Why SBD is trading so high (and how you can help)

One of the three token types on the Steem platform is the "Steem-Backed Dollar," or SBD (the other two are STEEM and VESTS). The SBD is a so-called "pegged" token, which means that its value is meant to closely track the value of the US Dollar. If you're new to cryptocurrencies, this might not seem like a big deal, but if you've been around Bitcoin for a while, you'll understand that a peg to a real-world asset is a very cool thing.

I won't delve too much into the history of pegged currencies, but know that SBD is at least the 3rd attempt to create such a thing. The first was launched a few years ago on the original Bitshares network, and it's called BitUSD. It has gone through a few iterations, but appears to work fairly well nowadays. The second dollar-pegged token was the NuBit, which uses a completely different mechanism to arrive at a peg.

SBD uses yet a different mechanism than the other two, and part of its mechanism is not working very well at the moment, which gives us this odd chart that we see here:

For the past month, SBD has spent a lot of time being worth more than a dollar. You can't actually make it out from the above image, but a few weeks ago it actually spent a few minutes being worth $3 or $4. Absurd, for something that's supposed to be worth only $1. Right now, as I'm writing, it's holding around $1.25.

How do you peg a currency?

Remember the term "supply and demand" from economics 101? That term refers to the principle that prices aren't chosen arbitrarily; rather, they are set by two quantities called "supply" and "demand." The more supply there is of something, the lower its price; at the same time, the more demand there is of something, the higher its price.

That is, supply, demand, and price are three inter-dependent variables; you can't nail down all three at once. You can't control demand^{[citation needed]}, so if you have a fixed supply, the price will fluctuate with the demand. This is why the price of bitcoin goes up and down so much - the supply is fixed. When more people want bitcoin, the price goes up (and vice-versa).

So if you want to control price, you need to have a mechanism for controlling supply. Any pegged crypto-token needs some kind of mechanism to detect when there is too much of it (i.e., the price is too low), and remove some from circulation and destroy it. Conversely, when there is too little of it (i.e., the price is too high), the mechanism needs a way to create more and put it into circulation.

Do you see what's missing yet from SBD? Here's a hint: SBD does not have a responsive mechanism for printing new SBD. SBD comes from (essentially) only one source: author rewards. When you write an article on Steemit, if you get paid, part of your payout comes as SBD. That SBD you get is brand spanking-new; it was just created out of thin air. Right now, with rewards rather low, the network is not printing a huge amount of SBD. Thus, the price of SBD is higher than it should be.

Aside: how does SBD remove itself from circulation if its price is too low? If you go to your wallet page and click on your SBD balance, you'll see an option called "Convert to STEEM." This is a special operation; it does not mean "sell". When you click that link, you're actually destroying SBD and being paid an equivalent amount of STEEM. This is how the network increases the price of SBD when it's too low.

Here's what you can do to help: The problem is that SBD is sitting around in your wallet doing nothing, when it needs to be out in the market pushing the price of SBD back down towards $1. So sell your SBD! Note that I said "sell." As I mentioned above, this is not the same thing as "convert." DO NOT CONVERT YOUR SBD TO STEEM, you'll get a bad price for it at the moment and you'll be destroying SBD when more should be created! This is an advanced feature, and IMHO should not even appear in the wallet unless you click an "advanced" checkbox or something.

How do you sell SBD? Here's an older article that explains: How to sell SBD.

Cheers!