STEEM DOLLAR Will Fall To $1 USD : Here’s Why
Every Author likes high Post Rewards but are we deluding ourselves in thinking that this high STEEM DOLLAR is actually sustainable? There has been a lot of discussion recently amongst the Witnesses about whether to fix the broken US Dollar peg and it’s no surprise to find that it is a pretty unpopular topic amongst the Minnows and Dolphins on the platform who want the good times to keep on rolling. I hate to be the bearer of bad news but if you have a look under the covers at how the system actually works it looks pretty inevitable to me – even if the Witnesses do nothing.
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There are 2 features of the system which are important to understand before we go much further :-
Most of us are familiar with the basics of how a post is rewarded. As an Author you have the option to select 50% of your rewards to be paid in STEEM DOLLARS, but the system calculates the number of SBD you receive as if they were valued at $1 USD each. So if your post payout is $10, then you will get $5 worth of STEEM and 5 SBD - which is actually worth substantially more. These are actually newly minted SBDs that are CREATED by the system and added to the Circulating Supply.
Instead of selling your SBD you have the option to redeem them via the blockchain for $1 USD worth of STEEM and up until recently you could do this via the Steemit interface. When you redeem an SBD it is effectively DESTROYED by the system and taken out of the Circulating Supply.
I’m going to break this next part up into 2 sections to show the contrast in how the system has been working. First I’ll have a look at the period of the 1st August to 21st November, which is just under 4 months. It’s back when the STEEM DOLLAR was fairly stable and before it broke the US Dollar Peg. Have a look at the graph below :-
The Blue line represents the 7-Day Moving Average of the SBDs CREATED from Author Rewards. The Red line represents the 7-Day Moving Average of the SBDs DESTROYED by SBD Conversions back to STEEM. The Green Line is the difference between the two. As you can see the Green Line is fluctuating either side of Zero and shows that the Circulating Supply of SBDs was up and down but if you add it all up over the period it’s actually a slight negative. This means there were less SBDs in existence on the 21st of November than there was on the 1st of August.
Now have a look at the same graph for the period of 22nd of November to the 29th January 2018 :-
You can see immediately that the SBD conversions have gone to near-Zero because nobody in their right mind would take $1 worth of STEEM in preference to selling SBD at an inflated market price. This means there are almost no SBDs being destroyed. Meanwhile you can barely see the Blue Line showing the newly created SBDs because it is covered up by the Green Line showing the Net number of SBDs being added to the Circulating Supply EACH DAY. Now remember that this is NOT a cumulative chart. If it was cumulative then it would look even more like an exponential curve….and there-in lies the rub.
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Since the 21st of November, there have been approximately 4.1 million new SBDs added to the Circulating Supply. This represents an Inflation Rate of about 125% over just over 2 months. In the last week alone, the Inflation Rate of the SBD is about 10%. At this rate, with a $7 SBD price, we need to add over $4.5 million US Dollars of fresh money to the SBD Market Capitalisation EVERY WEEK - JUST TO KEEP IT AT $7. Any less and it’ll fall. But wait, there’s more. As the STEEM price rises it is going to result in a bigger reward pool and EVEN MORE SBDs being created and added to the Circulating Supply.
That’s right, STEEM DOLLARS have become HYPERINFLATIONARY. Now if you think that speculating on a currency with that sort of Inflation Rate is a good idea then I’m sure that we can find some Venezuelan Bolivars you’d be interested in buying too.
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I know that this system is a bit complicated and I don’t blame new users for not understanding how it works. We all want to get bigger rewards for our posts, but let’s not delude ourselves any longer. This is a short term windfall and the exploding SBD supply won’t resolve itself until people start Converting SBDs back to STEEM, and that’s not going to happen until it gets back near $1 USD. So this is a train wreck waiting to happen for those poor bastards in South Korea buying this pump. A drop from $7 back to $1 is bad enough, but if you bought at the peak your losses are going to put you in the same boat as a BitConnect bagholder.
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That’s where I have an issue with people who are familiar with the system but are promoting and perpetuating a high STEEM DOLLAR. They should know better and pushing this myth that this price rise is sustainable while at the same time lining their pockets with Author Rewards is in my view, unethical. Those people are no better than those ones who were pumping BitConnect before it collapsed.
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Great article buggedout, I didn't know the SBD were being destroyed when converted to steem. Do you know if those steem being created on top, come from the reward pool or come from the owners supply?
