The Impact of Price Feed Discount on the Market

in steemit •  2 years ago

As suggested in Dan's post, discounting price feed is a way to improve SBD peg. After his suggestion at 2016/9/19, each witness started to discount its feed price by 7~14%, and the SBD market price went up from $0.86 to $0.96. Aside from this positive effect, I want to point out another effect and related market opportunity.

Data

  • Period: 2016/7/19 ~ 2016/10/9
  • Price sources
    • Poloniex: STEEM/BTC, SBD/BTC, BTC/USD
    • Steem blockchain: FEED/USD

Analysis

The meaning of price feed discount is simple: giving premiums on SBD by discounting STEEM. This has direct impact on total reward amounts since the market cap of STEEM determined by the feed price is also discounted. Meanwhile, premiums on SBD incentivize to buy SBD at higher price because there are less risks in SBD-STEEM conversion.

In addition to these direct effects, I found one more impact. Discouting the feed price can lead to facilitate STEEM price decrease. Let's look at a graph first.





The blue line(steemusd) represents market prices of STEEM in real dollar (STEEM/BTC * BTC/USD). Orange line means STEEM price in SBD (median price feed). Green line means STEEM price via conversion (median feed price * SBD market price at 7 days ago). So an implication of this graph is simple. If the green line is below the blue line, you can earn money via conversion. For instace, we have +28% difference at 8/8. We can (1) buy SBD at $0.81 at 8/1, (2) convert it to STEEM, (3) buy STEEM via conversion at the median feed price of $2.07, and (4) Sell them at the market price of $2.14. So 28% comes from (2.14 / 2.07 * 0.87) - 1
However, if the market price fastly decreases, the lagged feed price can be higher than actual market price. Actually, without cheap SBD in market (orange line), SBD conversion is not profitable most of times, and we can even see that the green line is above the blue line after some price deeps (e.g. between 8/9~8/13)


But what happens if we discount the price feed? There is more possibility of earning through conversion since the orange and green line are shifted down. The next graph shows the differences between STEEM market price and STEEM price via conversion, if it aboves zero, it means you can earn via conversion.





Here, it is notable that 3.5 days after Dan's suggestion, the graph is always above zero.
Then, how much incentives does the discount provide? If we assume the price moves perfectly linearly, the discount gives x2 percent of a safety zone. That is, if discount is 10%, the conversion stil earns money unless STEEM decreases 20% (10*2) a week. Although the sample size is small, I plotted STEEM market price change (x-axis) and the difference between STEEM market price and STEEM conversion price (y-axis), and tried to regress before and after the discount, respectively. Since the discount level is 8~10% (witness's median), I expected the change between the before and the after is 16~20%.





According to the regression results, the conversion tends to lose money if STEEM price decrease a week is over 19% before the discount. However, after the discount, the conversion is more protected (36%) from the price decrease. The difference is +17%, which falls in my expectation of 16~20%.


This implies three things.
First, we can have more opportunity to earn money via SBD conversion
Second, thanks to the incentive, there will be more buying power on SBD
Thrid, however this can generate more selling pressure on STEEM


Explaining the third point, traders who convert SBD easily can sell STEEM because their breakeven point is lower(e.g. 36% decrease a week). So they can do the process (convert SBD, sell STEEM, buy SBD, convert SBD ...) more actively. In this sense, I think that we need to make a balance in the discount rate, because low or no discount rates can break the peg while high rates can push STEEM price down quickly. Therefore, witnesses should consider this mechanism and provide their feed prices wisely, and voters should prudently select their witnesses.


FYI: Currently my witness provides price feed discounted by 5% (and maximum 7% depending on the market condition)

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There is an equilibrium point where demand for Steem Dollars at $1.00 and the price of Steem meet.

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That sounds great. Can you elaborate?

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The market is looking for it. Let's see.

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Is there anything that can done to slow the price decline or are we just going to let market forces dictate the price? Dilution was implying a 2% drop per week on average, yet we are falling something close to 12-15% per week...

Excellent analysis, thank you!
resteeming

Since the backing of SBD is done with STEEM, it's only natural that if the price of SBD goes from, say, 0.80$ to 0.95$, you'll need more STEEM (which gets dumped).

Stronger peg near 1$ = more STEEM are used.
Looser peg = SBD is way below 1$ and less STEEM are used.

FYI: Currently my witness provides price feed discounted by 5% (and maximum 7% depending on the market condition)

What is missing from your analyses is the discount that the converters should demand. This is due to the risk of loosing money if the drop is big enough. As you pointed out yourself, this can and do indeed happens. In that regard your discount is not enough and you should be voted against as a witness.

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Loosing money happens if the price falls dramatically. But the discount rate allows more price decrease for making a profit via conversion. And I am not a witness that provides the highest price feed. Some of 19 have 1~7% higher feed than mine. Please keep in mind that the price feed is median of 21 witnesses, and 7 day median.

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What is your point regarding the median witness? By this logic you can feed a price with a premium as well. As long as the median one is correct yours does not matter??? True some witnesses have higher price than yours, hell some don't even bother with a discount. Yes I am talking to you @datasecuritynode (guess you're too busy with own 'plays' / projects)

What is really concerning is your make your post on a day of single day 16% drop in Steem price and you say that your 7% hard max is enough! Not even close 2*7% = 14% is still short of being correct!!!

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I am not totally against discounting price feed. Given the small SBD ecosystem, we need to reduce debt (SBD) to protect the whole STEEM ecosystem. But my point is that (1) the discount rate should be wisely determined and balanced, and (2) people need to know they have opportunities to earn via converting SBD.

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Unrelated question - Is enki your bot?

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Wow, Great explanation! Thanks

I've been trading the range with a little arbitrage buffer from poloniex to bittrex.

There's certainly someone loading up on Bittrex though to make the transfers. Thanks for this post, I realised the SBD push up was due to the price feed changes. Thanks for the quant data :)

I think once the SBD gets to an equilibrium close to $1 it will be more valued and more likely to be held and actually used for commerce. That combined with liquid steem increasing... might be the fundamental drivers to shift Steem power demand up.

This is very interesting, thanks for sharing! It also might partly explain the acceleration of Steem prices to the downside over the past several days...

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I think so.

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I resteemed this to help get the information out there! Thanks again for putting this together.

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Thanks! 😉

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Yes, when @steemit account (and its siblings) was buying SD at par, at random intervals, things were was WAY better!
Increases of Steem price day after day! Like a rocket to the moon, as far as I recall that is!!!

Thankyou for your analysis and new price feed discount range, I hope other witnesses pay attention to this and lower their price feed discounts.

SBD need to become a reliable peg before the price of STEEM will increase.

Nice graphs and analysis and I upvoted even though I almost completely disagree with your conclusion.

When Dan proposed a witness feed discount, SBD was at about 0.80 USD (sometimes even below that). Shortly after he proposed a 10% discount and most witnesses implemented it, SBD rose to about 0.90 USD. It has slowly risen over the following weeks to about 0.93 or maybe 0.94 USD (some range around that at least). This included some, but not all, witnesses implementing even higher discounts of 12-14% (currently the aggregate discount is around 9-10%).

Based on these observations I don't find a 5-7% discount likely to produce the desired results of a both a functioning USD peg and a transitioning to a lower debt load in any reasonable period of time. However, I can't state this as an absolute fact, since it is ultimately up to the market.

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My discount rate is not the conclusion but just my personal disclaimer.
One of my point is many people should recognize this market mechanism and opportunity so that they can participate to improve SBD peg.

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Okay then, I misinterpreted re. conclusion. Agree.

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