Steem Dollar Stability Enhancements

in #steem8 years ago (edited)


Black swan on Vacha reservoir, Bulgaria by Kiril Krastev

Over the past couple of weeks, our team has been working through the Steem Dollar mechanics in an effort to secure the economic foundation of Steem against black swan events. It should be obvious to all that if at any point in the future the market cap of Steem fell below the supply of Steem Dollars then the Steem Dollar would break. Long before that happened there would be a run on the bank.

We designed the Steem incentives to always push Steem toward a Steem Dollar supply equal to about 5% of the available market cap. This happens because for every Steem Dollar we create we create about 19 Steem Dollar’s worth of Steem and Steem Power.

This system works well when the market cap is rising or relatively stable, but there is one edge case which could cause the system to unravel. When the market cap falls and pushes the Steem Dollar ratio to dangerously high levels (20% or more of market cap), then the network must start paying off its “debt” with “equity” and reducing the Steem Dollar supply.

Extremely Unlikely but not Impossible

Before anyone starts worrying, lets look at what would have to happen before these kind of scenarios become a concern.

Currently Steem Dollars represent about 1% of market cap and total about $2.1 million dollars. This is a very safe level. The market cap would have to fall to $10.5 million dollars before Steem Dollars represents 20% or more of the market cap.

Each day the supply of Steem Dollars is increasing so over time the danger zone market cap will rise.

Reducing Steem Dollar Supply in Down Market

There is only one way to reduce the Steem Dollar supply and that is by users voluntarily converting their Steem Dollars to STEEM at the price feed via the 7 day conversion. This processes can be incentivized by offering a short-term premium conversion rate that gives each Steem Dollar holder $1.25 worth of STEEM when they convert. This is possible by having the witnesses temporarily adjust the price feed.

It would be critical that the premium remain temporary and has a pre-planned deadline or else the market would permanently adjust the trading value of Steem Dollars to reflect this new premium conversion rate.

Steem Whales can also buy Steem Dollars on the market by powering down some STEEM and then convert to back to STEEM. This process would not necessarily be profitable for whales and suffers tragedy of the commons. One whale would carry the burden for the benefit of the entire platform.

Stop Increasing the Supply

Of course it gets difficult to reduce the Steem Dollar supply when the supply keeps growing due to interest and author rewards. The fastest way to dig yourself out of a hole is to stop digging. As it exists today, this isn’t an option for author rewards but it is possible to reduce the interest rate to 0%.

New Enhancements for Stability

In the up coming hard fork we will be including changes to the protocol designed to protect all parties in the event persistent price declines and lack of redemption requests allow the Steem Dollar supply to reach unhealthy and unsustainable levels.

Gradual Shift in Author Rewards

As the Steem Dollar supply grows from 3% to 5% the percent of author rewards paid in Steem Dollars will go from 50% to 0% and the percent paid as liquid STEEM will go from 0% to 50%. In this way authors are still awarded with liquid assets, but the network gradually slows down the printing presses on Steem Dollars.

At current levels, this measure wouldn’t take effect unless the market cap fell to $70M and would completely stop issuing new Steem Dollars when the market cap fell to about $40M.

Gradual Forced Redemption of Steem Dollars for STEEM

Any time the Steem Dollar supply reaches 20% of the market cap, 1% of everyone’s Steem Dollars will be converted to Steem Power at the price feed. This action can be viewed as a partial “bail-in” where everyone is treated equally. This will immediately reduce the Steem Dollar percent of total market cap while preventing immediate dumping of the STEEM which could accelerate the collapse in a positive feedback loop.

Steem Dollar holders that wish to avoid this forced redemption should convert to STEEM and sell on the market. If done via the 7 day conversion process, then the supply should decrease naturally and all Steem Dollar holders can be spared the “bail in”.

Implications

It is our belief that having this safety net in place before it becomes an issue will help the entire community know how stake will be allocated in the event of persistent long term declines in price. The existence of this safety net will in turn reduce the likelihood that fear will turn into panic selling that would ultimately precipitate such an event.

