RE: The Steem-Backed Dollar (SBD): Having your cake and eating it too
Your understanding of SBD is slightly off. SBD can only ever be created by rewards or to pay interest and is only ever destroyed when "burned" or "converted at feed".
Every article I have seen addressing the top of SBD's impact on STEEM has been entirely one-sided, when in reality it is "neutral".
STEEM has a natural level of volatility. SBD removes volatility by transferring that volatility to STEEM. No volatility is created nor destroyed, it is merely transferred.
SBD is also not RISK free.. it is a reduced volatility asset with a much higher risk profile than many dollar pegs. Most of the risk shows up in short-term volatility that can be +/- 2% these days (aka Liquidity issues).
The interest paid on SBD is simply compensation for accepting the risk.
SBD adds to the STEEM market cap, it does not take from the STEEM market cap. Those who hold SBD are lending the network money and are choosing not to hold STEEM. As a result they are contributing capital to fund rewards.
There are two ways of financing, debt and equity. There are two types of capital available in the market (lenders and investors). SBD allows us to tap both sources of capital.
When STEEM grows, SBD gives all STEEM holders leverage! So those who are long-term bullish on STEEM make more money when steem grows with SBD than without SBD.
SBD is "bad" for investors when STEEM is falling in value only because lenders have a higher priority than investors.
Most founders prefer debt financing because it means they get to keep more of the fruit of their labor. If you use equity financing then you are sharing the gains with more people.
Hi Dan!
The most important point is that the high positive interest on SBD IS a one-sided drag on STM. IF the interest were allowed to go negative and were properly managed, then YES, what you say would be true. Unfortunately, the interest rate is managed to make SBD attractive which then transfers all the downward volatility PLUS that attractiveness tax to STM.
IN THE REAL WORLD - The interest actually paid on SBD is MUCH HIGHER than should be the case for simply compensation for accepting the risk.
SBD + STM == STEEM Market Cap
If you give SBD too high an interest rate, STM suffers massively and the downward spiral begins. The lenders of your scenario are charging too high an interest rate and are bleeding the community dry. We need to separate STM from them if it is to survive.
P.S. I do understand when SBD is currently created and destroyed. I am proposing a radical change to that scheme.
I agree with your assertion that the interest rate is too high and I've been continually active in trying to convince other witnesses to lower it (my current vote for the rate is 6% and I intend to go lower still). However, as with most of these SBD arguments your statements are incredibly hyperbolic. The total amount of SBD outstanding right now is about 1.2 million. 8% of that (the current APR) is about 100K/year. That's 0.3% of STEEM's market cap. That is the cost of the interest. This is hardly bleeding anyone dry now, nor will it ever.
The same applies to all of these alarmist arguments about SBD in terms of allegedly excessive selling pressure from conversions, the supposedly enormous cost of feed discounts which are sometimes used to support SBD value and incentivize conversions, etc. It is a story people want to hear when the price is falling because it feels good to have something on which to attach the blame, but when you work out the numbers it ends up being very much like the above, and it doesn't hold water.
AHA! I didn't realize that there was "only" 1.2 million in SBD. I had believed that it was much higher. Thank you for the education. I now agree with your conclusions (and will edit my post accordingly).
TL; DR - The interest payouts on SBD are far higher than they should be which is a drag on the entire system that shows up only on the STM side. All the equity is bleeding from STM to SBD and making the community-building voting and payouts MUCH less valuable.
Thanks for explanation dan. Why on earth every one have to be forced to involve this shorting smart contract instead of let individual choose to like BitShares?