SBD Debt Issue - Riding the STEEM Price Roller Coaster
It is a well known fact that crypto-currencies like STEEM can have dramatic price fluctuations.
This makes it difficult to use as a marketplace currency, since the value of the coin keeps going up and down compared to the price of goods/services. Very few merchants would want to accept and hold a currency that can drop 90% in value overnight.
SBD is meant to provide the marketplace with a stable currency, despite what happens with the price of STEEM. Providing this stability comes at a cost though, and it is the STEEM/SP holders that must pay it.
In order to honor the intention of SBD being equal to "approximately one USD worth of STEEM", the blockchain must produce however much STEEM is necessary to equal ~$1 USD. (If the price of STEEM goes down, more STEEM coins need to be produced to pay back the same amount of SBD.)
- If STEEM coins are worth $1.00, then the blockchain would only need to produce 1 STEEM coin to pay back 1 SBD.
- If STEEM coins are worth $0.10, then the blockchain would need to produce 10 STEEM coins to pay back the same 1 SBD.
The Steem blockchain is intended to have a static rate of inflation, but due to the way that SBD is generated, it can end up being much higher than intended.
If the price of STEEM goes way up (like the July price spike) then the SBD rewards will go up as well..
- Assume at today's prices, the system will generate $10,000 SBD of author rewards.
- If the price of STEEM goes up 10x, then the system will generate $100,000 SBD of author rewards.
- If the price goes back down, the blockchain will need to pay back the $100,000 worth of SBD debt, but at 10x the cost.
There are some extra complications to consider as well:
- If the debt level is below 2%, the blockchain will pay users in SP/SBD.
- If the debt level is between 2% and 5%, the blockchain will pay users in a combination of SP/SBD and SP/STEEM.
- If the debt level exceeds 5%, the blockchain will pay users in SP/STEEM.
- If the debt level exceeds 10%, the blockchain will 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.)
Based on this, it is reasonable to suggest that we try to keep the SBD debt below 2%, but with fluctuating STEEM prices, this is very hard to manage!
I have a few potential solutions. Some of these may be really bad ideas though. (At this point I'm just brainstorming.)
- Just accept it and enjoy the ride.
- Give users the option to accept post payouts as 50% SP / 50% STEEM, regardless of the current debt level. This seems like a fairly easy change, and would reduce the amount of SBD that gets generated during price spikes.
- Witnesses can offer an extra incentive (via price the feed discount) for price conversions in rising price scenarios. This does come at a cost, but it may be cheaper than waiting to pay it back at lower STEEM prices.
- Abandon SBD altogether. This is a very drastic solution, and may be a really bad idea. It is something to consider though. BTC does not offer price stability, but it has still been widely adopted as an acceptable form of currency.
Every action has an equal and opposite reaction. SBD results in deflating STEEM supply when price goes up. It adds leverage to STEEM increasing its volatility in both directions.
Yes, this is it exactly! It is almost like you have thought this through before ;)
A lot of the 'issues' that we are seeing with the SBD debt could be attributed to the fact that the currency is relatively new, and the trading volume is relatively low.
I imagine you are looking at it from more of a long term perspective, where many of the scenarios that are near 'crippling' in today's ecosystem would be a mere 'drop in the bucket' if the economy was many times larger.
If that is the case, then any 'drastic' measures would be seen as throwing the baby out with the bath water.
The one thing that I am still not personally comfortable with though (even with the economy growing to a much larger scale) is the fact that there is such a narrow gap between a 'safe' debt level and one that starts to put the system at a very real risk (10%).
It is hard to say what is considered a 'reasonable' debt level, but even if we assume the 2-3% range is 'OK' - that does not leave much 'wiggle room' as far as STEEM price fluctuations before it would put the SBD debt level at a dangerous level. A 50% price drop would put the debt level at 4-6%, and another 50% price drop after that would basically send it past 10%.
It seems that even though the current system is almost designed to produce additional volatility - that volatility is the main thing that is putting the system at it's greatest risk.
I don't think it needs to be that narrow. If the safe target is taken to be 1% (where the 2% print rate reduction trigger is seen to be the start of entering warning zone) then 1% to 10% is a pretty big spread. But it is important that sufficient conversions occur if there are price declines to keep 1% from turning to 2%, then 5%, and then 10%. This is what wasn't done before.