It blows my mind for how long this premium SBD price has been going on with the selling pressure increasing daily. I doubt it will ever go to 1$ again (probably 1.5$-2$) as many might speculate to sell when the price peaks again. Current rate really screws up curation, would be nice to have an update of the entire situation by ned.
The way it works is that there's a set amount of steem in the rewards pool. When payout comes, and sbd is printed, instead of giving you all of the steem, it converts the steem it would have given you into SBD via the price feed.
So to answer your question, steem is not being created "on top". It is a deferred creation. Instead of creating it on reward time, it gave you SBD, and whenever you decide to convert it , it gets created then instead.
So in this view SBD really is backed by a set amount of steem. (at the time of conversion).
Concerning your point about price. It will go down as steem price sustains or goes up. The supply is increasing at greater and greater rates! It's just a matter of time.
As long as Steem keeps growing in user base and Steem Dollars keep being held it is going to be harder and harder to see it coming back to $1. Something would have to happen because demand for Steem Dollars doesn't seem to be reducing. The only thing I can see happening is Dai becoming more in demand.
Greater supply as the graph in the original post shows you would think would result in a crash in price for Steem Dollars but do we really know how much demand there is for a stable token? Do we know how much demand exists for Steem Dollars? If demand outpaces supply then even if more Steem Dollars get created, in a market with 500 billion total floating around it's not so easy to know what will happen or when it will happen.
Also there are the SMTs which are coming. Who knows what influence that could have on Steem Dollars?
You raise a good point, but the problem with this line of thinking is that the demand needs to keep up with supply. Right now we are printing steem at 5 times the rate that we did before (proportional to STEEM feed price). I really don't think we've seen the effects of this just yet, as this is a recent phenomenon.
Even if we were to do nothing, you need to keep this demand increasing, no? Where do we expect this demand to keep coming from? The population is finite, but SBD supply grows without anything else changing. The only way demand has a chance is if STEEM price goes back down, which I admit is also a possibility.
I agree that for now it doesn't look like it will hold. I just don't know the long term value of SBD. It could be worth much more than $1 but I don't know exactly what. It depends on how SBD is used and whether it gets locked up, burned, etc.
With current parameters and nothing else changing, assuming demand does not keep up with supply (I know this is not a widely accepted assumption) this is what happens:
The reason 1 USD is the threshold is because of the conversion rate of 1 SBD to 1 USD worth of steem based on price feed.
Note if the witnesses change the price feed to be against some other asset, the peg would then be towards that asset instead.
Nailed it. Good job :)
The problem is many people are hopelessly confused by this Steem Dollar have no idea they can convert it to STEEM at market rates then use it to increase their rewards via self voting and curation.
Thanks, so if I understand it correctly. SBD are part of the ~9,5% yearly inflation of steem.
Yes, that is correct.
Thanks for the great answer!
Thanks. I think that the Circulating Supply won't start normalising until it is near $1 and there is no longer a dis-incentive for the market to convert SBD back to STEEM.
Youre missing one thing - this is crypto and if some whale / pump group decides to pump SBD to $100, they will do so. The mechanics you're describing are in works since the start of the pump and SBD is still above $5. Free market mechanics of demand / supply have no power here. But from logical point of view you're absolutly right :)
The point about my post was really that the system mechanics and the inflation of the SBD is poorly understood by many users. The fact some are now using ignorant views on the subject to affect witness rankings is a disturbing new trend.
While I agree it is poorly understood, that does not give Witnesses the right to take corrective actions without community support. I agree the price will fall. I do not agree with Witnesses taking corrective actions without polling the community. I too will be unvoting any witness that takes this action without vetting it through the community.
Yeah but it's like fighting a tidal wave. Once the supply is high enough and it matures, it is not as susceptible to pumps.
True.
How high is that?
Who knows, but my point is about the long term (years, is my guess) state. Admittedly it's not comforting to not be able to give any timelines for this.
What if it's a benevolent Steem whale, who profits after the speculators chasing the pump while giving the bloggers a pay raise?
What is this mythical creature you speak of? LOL
the benevolent whales aren't as visible, typically. or you don't know where to look ;)
there is so much to not understand about what's going on... hard to not speculate on theories and such... think of the grump cat... someone had enough money to buy all that steem, and start regulating on steem no one knows who they are, there isn't enough sp among the other whales, that he can do whatever on steem and no one can stop him.
if I had enough money to profit on a PnD with sbd, while at the same time benefiting the masses on steem, damn right! why not? a fun game where everyone in steem wins except the people hell bent on a peg.
