollar is actually really good currency and start to use it?
Maybe some economic crisis in a third world country drives people to look for a way to protect their wealth. Transactions in Steem blockchain are free, so it's very affordable to use in everyday business – even for poor people.
Usually when the demand for something goes up, the price goes up as well. But if the commodity in question happens to be price pegged to another currency, price should not go up. That's how SD works – it's pegged to USD.
If there is lots of demand but price will be the same, then the quantity should go up. But that's also impossible, because SD is not created to satisfy demand. Instead, the blockchain creates it for Steem users as a reward. How much is created depends on how valuable the blockchain is.
My initial thought is that it's very possible to see that there are times when SD will be traded with price significantly more than one USD. This will very likely raise the value of Steem blockchain, which will then create more SD – but how fast this mechanism can respond to the demand?
Price peg mechanism includes an internal exchange for Steem and Steem dollar. Because there is also a liquidity reward, I'd guess that the peg will hold quite well at least in there – traders have incentives to trade close to the peg. But other exchanges might be a different story, at least in the beginning when most trades for SD are made with Bitcoin in other crypto exchanges. But this will create great arbitrage possibilities for traders, so in the long run peg should hold everywhere.
Any thoughts? The Steem blockchain has some unique features which make it difficult to understand and predict how the prices will evolve over time.
I think that if more and more businesses realize "what's the catch" with STEEM, they will start adopt and use it too.
I am also donating 15% of a STEEM based crowdfunding campaign to the STEEM dev so they can continue the development of the platform. Here are the details: https://steemit.com/introduceyourself/@gabi-dumitriu/hello-steem-community
So if more STEEMERS start using the concept or the steem or anything related to it, the impact should be reflected in an natural price rise or a broad steem adoption.
I addressed much of this in the white paper, but will address it here to.
As demand increases, the witnesses will lower the interest rate until it reaches 0. The lowering of the interest rate should be done only periodically (at most once per month). This gives markets a chance to adapt to the new rates.
If demand surges beyond that, witnesses can adjust the price feed to give less steem per steem dollar. A side effect of this will be to increase the rate of issuing Steem Dollars.
Effectively, a surge in the demand for Steem Dollars will show up as a surge in the price of Steem.
Thanks, I totally forgot the interest rate. I wrote the post quite quickly, didn't even checked what whitepaper said.
But I don't think it will make much difference in this situation. If there is huge demand, people don't care how much they get interest. Probably most of them are just fine with 0 %. They are mostly looking for a way to protect their wealth in a bad economic situation.
Sudden huge demand is possible because SD is so useful: it's free to use, it's fast, there is no limits who can use it and how it can be used. This might cause a situation where demand for SD is bigger than demand for USD (if transfers for real fiat currencies are limited).
What's going to happen if price is pegged to SD=USD, but actual demand is bigger for SD?
Similar situation has happened earlier with coins that have been made with precious metals, but later changed to cheaper material while keeping the same nominal value. This has made earlier coins much more valuable, but that's not possible with SD (if the peg mechanism holds).
My guess is that because arbitrage will be possible through different ways, the peg will hold and it will cause price of steem to go up. After all, steem is the currency that is supposed to take all volatility while SD is stable.
So... If the value of Steem will go up because of huge demand for SD, it means that the blockchain will create more SD. But this will not be given to those who demand it. Newly created SD will go for writers.
This might cause a situation where blockchain is paying huge sums for writers, which will of course incentivize more people to write, which will make Steem more popular and it will cause the price of Steem to go even higher.
That's a pretty good analysis, basically there are 21 times the amount of Steem tokens to Steem Dollars, so the idea is that you use as many Steem tokens as it takes to make up SMD 1.
So if Steem is worth fifty cents, it will take two to make a dollar and of course 25 cents will make 4.
As far as we're concerned we want Steem to be as close to a dollar as possible, though the financial technicalities escape me, I know that traders like stable currencies that they can make good long term profits on. So the more people who are aware of Steem, then the more traders there will be, which leads to better prices, which leads to joy and happiness for us Steemsters.
:-)
CG
I'm guessing the amount paid out could,should,might or may be the amount that was spent on Steem, id est (i.e i.e) how happy people are with the content. Then if speculators put it in a bubble and you make a brilliant or inane post that goes viral you'll be rich. I haven't read the white paper, but I've heard its good.
While only a partial response to your post. Here is my contribution:
Thanks! This is a good explanation for price stable currency in general. But the mechanism for SD is different from Bitshares.
In Bitshares it's possible to create new BitUSD whenever market demands it. But Steem doesn't function that way, it will only create new SD for writers and amount is determined by value of the whole blockchain. So the response for market demand will be slower than it is in Bitshares. How it will eventually play out is something that I'm trying to wrap my head around.