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I've always been wanting to do a bit more research about how the three Steem tokens work, and over the past few days with the craziness of SBD I still had a lot of questions about how the numbers work out. I've gotten to a place where I have a consistent picture (will need verification of correctness from people more knowledgeable than I). I wanted to share what I've found out and compile a little playbook for users like you and me for how to react rationally to these tokens.

First of all, as of this reading, according to the marketplace, 1 SBD is worth about 12 USD (Bittrex), and STEEM is worth about 1.75 USD (Bittrex). Steem's internal market matches this, allowing one to trade SBD/STEEM at a rate of 0.15 SBD for 1 STEEM. These numbers are easy to look up, and are well understood. You can swap tokens with someone else on the exchange at those rates.

The part that I feel is confusing and wish to clear up by the end of this post is how that affects Steem's internals, specifically:

1. Payouts
2. Conversion Process

Before that, we need to get into something you may have been hearing thrown around a lot: the price feed.

What is the Price Feed?

You may have read that

1 SBD can be redeemed for *about* 1 USD worth of STEEM.

What is the "about" about? Two things.

1. The price is determined by the price feed. In short, Witnesses publish a feed price that reflects the market price of STEEM in USD, with the discretion to deviate from the market price as a monetary policy tool. The price actually used is determined by 21 witnesses and the median is used to insulate against outliers. You can see the feed prices here. If my reading is correct, it is still reflecting market price, without adjustment.
2. The redemption process (and payout conversions) averages the price feed over 3.5 days to stabilize the rate so that it does not fluctuate as wildly as the market might. This mechanism also allows time for witnesses to vote out malicious actors or adjust for bugs in the price feed.

So actually, I want to adjust this language to be unambiguous:

1 SBD can be redeemed for exactly 1 USD worth of STEEM as determined by witness price feed averaged over the next 3.5 days, with the payout being in 3.5 days in the future.

Price feeds and conversions

Say that the price feed is at 2$, and assume it stays stable for 3.5 days. If you use the conversion mechanism (Wallet, SBD -> "convert to STEEM" option) to convert 1 SBD, you will be getting 0.5 STEEM after 3.5 days (as noted, the delay is to prevent gaming fluctuations in the price feed).

After conversion (3.5 days later)
----------------------------------
Your SBD wallet: -1 SBD
Your STEEM wallet: +0.5 STEEM
Total SBD Supply: -1 SBD
Total STEEM Supply: +0.5 STEEM

Note: You need to pay close attention to the relationship of the median price feed to the market rate of STEEM before you convert, and compare with the internal market, or else you may be losing a lot of value. And if volatility of STEEM is high, the conversion becomes unpredictable, even though there is some averaging to mitigate the unpredictability.

Price feeds and payout

Say the price feed is at 2$, and again assume that it is stable for 3.5 days. This means if you were supposed to receive 1 STEEM worth of SBD, you would be getting 2 SBD. This is why if you see the market rate of STEEM go up, the payout in SBD increases, and your votes are worth more.

Let's say that after a 50/50 reward split, the blockchain is about to pay out 1 STEEM worth of SBD and 1 STEEM worth of SP for your post.

After Payout:
----------------------------------
Your SBD Wallet: +2 SBD
Your STEEM POWER Wallet: +1 SP
Total SBD Supply: +2 SBD
Total Steem Supply: +1 STEEM (in the form of SP)

Remember: 1 SBD to the blockchain = 1 USD. It does not use external market to value SBD.

Estimated Value of a Wallet

This was also a question asked, and based on the above, we can answer a simple question for how the number is calculated.

Estimated Value = (SBD Amount) + (Feed Price) * (STEEM + SP Amount)

Again, it does not use the external market to value SBD (though it possibly could).

Note: This is actually a guess, I did not inspect the code for how this value is computed. Appreciate it if someone could confirm this.

Effects of Price Feed Bias

First, to address a question: What do people mean when you hear "price feed bias"? You will see this listed on the Steemd witnesses page. This is just another way of saying that the given witness has adjusted its price higher or lower relative to the market rate. If you hover over the bias cell, or if you click into a given witness that has set a bias in steemd, you will see the price they have set on the feed.

If the feed price is over the market price of STEEM, then:

1. SBD will be converted for less than 1 USD [market] worth of STEEM. (e.g. SBD is less desirable with regard to conversions). To see this quickly, in the example above, supposing STEEM is 2 USD, and price feed is at 4 USD, 1 SBD will be exchanged for 0.25 STEEM rather than the 0.5 STEEM under normal conditions.
2. Payouts will be giving more SBD to users. This should be clear from the example above. If you were intended to receive 1 STEEM, it would be converted to 4 SBD if the price feed is at 4 USD rather than the 2 SBD earlier. More SBD is added to the supply than under normal market conditions.

The reverse happens when the feed price is under the market price of STEEM.

I do not believe this is happening right now (someone please verify), because the median feed price is still at market price, though there are witnesses that have discussed increasing their feed prices.

I will not go into monetary policy in this post, just what it means for users. (Monetary policy will involve a discussion about SBD as a debt instrument, stay tuned.)

Playbook for the Rational SBD Holder

This is the TL/DR most of you are looking for. I will outline possible scenarios and rational actions that the market would take in reaction to these fundamentals. My conclusion after studying this all is that the market is simply stupid and unaware of these properties I've outlined above. DO NOT HOLD SBD IN EXPECTATION THAT IT WILL KEEP GOING UP.

No Price Feed Bias, SBD > 1 USD (aka now)

1 SBD is worth 1 USD worth of STEEM with respect to price feed. Do not use native conversion, you will get less value worth of STEEM and you have to wait 3.5 days. If you want to make the most out of SBD to STEEM, swap SBD for STEEM on the marketplace.

In this regime, I basically am dumping SBD as soon as my payout happens (but reserving around 1 SBD for services that take SBD).

No Price Feed Bias, SBD < 1 USD

1 SBD is worth 1 USD worth of STEEM with respect to the price feed. Swapping on the market will give you less STEEM than going through the conversion process. convert SBD using the conversion process.

And if I'm sold on the stability of STEEM (I am), I might be doing the following:

1. Buying as much SBD as I can through the marketplace.
2. Converting the SBD through the conversion process.

Why? Because I'd be getting the SBD for less than 1 USD, and converting it to more than 1 USD's worth of STEEM!

There will be other factors, as in this regime, the witnesses can set interest rates on SBD to encourage demand for SBD. That will also influence the decision to convert.

General Picture

Convert: 1 SBD = [1 / (feed price)] STEEM
Market Swap: 1 SBD = (STEEM/SBD market price) STEEM

Note that feed price adjustments are a monetary tool that witnesses can use when SBD is not parity (again, saving for a later post). If it is off, then the comparison is more complex, and you basically use the above formulas and just pick whichever one is higher.

However, there is a caveat: Conversions will happen 3.5 days later at the feed price at that time, so if volatility is high, there is an element of risk when carrying this procedure out.

Summary

It bears repeating, but: SBD is redeemable for 1 USD [price feed's] worth of STEEM. It is meant to be worth 1 USD. The market can trade such a token for however much it wants, but that does not change the fundamentals of the token. Do not HODL. It already has natural downwards price pressure by the virtue of printing SBD at payout time.

Now, I could be proven wrong if SBD has other properties. One that I am aware of is that SBD's can be redeemed in the post promotional section as a means to boost your post in the post promotion section. Suffices to say that this is not used a lot, so I don't think people are going nuts over this property. Let me know if you know of any others.

Finally, let me know if you have any questions or clarifications, and hope this was useful to some of you.