If you can help out with where to look I'd appreciate it.
I've found a few benevolent witnesses that I'd like to network with and help, but the whales seem to be a bit more elusive ;)
:shrug:
I guess they did it once already and will do it again. Since the price has gone down, it looks like the time has come to pump again.
Thats exactly my opinion. Here is an additional chart where you can see: If SBD price rises then inflation rises too.
Its included in my weekly statistic charts:
https://steemit.com/steem/@sevenseals/steem-statistic-charts-week-04
It may look that way, but it's when the STEEM price rises then inflation rises. It is easy to get confused because often STEEM and SBD rise together.
In may opinion inflation of SBD rises because when the price of SBD is high, no SBD will be destroyed. What should be the connection between high Steem price and SBD inflation?
I saw SBD go up when TETHER got hacked. Thats how I see it.
If SBD drops to 1$ I think that it will be a incredible opportunity.
I originally thought the pump was related to the Tether hack too, but I've since cast doubt on it. The correlation of SBD to the broader market suggests is not being sought after as a safe haven.
I have been telling my friends This too, its not sustainable, And honestly i dont understand Who started the pump And why? :p
I don't know who started it, but the question I have is... how has it been sustained?
We will probably never know the who and maybe never know the real why either. It has only been sustained because of uninformed demand IMHO. When every man and his dog is doing Technical Analysis without looking at Fundamentals this kind of thing can happen.
Ahh, too true, and do you believe like I do, that most people are just using it as a place holder during the Asian vacation and possible bear market like most use Tether, or are people actually trading it like a regular coin or token?
I believe many are trading it like a speculative asset and thinking it will appreciate in value alongside STEEM. I have seen numerous posts citing the coins relative "scarcity" as a reason to buy it (sorry, but scarcity is NOT a utility) and I've also seen numerous people doing Technical Analysis on SBD and saying it's going higher (without understanding ANY of the Fundamentals of the coin). So yeh, I think there is a lot of ignorant speculation going on.
Ha ha, this can be applied to so many people in this space.
My guess is that people who wish to invest in Steem, but didn't read the white paper. The names are too close. People don't know. That is why I think it is a last resort for Steem Witnesses to take action.
I would like to see what percentage of the reward pool has been taken by the highest stakeholders - over the same time frame...
I hope you didn't just call me an unethical scammer that has no conscience and therefore can't sleep at night, haha (laughs nervously). In my recent post I talked about this subject from my perspective and I didn't think I was being dishonest in any way. My concern is that if there is a sudden peg to $1 USD it is going to make people go away and we already have a problem with retention. This move would make it worse. I believe the markets will do what they will do and I am not trying to artificially sustain higher and higher prices. In fact, I stated the following in a comment on the same post in response to a reader's comment.
I am just asking the powers that be to consider the impacts of artifically re-pegging it back to $1 USD, especially in a short time-frame. In a couple of your comments, you have stated that you think SBDs could be re-pegged at a higher USD amount. I really like that idea. It does appear that you find some value in receiving the higher payouts. I figure the markets will do what they do. The high prices certainly was a surprise. I may not completely understand how this ecosystem works; I am not sure if I followed your explanation of how SBDs are destroyed. Are you saying that the only way SBDs are destroyed is when authors choose 100% Steem Power as their payout selection? Honestly trying to understand and not be a jerk. What I do is take my SBDs and sell them on the internal market and then use the Steem to buy Steem Power. I have consistently been getting more Steem per SBD over the last few months and to me that is really the advantage, while it lasts. It appears that is what you are doing as well. I didn't realize we were creating so many SBDs and they aren't being destroyed and we are in essence, flooding the market. And, like you said, as the price of Steem goes up, we will begin to see more and more SBDs produced and the price is likely to come back down. I support pegging it at a higher price. I'd gladly have it pegged at $2 or $3 per SBD. Just throwing out a number. Thanks for providing your perspective. Again, I hope that I was not the sole inspiration for your post, I am learning as I go. I want to earn Steem Power and help secure my financial freedom and that of those that choose to associate with me.
No, steem has an option where you can "convert", destroy 1 SBD and create $1 of steem. It doesn't show under your wallet on steemit right now to protect folks.
Thanks, that's weird, I have never seen it.