I agree that if there was consensus on 1% being the 'safe' debt level, and witnesses were in agreement that price feed discounts were an appropriate tool to keep it at around that level, I would feel much more comfortable with the situation.
Part of the problem with solving it "on the way down" though is that SBD conversations generally result in downward pressure on the price, so if we start trying to correct it then, we will be pushing the marketcap down at the same time that we are reducing the amount of SBD. The amount of debt may be going down, but the ratio may still actually get worse.
I think a real key metric that should be used is to try and have the amount of SBD conversions equal to the rate of SBD production. This would help to ensure a relatively 'safe' debt level somewhat independent of the price. In cases where STEEM is being produced in place of SBD, it could still be considered 'SBD production', which would serve to speed up the conversion process in cases where the level has already exceeded 2%.
As I have stated elsewhere I don't believe this theory. First of all, retiring debt removes an "overhang" which will likely boost demand (or at least remove a reason that people may be reluctant to buy). Every single dollar of SBD that is converted and turned into STEEM supply removes one dollar of debt that is weighing on the system. To focus only on the increased supply and not also consider the positive market (demand) effects of reduced debt ignores half of the picture.
Second, especially when done at lower to moderate ratio, the amounts of increased supply is not that large. To reduce 2% debt to 1% debt only requires creating and introducing into the market (not all will necessarily be immediately sold, though much will) over time an additional 1% supply. Even at higher debt levels we are only talking about a few percent money supply "increase" (though again the apparent supply "increase" is always accompanied by a decrease in the amount of debt–which already represents additional future supply–outstanding).
This is just not very much compared not only to the entire supply but even to the amount that already must routinely be absorbed by the market in the form of rewards, power downs (especially post-fork), etc. For this to fail to reduce the debt ratio would mean that it (independent of other price action) incrementally reduces price by more than 50%. Especially in light of the resulting reduction of outstanding debt claims discussed above, I simply don't find anything close to that magnitude of net effect plausible.
However, if you disagree with my analysis of the matter above, then any alternate course of action still doesn't solve the problem. It remains the case that the only way to prevent SBD from eventually collapsing is to reduce retire debt during and after price declines, at something close to the rate of decline, to retain or restore a safe level. Even if you start with 1/2% or whatever "very low" number, a brutal bear market is always possible that leads to 10% or higher. At each stage in the decline, the debt ratio (if the debt amount is not reduced) will grow, and the debt will become both progressively more dangerous and harder to deal with (of course starting at low levels this is gradual at first).
So my argument is that if we want to give SBD any chance to succeed longer term (though both the bull and bear markets that are to come), we must adopt a policy of reducing debt during and after price declines. If it turns out that doesn't work, then we'll find out and SBD can be revised or removed (or alternately we can pro-actively remove it).
That is a good start! I absolutely agree with that one, outside of after a large price increase, at least one that is sustained for a significant period. If the economy has significantly increased in size, then the amount of debt that can be safely carried is higher (e.g. after a 10x increase starting at 1% debt, there is no reason to remain stuck at 0.1% debt ratio forever). This requires, by the way, that SBD actively circulate reasonably quickly from rewards, though some sort of economy (even a small one) and into conversion. If it ends up being hoarded in large amounts and for long periods, it won't work. So this requires discouraging use of SBD as a long term investment vehicle (e.g. with lower interest rates, potentially much lower).
However, it isn't sufficient. If the price declines (and this isn't really a question of if but when), then the ratio will still increase, and these price movements can and will occur much faster than normal SBD production. The only way to prevent a declining price from increasing the debt ratio, eventually to 10% or higher, is to retire debt at the same overall rate as the price is declining, and the only way to make this less painful is to start doing it (more or less) consistently starting a lower ratios (as with the 1% or 2% examples above), not waiting until the price has already declined a lot (and the ratio increased a lot) before doing anything about it. If you wait until 3% or 5% or even worse 9% to really address the debt then it is much more difficult to handle given the larger amount (relative to then-current market cap) that must be repaid.
You make some really good points. One the one hand Steem Dollars provide stability on the other hand they actually create instability in the way that the economy basically ends up in much bigger debt after a large price rise. None of the solutions are ideal. These are untested waters and I don't think there are easy answers.
I think the best (of a bunch of bad solutions) may be the one that people might find most unpalatable i.e. abolishing the Steem Dollar. On balance it's existence may create too much of a problem to be sustainable. It could be argued that volatility is going to be a feature of cryptocurrencies for the foreseeable future and this is going to create future debt problems.
