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RE: The Economics Behind the Steem Dollar Arbitrage..
Hello @biophil. I know you know this, just talking through my thoughts. When SBD is at $1, the incentive to covert diminishes.
This activity does increase the amount of Steem in Circulation, but from the numbers I have seen, I Don't believe significant volume would need to trade to support $1 SBD...and thus, not that much Steem is created from this activity.
Probably should spend a little more time drilling down on the numbers to prove or disprove this..
Yeah, if the price feed tracked the real-world price perfectly, there would be no incentive to convert at $1. You're probably right that it wouldn't actually take much to push SBD up to $1, but I don't know this offhand. You could get a lower bound on how much Steem it would take by looking at all 3 order books: steem internal, bittrex SBD/BTC, and poloniex SBD/BTC. It's only a lower bound, because people have reserves that aren't currently sitting on the books.
One massive problem is the mismatch between the feed price and the real-world price when Steem is changing in value rapidly. Last week I put in conversion requests for a total of about 500 SBD. But because real-world Steem dropped so fast in the past couple days, the STEEM I got from the conversions is now worth less than $400. So I'm more than 20% in the hole on what should have been a sure bet, and that's going to dampen my enthusiasm to support the peg in the future.