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:
![](https://steemitimages.com/640x0/https://i.imgsafe.org/553b24cab8.png)
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!
Learnt a lot from your post. Thanks a lot. Try to update steemians with your knowledge in future too.
No worries! I need to write a lot more than I do, especially with rewards being so unbelievably high lately. Cheers!
I joined steemit months after this post was published. Now I can see why a lot of things in crypto are not like the way we think or are informed. You have the capacity to bridge the gap here between users and developers. Actually we as users are mostly happy to see price hike but that may not be good for the platform. I am wondering if that Pocket can be used to stabilize SBD.
I don't know any clear way that Pocket can help, but I think it's ok. It's now clear that SBD is not truly a pegged currency; it's just one backed by a guarantee that prevents it from losing too much value. If the mechanism isn't designed to keep its price down, then we shouldn't cry when its price spikes.
Nonetheless, if I still had any I'd sell it in a heartbeat :)
Since I was linked this and the topic is very relevant (again), a few points:
Why is it in users' interest to keep the SBD close to $1 if that means lowering it? The only purpose of SBD from a Steemit user's perspective is to earn money, and for that purpose, the more it's worth, the better. Why would we want to bring it back down to $1?
Witnesses are, as far as I understand from this post by @dragosroua, witnesses actually stepped in and increased the supply of SBD to combat its rise.
Who's to say SBD really needs to be pegged, or is fully intended as such? It can also be that when we're paid in Steem we're paid in stocks, but when we're paid in SBD we're being paid in "stock options," but those options have been priced at $1.
Honestly, SBD only has a downward trend, as its only real use to Steemit users is to sell it, and its marketshare is relatively small for crypto enthusiasts to buy fully, as opposed to the more robust Steem economy, that is also useful for those who want to buy more power on the platform.
Finally, let's say that it's a failure of SBD's goals to be worth 9x a USD. What is lost on the platform from it? Why should the platform (as opposed to users in #1) should strive to return it to its "correct" value? Aside from striving to fulfill an initial goal?
Where is this post linked from? I've been seeing lots of increased attention on it lately.
I was linked this in a private chat with a friend after we discussed the value of SBD. I think he googled and came across your post. I suspect with the rising prices of SBD, people are looking the issue up.
1_ SBD still has that purpose. SBD is insured to always be worth at least $1 worth of Steemit. But that's just another way of saying it's there to help you earn money, just as a minimal amount. This is tied to point #5 as well.
2_ This is actually not true. @eonwarped had a discussion with @dragosroua on the topic, and the price feed he's presenting goes "up" when Steem's price goes up, not SBD's. So if Steem is worth 3 USD, it becomes 75/25, because you get 3 times as much SBD as Steem...
4_ Well, held as insurance against a situation where it drops below $1, but if it's worth more than $1, why would you want to hold onto it until it becomes worth less than that? :D
Moreover, I'm talking about how it can be used within the steemit ecosystem, and while Steem has uses within the system, SBD is only really there for fiscal purposes. Which eventually require selling it, even if you hold it for a while.
Looks like the madness happening again 0_0
It was very useful guide for me. Thanks,.
I sold what I had earlier today (only a few hundred). It gets really tricky when the internal market for STEEM gets so much lower than the price on the external market. In ways, it seems better to buy the low STEEM with SBD internally and then sell that STEEM on an exchange for a profit. The trick is $1 of STEEM internally isn't the same thing as $1 externally because those SBD are worth more than $1 when the price of STEEM is rising quickly.
I've been trying to figure this whole thing out for 9 months now, and I'm still confused by it. I'd love to have more people talking through the economics and how the various interest rates impact things. We're down to 1% interest now and that may go away also. Sometimes the market is just irrational (like we saw a few weeks ago). In those cases, I'm not sure how much it matters what adjustments we make to the interest rates because, as you said, supply can't be directly controlled. Also, even if adjustments are made, it takes time for markets to respond.
It's a tough thing to be the central bank of the Internet.
Yeah. The interest rate is particularly confusing because it's designed to incentivize people to hold SBD in an effort to make its price rise, but it's actually increasing the supply which should make the price go down.
To see whether it's better to sell SBD internally or externally, you just have to crunch the numbers every time. There aren't any hard-and-fast principles.
"I've been trying to figure this whole thing out for 9 months now, and I'm still confused by it." <--- You saying that made me feel better! I'm confused still too even after reading... I'm just sitting here like, so do I buy or nah?
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Because pretty much every coin on Poloniex is being randomly pumped. Buy and sell accordingly until the madness subsides would be my advice.... eventually the peg will be more or less restored.
Not sure if the suggestion will fly, but one idea would be to build in a "convert STEEM to SBD" feature, which basically does the conversion process in reverse and destroys STEEM to create SBD.
destroy? Does the creation of Sbd not require steem. What happens with the Steem that get used for author rewards? Btw I've Asket this many times and received no response.
When SBD is created for author rewards, it does not create 'actual' STEEM. It creates virtual STEEM, which means that it is STEEM that will be created at some point in the future (when a user converts it to STEEM).
When users convert SBD to STEEM, it uses the 3.5 day average price of STEEM during that time to create 'approximately 1 USD worth of STEEM' for each SBD converted. When it does that, it actually creates the new STEEM coins and destroys the SBD.
If the blockchain is paying out STEEM and SBD for liquid rewards (due to the debt level being above 1%), then the STEEM that gets created is basically created right at that point in time, instead of going to SBD first.
Hope that makes sense. If you have any follow-up questions, I'll reply tomorrow AM :)
Thank you. So essentially there is a decision to create Sbd vs steem as block reward. If Sbd are created the steem will actually only be created when the Sbd are converted.
Correct.
The steem that goes to author rewards is created out of thin air, same as the SBD for author rewards. Sorry you've gotten no answers on your questions - does this help?
Yes thank you!
Yeah, I've thought about that too. It would take some careful thought to make sure it doesn't create opportunities for gaming it.
Agreed.
informative!