In terms of brainstorming I can think of some ideas but again they are all problematic:
Like I said there are no easy answers and abolishing the Steem Dollar may be the simplest (albeit unpopular and problematic) solution to use.
What about keeping it but abolishing it as a reward for content, and continuing to only pay out in SP/Steem. It might be easier to control in that case?
That's a really interesting idea. Any time it is converted or burned the supply decreases, so there would need to be some way to regenerate it, but removing it as the primary form of payment would probably go a long way towards solving it!
Well it's regenerated from the 15% APR payout to holders. Another thought I have with regards to SBD is the exchange wallets hold a lot of it, so they get large APR payouts, are the exchanges crediting the holders with that money? If they aren't wouldn't it be nice if the exchanges would powerup their payouts to help alleviate the strain of the debt on the system.
No
Great question, I actually don't know how that works. I'm very curious to know too :)
This is actually a very good idea, IMO.
It is certainly possible but part of the goal is to both pay users in a stable currency that is more user-friendly than a highly-volatile crypto asset and also to seed SBD to a large number of platform users that makes it attractive to offer goods and and services to that large potential customer base.
If SBD is just turned into a financial instrument and not part of platform rewards then I think it loses a lot of its value, and the risk and costs that it adds to the system are harder to justify.
Yes that might help.
I like your first two bullet points. Also, wouldn't abolishing the steem dollar be less painful now that there will be no hyperinflation? However, I like having SBD, it is a nice feature.
Yes I agree it would be better now. I think we all like the idea of it a lot though so it might be difficult to convince people.
Good post!
I think 1% is about the right target if you want to stay below 2%, and I don't think that is particularly hard to manage. To maintain a constant debt ratio you have to retire half the debt each time the STEEM price drops by 50%. With a 1% starting point, this means retiring 0.5%, which is not particularly a big deal. Even starting at 2%, it may still be reasonably easy to retire 1% and maintain the ratio after a 50% price drop. The issue we have now is that we had about five 50% price drops from the peak, but since that peak we only retired half of the debt about once! This has obviously left us well behind the curve in terms of ensuring system stability.
This won't work. We had one brush with the 10% level and were pulled from the abyss mostly by one person who converted 300K and powered up. It was nice that that happened, but it can't be counted upon. Continuing to do things the same way as we have ensures that SBD will eventually fail (I do think there are already changes in place in terms of awareness at a minimum).
Doesn't seem very useful given the existing 100% SP option and the 8X faster power down rate after the fork. People who want STEEM as their post earnings can just power down.
I'm not in favor of this. I agree with @clayop that it is just adding extra cost. However, if the rising price scenario occurs when debt is still high (for example now), then I do think we should continue to offer discounts, unless we see a significant uptick in conversions from people trying to time the market.
The economic changes after the fork make SBD less necessary. STEEM is no longer hyperinflationary and can reasonably be held as a liquid currency. It is volatile, but it could still be used in commerce the way Bitcoin is (with prices calculated at the time of a transaction using some more-stable unit of account). I'm not entirely opposed to eliminating it. However, if we do keep it, it has to become a circulating system the retains the benefit of paying users in a stable and familiar currency and not something that is hoarded. @thecryptofiend is on the right track there. I don't know if demurrage is something that would be accepted by users, but at least we should get away from paying high interest that encourages people to view SBD as a long term investment. I don't see how it can reasonably function as that given its highly volatile backing asset and the need to reduce the amount outstanding during price declines.
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Until it quits the market, it does. I cannot believe hearing from who sold over 1.2 million STEEM in last two months via conversion (with @smooth-c). You are ignoring what have we done.
Fair claim. I would like to correct my statement to "and surely SBD conversion is more likely to be more active if people believe the market is rising"
Right. But we shouldn't over-incentivize using stakeholders' money when a significant rate of conversion is already taking place. So the conditions for "high discount in rising market" are 1) high debt ratio, and 2) low conversion rate. In rising market (in a mid- or long-run), we need to reduce the degree of interventions and observe how the market is going first. Let the market work first, and if it fails then we intervene.
I'd like to see more experiments with the platform and value generation. For instance on a particular day, once a month, if posts got awarded 0, and curation got awarded 0, would anyone still post or curate on that particular day "assuming you could gurantee everyone knew that was the case"?
