Why the proposed two-way SBD peg is a very bad idea

Update: There is an improved version of this post, The accumulate, pump, and convert strategy to show that the proposed two-way SBD peg can be abused.

The Steem witnesses appear to be seriously considering implementing a new two-way SBD peg where you can convert STEEM and SBD back and fourth over 3.5 day price averages with the SBD being pegged at $1 (e.g. see post by @lukestokes and post by @reggaemuffin). Note: Currently, the Steem blockchain only allows one way conversions of SBD into $1 worth of STEEM over a 3.5 day price average, so what the witnesses are considering is a major proposal with major consequences.

Below is a though experiment designed to show how bad the proposed two-way SBD peg can be by looking at a fairly simple plan designed to illustrate how someone with a lot of money could abuse the proposed two-way SBD peg to the detriment of the entire Steem community.

Step 1) Wait for the witnesses to implement the new two-way SBD peg, and have at least $100 million at your disposal, and be prepared to execute steps 2 through 5 below within a 7 day window. The plan does not require you to own any STEEM before starting step 2, but owning a lot of STEEM before step 2 makes this plan a lot more effective. If you plan to accumulate a lot of STEEM before starting step 2, then a way to buy a lot of STEEM without directly impacting the STEEM markets is to first buy SBD's on the markets at $1 or less each and then use the 3.5 day conversion process to turn those SBD's into STEEM.

Step 2) Start buying STEEM on the markets with the goal of maximizing the amount of STEEM you can purchase while also slowly pumping up the price of STEEM up to a heightened level which you think you can likely sustain for the 7 day window.

Step 3) As soon as you start buying STEEM in step 2 above, start dumping STEEM you have by taking advantage of the new STEEM to SBD conversion process keeping in mind that your conversion rate is going to be based on the average price of STEEM over the 3.5 day period of each conversion you make, and also keeping in mind that the goal is to maximize the conversion rate of all conversions you will do over the 7 day window.

Step 4) At the halfway point of the 7 day window (i.e. 3.5 days into executing the plan), you should have already bought all the STEEM you plan to convert, and you should have already begun all of your conversions into SBD so that all your conversions will complete by the end of the 7 day window. The goal of step 4 is to buy as little STEEM as necessary to keep the STEEM price propped up so all of your 3.5 day STEEM to SBD conversions can finish going through at a pumped up price. It is important to mention that in the first 3.5 days you didn't need to sell a penny worth of STEEM on the markets, and throughout step 4 you don't need to sell a penny worth of STEEM in the markets either.

Step 5) Shortly before the first wave of STEEM powerdowns hit the market at the 7 day mark (i.e. people who started a power down when they saw the dramatic rise in the price of STEEM so they could try and get some profits), your plan is to sell all the STEEM you accumulated in step 4. However, although the price of STEEM should still be high, once you begin for the first time to sell some STEEM into the markets you will likely cause the price of STEEM to drop, but the money you will likely lose selling STEEM as it is dropping is likely a small price to pay for the benefit of being able to convert massive amounts of STEEM into SBD at the artificially pumped up prices.

Step 6) After you have exited your entire STEEM position with all your 3.5 day STEEM to SBD conversions completed, you can count up how much SBD you were able to get. I think it would be reasonable to assume a plan like this could turn your initial $100 million investment into 200 million SBD; however, it wouldn't be that unbelievable if you were able to generate 500 million SBD or more because buying roughly $100 million worth of STEEM could potentially pump the price of STEEM up 5x or 10x or perhaps even more. Once you have 200 to 500 million SBD, then you can take advantage of the SBD being pegged to the dollar which could enable you to cash out slowly over time at a rate of 1 SBD equals roughly $1.

Step 7) After people realize that the runup in STEEM was just a temporary thing and that the result of the runup is that the Steem blockchain now has a massive amount of new debt through all the SBD's printed, then the price of STEEM may drop as people realize the consequence of all this debt and realize that the two-way SBD peg failed them. For example if the amount of SBD in circulation were 500 million SBD, then at the current supply of STEEM that would represent $2 of debt per STEEM which wouldn't seem like a big deal with STEEM being pumped up at $20 or $40 or more, but if STEEM happened to go back down to $2 (STEEM was $1 less than two months ago), then a debt of $2 per STEEM would be a major issue which could cause the price of STEEM to drop even further. As the Steem blockchain is licking its wounds after what just happened to it, you could then convert a large batch of your SBD into STEEM at the depressed price of STEEM which would create a bunch of new STEEM and you could become the biggest whale on the planet, and with all your new STEEM power you can begin to restore confidence in Steem by voting out the witnesses who made the huge mistake of allowing the two-way SBD peg to happen.

The thought experiment above is just one example of the type of abuse that could happen with a two-way SBD peg. It highlights the key flaw with the proposed two-way SBD peg system which is that it allows someone to convert massive amounts of STEEM into SBD without that person having to sell a penny worth of STEEM on the markets. Is there a flaw in my reasoning above, or is the the proposed two-way SBD peg a very bad idea for the future of Steem?

Update: There is an improved version of this post, The accumulate, pump, and convert strategy to show that the proposed two-way SBD peg can be abused.