I made a post just before HF20 predicting that the SBD peg would be broken in the future. While not all my predictions were accurate, a lot has happened and a lot faster than I expected. link

The current situation

Since HF20 SBD is printed by the chain until the marketcap of SBD(assuming a price of 1$ each) is equal to 9% of the marketcap of steem. At this point printing is eventually stopped.

SBD are a stablecoin since they come with the promise to be able to redeem them for 1$ worth of steem. But what fewer people know is that there is a haircut at 10% meaning that when the sum of all SBD is worth more than 10% of all steem the conversion rate is lowered. 1SBD is no longer 1 $ of steem, but less. The peg is broken.

source

What has happened in the last few days is that we were around 8% debt and then the price of steem (like most other cryptos) took a hit and the debt ratio shot up to around 11.5% currently. This means that right now 1SBD converts to 0.87 $ worth of steem, quite accurately explaining the prices seen on exchanges. The peg is officially lost and the prices we see are not a strange downwards fluctuation but reflect the market reality. They might even be slightly optimistic!

What was argued and why it was wrong

When I brought up my concerns ahead of the hard fork, people told me that there is no problem.

• People worried about their SBD can sell or convert ahead: But people were not warned that SBD is a risky asset! And even if they knew, they do not want to get rid of their sbd because they wanted a stablecoin and not steem in the first place!
• When the peg is lost there will be financial incentive to buy up SBD and convert: This is not the case. Converters take a risk. When the price falls during the conversion time they loose out. When SBD goes below 1$ at around 10% debt, that is rational since converters are not guaranteed their steem instantly but only after some time. So they loose when price drops, but dont gain when price increases. That is already asymmetric so SBD at 10% debt should be lower than 1$ for the opportunity cost of converters.

Why the current system sucks

We now have 0.87$ SBD. Some people think it is great to buy because it will come back to 1$ in the future. But what has to happen for SBD getting back? Steem needs to go up!. SO then why buy SBD and not just stay with steem if both will rise the same. Quite interesting, for SBD to fall lower steem has to fall lower. SBD is right now just a funny form of steem with a similar risk profile. When people realise this and that SBD does not even pay interest, prices could even fall a bit lower.

Before printing would stop at 5%. For the haircut to activate we then need a 50% price drop in the worst case. In crypto that can happen but there is some time to react and convert, even though financial incentives are also lacking in the old system.
Since HF20 we print up to 9% at full speed! That means that at any moment a 10% price drop will activate the haircut. And in crypto that can happen any day. There is no time to protect against it and SBD is not a security against price drops anymore. It can tank a few % drops, but quickly crashes for anything more substantial.

So we had an acceptable stablecoin and we officially ruined it. But why? Just so we can give out another 4% steem market cap in free money. WOW! that really makes steem something much better! Fundamentally changing the way posts here are rewarded. Especially since we only need to give up our stablecoin for that. A small price to pay for 4% more (risky) rewards (that are eaten up by inflation from conversions in most cases).

And right now all the people holding SBD and not knowing that is was transformed into a speculative asset are sitting on 13% losses. Where is the anger? Well they still dont know that this money is gone because they believe the markets are irrational and all is fine. But when you had SBD that were marketed to be bound to 1$, you have made a very real loss. Because you took the opportunity cost to miss out on steem growth for security. Security that would now after the crash allowed you to buy more steem. But you cant and you made a bad deal. And who has your money now? It was added to the post rewards. Thanks a lot for your donation to all the authors.

source

I strongly suggest to go back to the old system in the next fork and ignore SBD in the meanwhile. I hope this mess also brings the people wanting the opposite conversion to rethink if this is really a good idea. A peg needs a security, there is no way around it. There is no magic money and there is no free lunch. To make something work we need solid fundamentals and trying to squeeze profits we have destroyed them in the last fork.