On 0 reward day for posts and curation, I'd still do both. I wouldn't want that to happen everyday. But once a month, I think it would be fun an interesting experiment to see who would be active and who wouldn't.
Because of the design of the blockchain, that's like throwing a wrench into the machine to see how it would cope and perform.
Evenif that is a silly and stupid idea.. How many other similar silly and stupid ideas could yield a new workable idea?
Could be fun, hehe. Maybe even throw the rewards for the day into some type of jackpot or something :) It would be hard to implement (correctly) and would probably be fairly controversial, but it would definitely make it interesting!
Steem has some nice advantages over some of the other cryptos, like instant transfers and no fees. It might catch on.
The SBD aspect of the equation is interesting. What's a better way? Good question. In a sense, I'm not sure why it needs to exist anyway. How does it offer stability to Steem? If it doesn't, then why bother?
But, with the changes coming next week, it's hard to say much about what to expect now anyway. All things being equal, we might be able to make reasonable predictions. But we all see what's happening in the market right now. IOW, all things are not equal. :)
How's that for failing to really add anything to the conversation? ;)
IMO, your thoughts added a lot of value to the conversation! :)
I think it can be argued that it actually does the opposite. To some extent - a lot of what is good for SBD is bad for STEEM.
What it does offer (from what I understand) is that it by itself is a unique crypto-currency that has the potential to provide a stability that is unmatched by other coins that are out there. From the perspective of making crytpo go mainstream - this is one of the potential tools that can help achieve it.
As mentioned in the post though, the stability that it offers does come at a cost.
So, it could be argued that Steem actually adds stability to SBD, rather than the other way around. Very interesting.
I have no complaints or real concerns. Much of the whys and wherefores are not understood by me. But it does offer for some interesting turns and twists. Maybe I'll understand the reasoning better over time.
Unique apart from nubits, tethercoin and bitUSD!
My lack of crypto knowledge outside of STEEM is showing, lol.
It is a really interesting question as to what true value SBD is adding to the community. If we want are planning to take over the world, then I can see value in having a stable currency for users within the blockchain ecosystem. It does come at a cost though.
Tether is actually quite different, in that it is backed by actual USD in a bank. Nubits and bitusd are somewhat similar, though each have their own distinguishing features of course.
Nubits and bitusd are in not really the same thing other than the attempt at pegging to dollar value. Whereas nubits required a group of people to both create and park nubits away, holding both risk and reward. Bitusd and its equivalents must be purchased on a free market via a more prediction-market mechanism.
Let me treat you to a piece of history:
https://m.soundcloud.com/beyond-bitcoin-hangouts/bytemasterblog-nubits
Hope it clarifies things. It is straight from bm (the brains behind steems tech/economy) and was not very popular when i made it because it was considered "FUD" by the nubits community. We see where nubits is today though... bitusd and others still around cause they dont let ponzis get created.
I didn't say they were the same thing I said they were somewhat similar. As far as "where is nubits today", it has a market value of 1.00 USD and a market cap that is about 2/3 of SBD. Seems to be doing sort of okay, but when it comes down to it none of these pegged cryptos has really caught fire in any sort of big way. They all have their issues, including that both the market for them and the mechanisms they employ to manage the peg are uncertain.
what is the debt level % now?
The exact number kind of depends on how you calculate it, but using these numbers:
1,249,957 SBD in circulation (steemd.com)
$36,424,974 total STEEM market-cap (coinmarketcap.com)
= roughly 3.5 percent
I agree this direction, in terms of more conservative SBD printing, and having "a switch" until we have a consensus that there are enough usages of SBD.
This idea is economically not desirable as well as not following the rules. We don't need to artificially boost the burning rate when the debt ratio is decreasing (by STEEM price increase) and SBD conversion are taking place naturally. Personally, I am disappointed by some witnesses who are easily saying "Increase discount and burn debt anyway", given the fact that any discount will worse off every stakeholders. (If witnesses should pay all the costs for discount, would they do?)
I feel there is too much fear about the debt. Preparing the doomsday is a wise behavior, but we don't have to do it too much if it harms ourselves. Enjoy peace when it exists having us more strong, and when the bad signs begin to appear we can quickly cope with them.
Agreed. Out of everything so far, this is my favorite option.
I know the four of us ( @clayop, @smooth, @bacchist, @timcliff) talked about this at great length last night - so we probably don't want to re-hash everything, but the statement that stakeholders will be worse off does depend on how you look at it..
