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RE: STEEM DOLLAR Will Fall To $1 USD : Here’s Why
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.