I almost used it when I first switched off 100% power up when sbd first started rising. Thankfully I saw someone with an all caps warning to use the market instead.
Oh, okay, I think I actually know what you are talking about. Is it that process that takes 7 days? I did that a few times until I discovered that the internal market is much quicker and apparently offers better price conversion.
3 days I think, but yes that's the one.
Yes, but its that locked in price conversion that provides the floor. If SBD ever goes below $1, you could buy it up and convert it for profit.
No, I wasn't talking about you mate. In fact I wasn't trying to point the finger at any individual.
It was more a comment directed toward the Witness ranks who really DO know how this stuff works, or at least SHOULD know how it works. I think there is a temptation there for them to play populist politics to get votes by playing up the popularity of the high STEEM DOLLAR, or take away votes from Witnesses who are trying to do the right thing by the platform AND the investors by looking to address this issue with a long term view.
I already know for a fact that some Witnesses have lost votes over their stance on the SBD situation, so it pays to reason that others will have gained.
Ok, sorry for my big vomit of a comment about it. I agree that the witnesses should know exactly how all this works much more than a minnow like me. I didn't know there was such controversy among them about the subject. If big merchants like Starbucks really are considering Steem as their crypto for payments, I'd be glad to have The SBD pegged to $1 USD if that's what it took to get them on board!
We can only hope to attract a big merchant like Starbucks, but the argument is that they probably wouldn't look at us until we have our house in order so there is an opportunity cost to let this SBD situation run. There is also concern that a big bubble and crash of the SBD could really hurt the platform credibility and reputation in the fallout.
Don't SBD's also get destroyed when you promote your posts under the promoted section?
Yes, I believe that is true. A very good point and might be worth adding that to my query.
That burning for promotion means advertisers have a reason to buy a lot of SBD so as to have tokens by which they can advertise on Steem as a whole going into the future. Promotion as a function hasn't been developed out to it's full potential but that is because we don't even have a million users yet. Developed to it's full potential then how much could SBD be worth?
Ok, it sounds speculative and I have a healthy scepticism that it could be the root cause of the pump, but I'll concede it's possible. Let me sleep on it for a while and see if I can come up with a way to validate or quantify (or debunk) the theory.
now in 2018 steemit is very big platforms lot of peps and whales have invested alot
what i thnk fluctuation will be there i agree but it will rise in future anyhwo
Awesome, now I have a graph to point people to, thanks for this post. I am in complete agreement with your assessment. The problem is, I don't think all witnesses acknowledge that this is the picture, some still seem to think that long term SBD can still sustain its high value. Others acknowledge this but want a faster timing to the drop. We'll see what happens but I hope the conclusion takes this into account.
The issue is not whether it can sustain its high value "forever" but for how long. It has already been high, and volatile, for two months. The last time it de-pegged (spring 2017), it took about 3-4 months to fully return to $1. During these periods its utility as a stable value token is destroyed. Businesses that started to bloom around Steem making use of SBD had to abandon their plans and pivot or shut down. The interest in improving the peg mechanism (which in relying solely on accumulation of massive supplies of SBD to limit price gains has only a very weak, and very slow, response to demand spikes) is directed at avoiding continuing to have these incidents (even if each is temporary), which disrupt several important functions of the blockchain and greatly reduce the potential value-add of SBD to the platform.
Personally I am not looking for faster timing of the drop, I don't care about the short term movements. What I am interested in is improving the mechanism going forward so that SBD (and by extension the entire Steem blockchain) becomes more useful and valuable.
Ah you are saying that relying solely on the print functionality is not enough to prevent further demand spike incidents.
My theory on this is that in the mature state, the print rate would just be so high that a demand spike could not last for so long, and we are anyway better at propping up the value when SBD is below 1 USD. Likely we will be loosening these parameters to accommodate such spikes. Is this too naive?
Also, I would be interested in your response to the @twodollars abuse scenario here. Is there a potential problem with reverse conversions?
This is absolutely possible. But it won't be the case for a long, long time, if ever. Your model depends on the natural supply rate always being higher than any current rate of demand to increase holdings of SBD (with the difference made up using SBD-to-STEEM conversions). Without knowing the behavior of future demand, which is impossible, it is also impossible to predetermine a rate of supply such that we can be confident that the supply rate is always going to be higher than demand rate. Even if we could, given the existing design constraints such as an already-determined total inflation rate, it is difficult to envision how we could raise the SBD creation rate enough to chang this unless that creation comes with an associated destruction/conversion of STEEM.