If you compare users converting $5,000 STEEM at current prices with a 10% discount to the same users converting 5,000 STEEM with no discount, then yes - the stakeholders are harmed by this. The blockchain 'gave away' 10% extra STEEM at the expense of the network, with no value added.
Under a different scenario though, if a 10% discount gets users to convert $5,000 STEEM at current prices (who would not have otherwise converted), and then the price drops 50%, the blockchain would have ended up producing less STEEM with the discount than if the same users had waited to convert until the price had dropped. Under this scenario (which is obviously oversimplified) the stakeholders would have been better off with the discount.
Since a rational user wanting to get the most STEEM for their SBD would wait until the price was at it's lowest - it is reasonable to assume that more conversions are going to occur at lower prices than higher prices.
It is really hard (arguably impossible) to truly know the full effects of the discount, since there are so many factors at play.
The main fear is that we reach a 10% debt level, at which point the "SBD agreement" is broken. Most people are worried that if this occurs, it could cripple the long term value of SBD. It could potentially cause a "run on the bank" too, which could do a lot of damage to the STEEM/SBD economy.
I don't think it is necessary to be paranoid about it, but there are some very real risks there which we need to be mindful of.
Totally agree :)
Correct. In this case, the network will earn money (by alluring more converters) from converters. However, this example is contrasting to what you said, " in rising price scenarios". In rising markets, the network is already paying extra money (i.e. market price > feed price) to converters. Price discount only gives more money for them, and increases quantity too.
Agreed.
If we assume that the individual market actors are going to act in their own best interest to the maximum extent possible - they are going to try and convert when STEEM is at it's lowest, and try to sell it when STEEM is at it's highest.
Witnesses can't really influence the point that they sell at, but we can to an extent influence when they convert. If the price that they sell at is taken out of the equation, then it just becomes a matter of how much inflation the must network incur in order to convert the existing SBD debt into STEEM. The more conversions are done during times of high prices / spikes, the less STEEM will be produced by the network.
Where the water becomes mucky is we can't predict what the price will do, and we have no way of knowing how much additional conversion is done as a result of the discounts. If users were going to convert their SBD anyway, then the network is losing money by giving them an extra discount; and if the price of STEEM keeps going up, then the network would have been better off if they hadn't converted.
This I think could also lead to price manipulation by whales who would run the price up or down to purchase large amounts, of STEEM/SBD in order to manipulate the market to walk out making more than they put in, in the end this would hurt the witnesses, and the true long term investors. So that would also need to be a factor that would need to be considered.
I understand what you mean. But here are two things to consider:
First, SBD conversion will generate more STEEM and those STEEM will be sold and hence hinder increases of STEEM price. (unless they are kept as STEEM or SP)
Second, in rising market, the debt ratio is already decreasing, and surely SBD conversion will be more active. Is it worth to make the network additionally pay to boost debt amount burning (and with the consideration of 1, the influence in not clear)
I'd actually argue the added STEEM will usually hinder price increases no matter what is done with it, because someone looking to power up (or even hold liquid STEEM) would otherwise have to buy STEEM (could be done directly with SDB via internal market for example, or using regular exchanges). In the case where the conversion proceeds are not sold, the conversion removes demand from the market instead of adding supply.
(But remember, in all these cases of generating more STEEM from SBD, whether rising or falling market, it is offset by retiring a claim that can generate more STEEM in the future. There is always an offsetting benefit to stakeholders and to the STEEM price, not only a cost.)
It is not convinced about "surely". It may happen, it may not happen. It depends on people believing they can predict that the market will continue to rise over the next 7 (3.5 after fork) days. It is unlikely that anyone can actually do this very well, but if people believe it, and try to profit from conversions, then there is less need for incentive. Realize though, that roughly half the time people try to do this, they will lose money (and the stakeholders will gain).
As far as whether it is worth it, we need to consider whether it is a low debt or high debt situation. In a low debt situation, it is clearly not worth much if any added cost for debt retirement. In a high debt situation, it is important to ensure that debt retirement continues at a significant rate regardless of whether the STEEM price is increasing or not. There is never any guarantee that a rise will continue. A reversal would make the high debt dangerous again (and costlier to retire at a lower price).
I agree that if conversions are happening anyway at a healthy rate (due to the psychology of a price rise) and the SBD price is at least $1 then there is no reason to add extra discount/incentive.