SBD Debt Issue Part 2 - Riding the STEEM Price Roller Coaster (Witness Parameters)

in #sbd4 years ago (edited)

In my last post, I discussed how STEEM price fluctuations can cause high levels of SBD debt.

The last post was intended to be a brainstorming session. I tried to put everything on the table - from doing absolutely nothing, all the way to completely eliminating SBD.

Here are some take-aways that I got from the conversations:

  • SBD has the potential to be a great benefit to the STEEM ecosystem.
  • It costs the network more STEEM for users to convert when the price is low, than if they convert when the price is high.
  • To maintain a constant debt ratio you have to retire half the debt each time the STEEM price drops by 50%. ( @smooth )
  • The general rules from the whitepaper for how the witnesses should use their parameters to affect the debt are defined here. ( @clayop )

After a lot of back-and-fourth, I feel that @clayop, @smooth, @bacchist, and myself are actually close to being on same page regarding the major principals. There are still some disagreements on specifics - including the appropriate magnitude and conditions for when to do certain things - but I think it is healthy for there to be differing views on this.

In @bacchist's latest witness update he coined a perfect term for what I believe is our best solution to the problem: Smallest Effective Discount (SED). As @clayop pointed out: We should not discount price feeds any more than is necessary. The amount neccesary is whatever is needed to keep SBD pegged close to $1, and the debt level under control. SED is exactly what we should be aiming for.

The whitepaper gives general principals for when to use price discounts and interest, but it is very unclear how the terms and limits apply to the new economics now that the system is enforcing a limit on SBD conversions once the debt level reaches 10%.

Based on my conversation with @smooth, I think it is important for the witnesses to define what is considered an 'acceptable' debt level and conversion rate. Based on this, each witness should be able to determine what they believe the 'Smallest Effective Discount' is.

Debt Levels

Optimal Debt Level

A safe debt level is 1%. From an equilibrium point of 1%, the system can handle a 50% price drop before SBD payouts are affected, and a 90% price drop before the 10% debt level is reached. From here, witnesses should have time to react to changing market conditions and take corrective actions if things start to head in the wrong direction.

High Debt Level

Once the debt level has reached 2%, the system will start imposing it's own rules to reduce the debt. It is not a dangerous level at this point, but it has started to affect the system behavior. At this point, the debt level should be considered high.

Dangerous Debt Level

If the system has reached a 5% debt level, it should be considered dangerous. One more 50% price drop, and the system would be at the critical level of 10% - where the SBD 'agreement' would be broken.

Extremely Dangerous Debt Level

If the system has reached 8% debt level, the price stability of the system is at severe risk.

Critical Debt Level

At 10% debt level, the system would no longer honor the "1 SBD = approximately 1 USD worth of STEEM" agreement. (If this were to be happen, it would be really bad for SBD.) The system should not be allowed to reach this point.

Conversion Ratios

Safe Debt Scenario

In a 'safe' debt scenario, the SBD conversion rate should be approximately equal to the rate of new SBD being produced. This will fluctuate with short-term changes in price and conversion rates, but an equal amount of conversions and new SBD production over time should be the goal.

High Debt Scenario

In a high debt scenario, the SBD conversion rate should be greater than the amount of new SBD being produced. Whatever STEEM is being produced instead of SBD (due to the high level of debt), should also be counted as part of the "SBD production rate".

Low Debt Scenario

If the debt level is below 1%, the SBD conversion rate can be less than the amount of new SBD being produced.

These are intended to be general guidelines. It is up to each witness to determine what they believe are the appropriate actions based on the current market conditions.

Remember to vote for witnesses:


Amazing post @timcliff
And I actually understood most of what you were explaining, which is pretty significant. LOL
I'm still wondering how this will all be affected once the new hardfork goes through. I'm still nervous about the significant drop from 104 to 13 weeks for total power down and what that's going to do to us. I guess we just have to see what we see.

Thanks @merej99! :)

Everyone is wondering the same thing, hehe :)

Most of this post in regards to the debt level and witness parameters should apply in both pre and post hardfork conditions though.

Excellent post!