It should be obvious to all that Steem Dollars are not backed by any individual holding dollars in a bank or promising to pay US dollars and that the only thing you are guaranteed is some amount of STEEM. The STEEM cannot be guaranteed to have purchasing power.

Under the enhanced rules everyone is protected and fairly dealt with in the unfortunate event that the market cap of the platform is unable to sustain the Steem Dollar debt levels.

Feedback Wanted

If anyone has any concerns or has better solutions in mind please let us know.

Sort:  

I would like to make a brief statement that due to some legitimate concerns raised and an enhanced alternative solution I have come up with, the forced conversion at 20% will not be implemented. A future post will contain details about an alternative solution.

@dantheman any chance we can get an Official Steemit Guidelines and an Official Steemit Chat feature? See my post about Steemit Guidlines or my post about Steemit.Chat for a reasons why!

Today I wrote an article that is exposing your secret plan: https://steemit.com/steemit/@capitalism/capitalism-5-dan-s-secret-plan-for-world-domination-exposed-exclusive-cover-up
Opposite to the GivingPledge of Bill Gates I have made a KeepingPledge for it - so I will convert all SBD payed out by this article to Steem and power up afterwards. If more Steemians are doing this, this will stabilize the price. Lets make the #KeepingPledge popular.

Currently Steem Dollars represent about 1% of market cap and total about $2.1 million dollars. This is a very safe level.

Let's say that again:

Currently Steem Dollars represent about 1% of market cap and total about $2.1 million dollars. This is a very safe level.

---->> REMAIN CALM <<----

(Now you can read about a new way to burn steem in my STEEMIT SHOP idea)

Was going to sperg out, now I'm good. ;)

Thanks bro, I'm calm now.

We designed the Steem incentives to always push Steem toward a Steem Dollar supply equal to about 5% of the available market cap.

What is 'available marketcap'. The VESTS are illiquid, and not part of available market-cap. If we take them out, then we only have 8.4M SBD worth of liquid STEEM. This means, SBD to liquid STEEM ratio is 25%.

Calculated as:

2.1 / ((134.8-129.5)*1.59)
= 0.24919900

Using current values from steemd.com

All SP counts as well. Just because it is "locked up" doesn't mean it has no value.

I just find it weird to throw both STEEM and VESTS into the same market cap.

Technically they are not the same thing. They don't have the same value - VESTS need to be adjusted to account for inflation and opportunity cost that comes with the lock-in.

Although now that I think of it, my point on counting only the liquid STEEM is baseless. SBD is created in 1:19 ratio, all of the STEEM being issues as VESTS.

You could also introduce a flag in account information for accounts to volunteer to have their second half payout paid entirely in Steem Power, liquid Steem or Steem Dollars. This would slow down the increase of the SBD debt, and provide some more leeway.

This is good for a few reasons: more user control on their payouts, incentives for STAYING POWERED UP, and sets the stage for user controlled payout percentage options for contributors, editors, or artists related to content (ie. 25% to userX; 25% to userY).

I second this. I've been reinvesting all of my Steem Dollars into Steem Power and it would be nice not to have to take that extra step. I only plan on cashing out Steem Dollars if I make a post that pays out a large amount, and in such a case I would leave my Steem Power reward alone.

That's a really good idea. I'm sure a lot of people would volunteer.

Yeah, it sounds great. Perhaps even a setting in how you would prefer them to be distributed on top of the always active 50% as Steem Power. Say, I'd like 75% SP, and 25% SBD, without having to convert or hit the internal market.

I like this idea as well and would probably sign up for it, but I also recognize the value created in terms of market liquidity my SBD -> Steem Power conversion brings. If no one had to do that step, would the liquidity (small as it is today without the liquidity reward) also dry up?

All these types of things should be made very clear in the interface. The current interest rate should be shown, as well as any award shifts or forced redemptions.

Yeah it would be nice if they showed the interest rate.

Yes... it is also a major selling point that although there might be risk in holding SBD, there is also a considerable risk in having a bail-in in a commercial bank... especially in autumn (September/October)... and there one does not get a penny in interest... only risks...

