RE: This Post Is A Non-Scientific Study - Are You Ready to Buy?
SBD is essentially debt held by Steem holders collectively. There is currently 12.7 million SBD in existence. At $0.01, the current supply of Steem would be worth $3 million.
At that point, SBD will be in almost complete default, since SBD is no longer fully backed by Steem once it's above 10% of the virtual market cap. In that scenario it's 80% of the virtual market cap.
As the price goes down, SBD's are worth more and more Steem, at least if conversions are happening. Every conversion increases the total supply of Steem and reduces the inflation protection provided by the 10% limit on further conversions. If people decide to arbitrage SBD (buy and convert whenever it's below a certain price based on what you would get from Steem), you will eventually get to the point where conversions are creating millions of Steem, potentially more than the current total supply of Steem.
So far the fact that SBD is no longer issuing $1 worth of Steem has discouraged SBD conversions. Some large stakeholders may be deliberately holding onto SBD to prevent a downward spiral of their vested Steem. Or it may be purely psychological, because it can still be rational to convert SBD when the price goes below a certain amount, especially if you don't hold Vested Steem yourself.
But it would also be trivial for an attacker to buy SBD at highly discounted prices, and convert it to massively inflate the supply. They could profit from this by shorting Steem before they do.
Interesting idea you have there. Have you factored in the new steem emitted daily?
SBD is a debt instrument this is correct.
Anyone who converts SBD at the moment gets a haircut in it's value based on the the total of SBD to liquid steem available on the internal market.
On the external markets. I think people who bought SBD as a dollar pegged stable coin will be selling it asap which will further drop it's value.
As far as vests go. If we hold steem then the number of vests related to that steem increases annually at 9.5% this year and 9.0% next year etc. Due to the current inflation ratio of steem
This statement above is not possible. It doesn't make any economic sense.
We cannot have more steem than the current supply.
I'm trying to follow your train of thought. Can you elaborate?
This inflation rate only relates to Steem created at point of issuance. When Steem from reward pool is turned into SBD, it takes that and creates "Virtual Steem". This Virtual Steem becomes real Steem via SBD conversions, but at the rate given at the time of the conversion, not the time of initial issuance. 1 virtual Steem has the potential to be 10 or 100 real Steem some day down the line.
Check out this chart of Steem supply by @socky. Notice the curve upwards during a period of high SBD conversions in November. The real inflation rate in Steem is variable due to SBD conversions.
I'm afraid we're confusing terminology. I'm talking about the convert_sbd function which is the smart contract backing the SBD token. You're talking about the rate of exchange on the internal market. They are two completely separate issues. The SBD smart contract is completely independent from the internal market price (although internal market price will affect the behaviour of those engaging in conversion arbitrage).
We have more Steem than the current supply every day. It increases above the current supply every day.
Current supply = 287 million Steem. In a scenario where the price of Steem goes low enough, and SBD is being converted, you could see more than 287 million Steem created via SBD conversions. In fact it could be billions of Steem, worst case scenario.
Thank you for the detailed explanation. I can see clearly what you are getting at now.
From new emissions I'm assuming?
The sticking point for me is this.
Aren't these SBD conversions buying up existing steem?
And isn't the SBD used to buy the steem burned?
I get what you mean about the virtual steem being created from converting steem to SBD and the mismatch between issuance and current price but it still doesn't explain how this virtual steem can be valued without reference to the quantity of steem in circulation.
We have some weird economics going on here?
Edit: OK I get it now. Steem and SBD on the open market.
That SBD isn't burned.
That is not good at all. Damn!
Just noticed you are from the Isle of Man. Cool I'm in Cambridgeshire and collecting Brits. Do you know about the @steemclub-uk initiatives?
It's more like this:
There's a total amount of "Real Steem". That's Liquid Steem + Vested Steem combined. There is also Virtual Steem, which is the Steem behind SBD. The Real Steem normally increases in a predictable way. New Real Steem is added to the vesting fund and the reward pool every day, and given out to users. Every day there's a little more, but in a predictable fashion. However there's one more way that Real Steem is created, via the conversion of Virtual Steem (SBD). When convert_sbd is used, the network doesn't buy Steem that already exists, it creates it from Virtual Steem. The supply of Virtual Steem can change in a much less predictable way than Real Steem, because it's totally dependent on the price feed. If the price of Steem drops one day by 10%, the amount of Virtual Steem can increase by 10%, or vice versa.
Back when Steem was $9, each SBD had only 0.11 Virtual Steem behind it. At $1, each SBD represents 1 Virtual Steem. At $0.01, each SBD represents 100 Steem in theory. It's more complicated than that due to the limitations after SBD is more than 10% market cap, right now each SBD represents merely 2 Virtual Steem, even though there's 4 Steem to a dollar.
The predictable inflation for Real Steem potentially goes out the window if the price of Steem is low enough, because when that Virtual Steem which was created at only 0.2 Steem per SBD gets realized (ie. converted) at 2 Steem per SBD, that's ten times the inflation. We're currently being protected from it being converted at 4 Steem per SBD by the 10% rule, but the more conversions happen the more Steem is added to the market cap, the less protection that rule gives.
This is a sobering and very useful and helpful explanation @demotruk I'm pretty sure most steemians are unaware of this state of affairs?
Do you think it would it be possible to hardfork out of this current dire situation?
It's not necessarily a dire situation right now. It's a risk associated with the fact that Steem itself carries debt. Certainly the older Steem people who started with the white paper and also those who were around in late 2016 are aware of it, because it was a widespread concern back then as well.
Yes there are solutions that could be implemented via hardfork. It is unlikely to avoid violating the integrity of the social contract for SBD though.