I want to clarify one item:

To maintain a constant debt ratio you have to retire half the debt each time the STEEM price drops by 50%. ( @smooth )

This should not be taken to mean I am proposing a practice of literally retiring precisely half the debt when the price drops 50%. In some cases this might be impossible (if the decline occurs rapidly for example). It is more intended to give perspective of what is needed to maintain a "safe" debt ratio (or any other ratio) over an extended period.

Conversely it could be read as a warning of what will happen if the price declines 50% and hardly any debt is retired (the debt ratio will almost double, and retiring the same proportion will then require generating almost twice as much STEEM). This is important because 50% declines in risky crypto assets are quite common. The rest of your post does a good job of putting this into the context that there will always be short term fluctuations and a perfectly constant debt ratio over the short term is not a goal.

Thanks @smooth!
Appreciate the clarification. Yes, it is important to look at it over an extended period, rather than in the context of short-term fluctuations.

At 10% debt level, the system would no longer honor the "1 SBD = approximately 1 USD worth of STEEM" agreement.

I guess this is built into the system? But why not just get rid of this restriction?

Aside from the fact that we stop honoring the conversion at 10%, there is nothing inherently bad or dangerous about 10% debt. Ive seen plenty of IPOs with with higher debt to equity.

There are quite a few disadvantages and pitfalls to paying debt with money you print from nothing. But the one great thing about it is that you don't have to sweat your debt to equity ratio, because it really doesn't matter.

Given the amount of steem already being printed, i can't imagine the concern is just the possibility of putting more on the market through redemption.

The 10% limit was put in place to prevent potential "black swan" events. It is a somewhat controversial change, but unless a new change is made to remove it - it is there, and we must deal with it.

The 10% rule is probably the biggest risk, but in general a huge increase in debt ratio (usually as a result of large price drops) does add risk of hyperinflation. The blockchain is designed with a target inflation rate, and if it needs to produce 10x or even 100x the amount of STEEM to pay for the rewards that have been paid in SBD - it poses a risk to the current investors of STEEM/SP.

Interestingly, the main intention of using debt is not just to pay for rewards. The blockchain could do that without SBD, by just paying in STEEM right away. It is more to create SBD as a stable marketplace currency, so that users can buy things with their rewards, instead of cashing them out for 'fiat' money.


Well said! Can you tell the number of SBD printing amount(or percentage)?
Last week, about 46k SBD were converted. Is it bigger than the printing amount?

That is certainly bigger than then printed amount last week which was almost zero. SBD printing recently restarted but only recently and only at low rates at first (has current reached 44%). SBD printing at 100% given current prices would be about 3700/day or about 25900/wk (not exact because the split between author and curator rewards is not fixed, also some posts may take 100% SP).

Specifically, between 11/24 and 11/30, 2,987 SBD were printed and 21,481 SBD were converted.

It's a great question. I don't know yet where to find it / how to calculate it - but I will dig into it.

You can find how much is being printed by looking at sbd_print_rate... currently 4200 (42%).

It appears to increase linearly as the debt load declines from 5%, where no SBD is printed, to 2%, where all liquid post rewards are issued as SBD. Right now, the debt load according to the median price feed is 3.8%, and 1.2/3 = .4... so without being familiar with the code, it seems linear.

I might be wrong, but I think a little over 200k STEEM is produced for the reward pool each week. Up to 25% of that would go to curators, so at least 150k STEEM would go to authors. Half of that would be liquid... 75k. Now, at the current feed price, 75k STEEM is worth something like $10.8k. If we assume 40% of that is used to print SBD, we have 4.3k... a little less than 10% of what was converted...

The print rate and feed price tend to change quite a bit over a week's time, though. And, of course, curators don't end up getting 25% altogether... so this is all really fuzzy, back of the napkin math

That's just my best guess at how to approximate that... I would be interested in hearing from somebody who actually knows :)

but I think a little over 200k STEEM is produced for the reward pool each week

Reward pool is exactly 403200 STEEM per week, but how much of that turns into SBD can only be guesstimated. Will be less after the fork.

Very interesting. Thanks for the info!!!!!!!

Thanks for the summary of convos, appreciated ;)

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