Regarding the abuse scenario I don't have time to work through his scenario in detail but I have considered many and nearly all if not all rely on being able to predict the price or assuming the ability to unilaterally move the price without losing money doing so. (Both being assumptions I consider questionable at best.) While I don't think anyone really believes that these conversion mechanisms are completely impervious to abuse, most of us do believe that abuses are limited and that allowing SBD itself to be subject to rampant manipulation allows even more damaging outcomes, including loss of utility of SBD as a stable value token and the associated opportunity costs that arise because of uses that will never happen.
Ah okay. Thanks again for your reply!
I want the peg as the end state, but didn't think this reverse conversion would work.
The cited abuse path does make the assumptions you stated, so it is likely something you been have already thought about. And it sounds like you have measured the risk of this to some extent and the spread at least could mitigate this. Hell even a large spread would still make me want to do the reverse conversion in the beginning anyway if I had spare steem.
To be honest, if there are enough risk mitigation factors and fail-safes in place, I would not be opposed to this procedure, as a peg is a completely sensible thing to have.
However, do you think it makes sense to see how the market reacts to the current rate of printing? Because it does seem to be a relatively new phenomenon. (Although I suspect your position here is that this is already too long, the two months)
Not only the two months so far now, but this is the second occurrence of largely the same phenomenon. It happened last spring as well, and took about four months to resolve. So over the past 12 months, the peg has been working only 6 of those months. To me it is clear by now that this is not only not working well, but imposing real costs on Steem in terms of both distortion of the intended incentives (curation, vesting, self-voting) as well as missed opportunities to attract business and capital with a working stable value token.
Thanks for jumping in here @smooth with some thoughtful comments. This is a great little thread of discussion right here. I just need someone with more voting power than me to bump the original comment to the top for me.
All they have to do to secure the value of Steem Dollars long term is re-introduce yield. If yield is added again then people will want to hold Steem Dollars over alternatives at least until Dai becomes more known. Steem Dollars are actually backed by something.
The other element is SMTs. How will people buy into SMTs? If Steem Dollars are involved this could lock in Steem Dollars.
Do you mean the interest rate? I doubt that's something the witnesses would consider at this time.
What's Dai?
The Dai is a stable token from the Maker project which is basically the bitUSD token equivalent for the Ethereum blockchain and I understand it is backed by ETH as collateral. My TODO list has it near the top to investigate as a place to park some crypto wealth now that SBD has become speculative. Stay tuned because I will probably write about it soon.
The Dai is likely to be the biggest competitor to SBD as a stable token going forward.
Looking forward to it.
Speaking of this, I was thinking about taking some SBD and parking it in bitUSD. Then I realized I'm not sure if that's any different than any current holdings I have on the USD, so maybe I should just buy steem with it :). But supposing I wanted a USD token, why not bitUSD?
I like bitUSD too though the liquidity is not great there and the underlying collateralised asset (BTS) is more volatile so the black swan event risk is higher. With ETH having more stability and more liquidity I think Dai could really be a winner.
That said, I'd prefer the collateral underneath the peg be something value producing like the STEEM Reward Pool rather than a raw crypto, but I'm one who will take the best stable coin on the market at the time. That looks to me like it will be Dai.
The issue is not securing the value, it is providing enough supply quickly enough that it does not de-peg to the upside, as has happened twice now. Yield will not help, it only makes SBD even more valuable to hold. What is needed is more supply, exactly what this post explains is happening, but it does not happen in a manner that responds dynamically to demand, so can easily fail (as it has).
I thought this way too when this first happened but now I'm skeptical that it can ever hold a peg. If it ever goes below $1 people will buy it as free money. If it even is at $1 people will buy it up as free money. How will it ever get below $2?
It will (probably) get below $2 because at $2 (or even in principle at $1.01) supply will keep being produced essentially without bound as the graphs in this post illustrate, until there is just no more incremental demand to keep buying more of of it, and then the price will fall.
Look at the price chart for last year. Just as it has proven that it doesn't reliably hold a peg, it is also proven that it is possible to return to $1 after being too high (once supply with its slow-but-relentless climb catches up).
It all sort of works, but not consistently.
Good post. Well written and nicely explained and illustrated.
Thank you. I appreciate you taking the time to comment here. You input into this discussion has been invaluable in helping users understand the big picture issues.