How can Steemit back the Steem Dollars with US Dollars as promised?

in #steem4 years ago

Steemit Dollars are said to be "about" on par with the USD.

Surely Steemit must have lots of USD nominated cash income in order to be able to back up their claim that the Steem Dollars are worth on a 1:1 ratio to USD. Basically they will then be acting as a central bank which has decided to peg their currency to the USD. In this case, however, they have already set in stone the amount (and increase) of Steems, so I don't really see how they could manipulate the exchange rate in any other way except to just simply have lots of dollars and buy up all the steems at a pre-set price.

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Thanks for your question. The short answer is that Steemit does not back the value of Steem Dollars.

To illustrate that Steemit and Steem are separate, it's worth seeing that Steemit is just one application plugged into Steem. Another application showing the same data is steemd.com.

Steem Dollars are a blockchain based contract in which the Steem blockchain has committed to buy and destroy the contract in exchange for Steem at the value of a dollar. The system does not depend on a third party to 'back' the value. The value comes from speculation (see: Steem on Bittrex.com or its market cap on coinmarketcap.com), price feeds and recurring seignorage to reward holders of Steem Dollars.

Steemit does not back Steem Dollars and never promised to back them. Steem Dollars are backed by the blockchains ability to create new Steem. Those who hold Steem Dollars are like investors lending money to a startup using a convertible note.

In effect, those who hold Steem Dollars are lending the value of a dollar to the blockchain secured by the ability to print Steem. In exchange for lending the blockchain dollars, they are paid interest in the form of more dollars.

If the value of the blockchain were to implode to near 0, then all Steem Dollars would get converted to Steem at the same ratio and existing Steem holders would lose almost everything. Steem would be under new ownership (Steem Dollar creditors would take over the Steem).

no one in this system is like an investor nor is it like using a convertible note.

The mechanism how Steem Dollars are created is described in the whitepaper. I suggest that you read that first to get a better understanding how the system works.

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