Delegated Proof of Stake (DPoS) and Free Market are Incompatible?
Following my last article about SBD and a possible price manipulation problem on Poloniex (all speculation, obviously), I observed a certain trend in the comments. People were swinging between "there is a free market out there and everybody is free to do whatever he wants" and "the peg should be maintained / enforced".
The problem at hand is SBD, or Steem Backed Dollar. In the Steemit ecosystem, this is a "smart contract" enforced by witnesses, which make sure that 1 SBD is always equal $1 worth of STEEM (as you can read it on your wallet right now). In order to make sure that 1 SBD always stays at this price, witnesses act as oracles, by publishing price feeds, or quotes. The price is calculated as median average of those price feeds.
So, in the internal market, SBD should always be equal $1 worth of STEEM, provided that all witnesses are correct (which you may see in a very transparent way, since the price feeds are just transactions on the blockchain and everybody can look at them).
But once we take this out of the realm of Steemit, and we make it subject to supply and demand, SBD price is no longer maintained by the price feeds published by witnesses. That makes it speculative.
It is no longer governed by price feeds, but by greed and fear (like all the markets). That makes possible spikes like the one we saw during the last few couple of months. Some people are pumping SBD, simply by creating FOMO (Fear Of Missing Out). And that creates a discrepancy between the price in Poloniex, for instance, and the price in internal market.
So, which is one is better? Should we have a free market in which everybody rich enough could speculate the price of SBD (which is, like I said, mostly a smart contract) or should we just stick with the witnesses acting as oracles inside the Steemit ecosystem?
My position is that we should maintain SBD as an internal store of value object and should refrain from trading it outside the internal Steemit market. The temptation might be very big, if we see it trading on exchanges at 50-60% higher than on the internal market. But keep in mind that SBD has the role of maintaining a certain level of health of the broader Steemit ecosystem and, as such, it should be somehow protected.
This position is based on the fact that Steemit is not a free market. It's a Delegated Proof of Stake market. All transactions on this ecosystem are validated by witnesses, which are freely and openly voted by all the members of the network. This is in stark contrast with Bitcoin or Ethereum, where all transactions are validated by miners, which can obviously collude in influence groups to seize control of the market (which, if you are following the segwit / bitmain discussions, it is already happening).
I personally think the DPoS system is a much better governance model than PoW. It gives more people access to value and it can be corrected and amended much faster (Steemit had 19 hardforks without any side chain so far).
By delegating your stake in the network to witnesses (a.k.a. voting for witnesses), you can ensure that the entire ecosystem works as advised.
In this case, you can make sure that a SBD will always be $1 worth of STEEM. In a world in which Steemit's DPoS governance model will be more widely supported, this will obviously make SBD as a very attractive store of value tool, protecting you against STEEM variations.
The only reason that some people are not realizing this is, in my opinion, lack of education and a bit of greed. I bet that less than 50% of the people trading SBD on external exchanges right now have any idea about how and why SBD works. If there is a slight difference between the price of the internal market and exchanges, it's clear that, in the very short term, you can make some profit off of your SBDs. But once you understand the inner working of Steemit, there's no advantage, medium and long term, in trading SBD at a higher price than $1 in an external exchange.
But there is a medium and long term pressure on the Steem price if you do.
I'm a serial entrepreneur, blogger and ultrarunner. You can find me mainly on my blog at Dragos Roua where I write about productivity, business, relationships and running. Here on Steemit you may stay updated by following me @dragosroua.
https://steemit.com/~witnesses
If you're new to Steemit, you may find these articles relevant (that's also part of my witness activity to support new members of the platform):
Thank you @dragosroua, some of the finer details of the SBD role had eluded me earlier but now it is crystal clear!
Glad it's helpful.
I totally agree with you that very few people understand how SBD works, not even 10% do, they just want to take quick profits when it is heavily manipulated on exchanges like poloniex. People who are buying SBD greater than $1 should stop immediately, then the price will settle to its peg and things will be normal.
Your concerns are one reason I wrote this article just today: Time to Have Advertising on Steemit? It May Increase Your Earnings. What Do You Think?.
Not because I love adverts, but to have an external income stream to help support the crypto steem.
Regarding my previous question, this would make the most sense. It was contradictory to trade it freely and keep it at 1 USD. You can peg it to the dollar in a closed system or with a lot of intervention, but the market adapts and puts pressure on it. It is something like the swiss franc which was hold by the state to a lower value, till the market pressure made the regulations to be lift of and the value skyrocketed.
