Some users have asked why anyone would use the 7-day Steem Dollar conversion function when they can trade their Steem Dollars on the market instantly. I'll explain in this post with a simple example.
This post involves made-up numbers and a simplified model that does not reflect actual trading conditions -- the model ignores transaction costs, spreads, and exchange rate risk. The reader undertakes any trade entirely at his/her own risk!
First, let's imagine the following market conditions apply to Steem:
- (1) BTC/USD trades at $600 per BTC.
- (2) Steem / BTC trades at 0.005 BTC per Steem.
- (3) The Steem / BTC and BTC / USD prices are steady and will not change much over the next 7 days.
The witnesses report these market conditions to the blockchain in the price feed. You can see the currently reported feed values at steemd.com witnesses page or in the command line wallet. With honest and competent witnesses, we should have the following situation:
- (4) The price feed reflects the value of $3.00 USD / Steem implied by (1)-(2).
Finally, let's look at the Steem Dollar / BTC market, and for the purpose of this hypothetical example we'll imagine Steem Dollars are too cheap:
- (5) Steem Dollars / BTC trades at 0.0015 BTC per Steem Dollar.
The following trade is then possible:
- Convert $5400 USD to 9 BTC by (1).
- Buy 6000 Steem Dollars with 9 BTC by (5).
- Convert 6000 Steem Dollars to 2000 STEEM by (4).
- Sell 2000 STEEM for 10 BTC by (3).
When this trade is possible, market participants with deep pockets should step in and do it, which will drive the price back up toward $1.00 -- it is highly unlikely Steem Dollars will ever trade much below $1.00 for long.