And the funny thing is, that as always banks are shown in the mainstream media to be solid as hell... while we care much about pointing out 20 times that there is risk involved in this space. In the perception of an outsider we ourselves say we are risky, while the others say that they are safe... with lots of cute capital ratios and stress tests... all bogus in my eyes...

They need to get the advertising revenue coming in and use that revenue for buying back SBD.

I was thinking that we need more ways to consume STEEM other than advertising, which ruins the experience.

For instance? Want to earn yourself an avatar image? It costs XYZ STEEM. This will cause people to spend $20 or something realistic to buy their avatar, either by earning it, or buying it.

The steemit.com/shop/ could be created. Owned, and staffed by the blockchain itself.

Virtual products, virtual services, sold by the blockchain, that consume STEEM. This way people who hold value, or can buy value from traditional exchanges, and enjoy these virtual products and virtual services to beef up their steemit accounts with something other than SP.

https://steemit.com/steem/@intelliguy/let-s-use-steem-and-consume-it-in-our-new-steemit-shop

a safety net during a "run to the bank" ... I have to think about this @dantheman for a few hours.

Would you mind coming on http://steemspeak.com and talk with us about it later today? A lot of people suddenly got panicked by this post.

Yes I hope he takes you up on that. These kind of things need at the very least to be discussed.

You should really have a changelog where you're actively updating all the rule changes you're implementing (and there should be a master doc that has all the rules presently in place).

Right now it seems like its a combination of blog posts and Github, and that's frankly hard to track. To track rules I'm kind of doing a combination of Google searches and reading the Github and it should be more simple than that IMO.

I think these solutions are more complicated than they need to be. If holding Steem Dollars creates a problem for the network, the resolution is simple: Reduce the incentive to hold Steem Dollars.

How would this be accomplished?

As the percentage of (Steem Dollars/Market Cap) grows, gradually lower the interest rate. Do the opposite when that percentage is shrinking. In order for this to work, these interest rate changes must be highly transparent.

When you think about the function of an interest rate, it's encouraging savers when the interest rate is high and discouraging savers when the interest rate is low. I don't think it would be any different with the Steem Dollar. What do you think, Dan?

By the way, I'm not against having other safeguards in place, it's just that I think we can solve this with​ a simple floating interest rate.

Variable interest rate shown in the interface is a good idea and may help much.

This processes can be incentivized by offering a short-term premium conversion rate that gives each Steem Dollar holder $1.25 worth of STEEM when they convert. This is possible by having the witnesses temporarily adjust the price feed.

Can you clarify this? Do you mean they would "fake" what the exchanges are actually offering for SBD on the open market? That, to me, seems odd, but I get how it would work, given the current mechanisms that are already in place. It just feels... icky.

Also, would this be widely communicated via a notification on the site? Seems like an important change people would need to know about.

It seems to me an active marketplace for SBD is the best long term solution here. Even if the value of STEEM dropped, a market place for SBD could (in theory) prop up the value of STEEM beyond what cryptocurrency speculators invest in it.

Do you have a timeline for the birth of that marketplace?

I run an ecommerce platform with thousands of merchants and already demonstrated how people could sell products on Steemit blogs right now. All we need to make this go mainstream would be official integration and a SBD payment system such as http://www.steempayments.com/.

Ah, I love this response. Thank you @dantheman. That post answers a lot of my questions and concerns.

Flagged for using a preview purpose only image from dreamstime.

Man what big balls you have!

@dantheman you changed the image again but seems to be plagiarism once again.

The image was licensed under creative commons: Wikipedia

commons.wikimedia.org/wiki/File:Black_Swan_bg.jpg

Attribution – You must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work).

Add source please.

FYI

https://steemit.com/photography/@repholder/how-copying-and-pasting-images-can-get-you-in-trouble

Edited : A thank you from the steemitabuse-channel members (aka steemcleaners) for adding attribution.

Flag removed ;)

The image already contains attribution in lower right and the URL already defines source (wikipedia).

@dantheman sounds like you guys really thought this out. I think a mixture of all those ideas would be ideal and guarantee permanent longevity for the platform and crypto.

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