Only a fraction of the entire Steem supply is pegged by SBD. But it's enough to put pressure on the price. If the community could maintain the peg for the amount backed by SBD, then the price of Steem itself should be much more interesting.
Think of SBD like some kind of "vault". Not all the people will keep their assets in a vault, but those who are keeping it, they want the vault to be impenetrable. That's the role of SBD and that's why it doesn't peg the entire supply, leaving the majority of it freely floating on exchanges. So the comparison with Swiss Franc only holds to a certain point.
Very interesting approach. Thank you for the explanation of all these points.
You're welcome hope it's useful and you will start educate yourself more. The more we know, the better we'll be.
The steem-dollar has always been a risky business in my opinion. It's basically a loan and in bad times it will be difficult to pay back all the Steem.
Precisely :)
if SBD has to be always equal $1, why it is opened for exchanges? (isn't it samething with tether?) And in this situation why witnesses should try to keep always 1SBD equal $1? Maybe in next hardfork steem founders should blocking transfer sbd to exchange accounts. sorry for my bad English
SBD should be fungible, meaning you could get it from everywhere. The problem is when it is speculated. This can happen to any asset (any it is happening all the time). I just wanted to point out what are the implications for the Steemit ecosystem.
"The only reason that some people are not realizing this is, in my opinion, lack of education and a bit of greed. "
And unfortunately, the loudest voices in many chatrooms are just teenagers yelling about pumps and dumps and trying to not even day trade but minute-to-minute trade the market and get $$$hella rich$$$.
It helps having people like you spread the word and reminding the steem population - SBD going closer to $1 is a good thing! It's not a speculative asset, it's a peg. I would personally love being able to keep some of my steem money in SBD at times and knowing it won't have a sudden shift in value.
Exactly!
I did not know any of what you just said. I am just learning about cryptocurrencies. I am not sure I understand the difference between supposed free market speculation (theft) and the witness "It's a Delegated Proof of Stake market." , but I can tell you I will. lol
There are a few links at the end of my posts, they are supposed to help newbies. Do read the one about witnesses, it should shed some light.
Yeah I like "Witness what are they and why should you care.". I haven't had time yet to study all the Witnesses and really there is a mountain of data in this virtual world. It is just going to take some time that is all.
As far as the value of steem. It being hooked up to the ponzi scheme criminal organization called the U.S Federal Reserve, is what makes me nervous. The U.S dollar is almost as valuable as my toilet paper. If it wasn't for the fact that it doesn't make very good toilet paper, I'd use it for that purpose.
The fact that our legal system is fictional and does not represent sane legal adjudication would be funny if it wasn't so harmful. I have often felt as if bugs bunny was trying to hand me a carrot and forcing me to take a bite, as if the carrot which doesn't exit is going to nourish me. The governments are completely insane.
I am not complaining by the way. Just stating the facts. lol
Yeah it is just going to take time for me to digest it, but I will take the time.
Steem is a decentralized autonomous company (DAC) which is offering a few different services to the free market: Publishing platform, payment network and price stable cryptocurrency (SBD).
So to talk about free markets in this context seems to be quite weird. Steem is the organization which is operating in the free market. The question is: what is should do? How it should be serving its customers?
Currently SBD is a failed product because it doesn't work as it's supposed to work. It's financial instrument that tracks the value of US dollar but it's been failing for a long time now. It's clear indication that the design of the product is bad and needs to be fixed. Or, as I would recommend, remove it from the blockchain.
Thanks for the comment. To a certain extent, I agree that the design of the product (SBD in this case) can be improved. But I would definitely keep some protective layer (which SBD is, at the moment) if that is possible within the main design of the DAC.
My question regarding the coexistence of DPoS and Free Market was related to the comments I received, and you pointed out even better than me how things actually are. Well said.
A little bit better might be to say that SBD is a product that's half successful. The basic promise that Steem DAC makes when marketing the product, has two features: Price of SBD won't be less than a dollar, and it won't be more than a dollar. It has kept the peg downwards, but the upward peg has been more or less off too long time.
Usually companies/organizations are not successful in the long run if they offer failed products for the markets. That's why I think it should be removed. I don't think Steem community has enough skills to rewrite the system and make it work as promised.
Hi @samupaha,
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