Steem-backed Dollar peg failing?

in steem •  9 months ago

The current prices for STEEM and Steem-backed Dollars (SBD) are currently rising steadily, which is good news for those holding those cryptocurrencies as investments, but it raised some serious questions for me, specifically because SBD are supposed to be "pegged" to the US Dollar.

I did some diving into the technical aspects of the SBD/STEEM relationship, and it seems the main thing that enforces the peg is that one unit of SBD represents one USD worth of STEEM. But how is the value of STEEM then determined (how does the system tell how much "one USD worth of STEEM" is)? That's done by the Witnesses advertising what they think the current STEEM value is.

This fundamental ability of SBD to be converted into one USD worth of STEEM guarantees a minimum value for the thing. If you can acquire one unit of SBD for $0.75, you can convert it to $1.00 (in STEEM) guaranteed. In a traditional stock/asset/cryptocurrency, if you bought it at $0.75, and wanted to sell it at $1.00 to make that same profit, you'd need to find/convince some other sucker to pay $1.00 for what you only paid $0.75 (not guaranteed!). So that guarantee should be a strong financial incentive for the value of SBD to not drop below one USD.

However, with the recent price surge, of SBD being worth $5-10, there were many people looking to cash out and take some profit from that. Some people, misunderstanding that fundamental aspect of SBD instead of selling the SBD for $10 worth of some other asset, executed the SBD action on the STEEM blockchain, receiving only $1 worth of STEEM. So posts like this one popped up urging people to not use the "Convert to STEEM", and recently it was removed from the Steemit interface entirely.

The "convert SBD to STEEM" action is a fundamental part of the STEEM blockchain, so even if Steemit as a website hides it, the functionality is still there, just not nearly as accessible. If less people can find it, that feature's ability to hold the lower end of the price peg gets more shaky.

But what about the high end? The USD value of SBD is soaring to $10 currently; ×10 what it "should be". What is there to hold that value down? Right now, the world is getting more aware of cryptocurrencies in general, and the features that all of them represent (trustless and decentralized). Those features alone seem to be gaining value in people's eyes, so, even though SBD is "supposed to be" a representation of debt on the STEEM blockchain, it's also a trustless, decentralized cryptocurrency (with a built in savings account feature!), and those features may be what's driving more investors to that coin currently.

So, the STEEM blockchain can scoff and say "You dummies; that thing is only worth $1!", but if there's more media coverage about the whole cryptocurrency space rising, the fear of missing out (FOMO) can speak much louder than that. There are testnet blockchains for Bitcoin and Ethereum that are "supposed to be" worthless, and for the most part they are considered worthless tokens. But those two are also cryptocurrencies; what's preventing the community from giving them actual value? Well, the Bitcoin testnet is reset every so often, destroying assets of anyone who holds those tokens long term, and the Ethereum community starts new testnets every so often, so users remaining on an old testnet find themselves without a community any more. So how can the STEEM blockchain as a decentralized entity counter the "we really think SBD should have more value!" cries?

Right now, if the STEEM blockchain wants to keep the value of SBD down, it needs to de-value it. One of the key ways to de-value a currency is inflation; print more of it. If more of it is in circulation, users go from being excited by having 1,000,000 of something, to being rather tepid about it, when they realize all their neighbors also have 1,000,000 of them too. Normally, SBD springs into existence at a fixed ratio whenever STEEM is created (as part of the act of rewarding authors and curators when content is upvoted). So, to make more SBD, more content has to be created. But you can't just force people to post more (and really, if you did that, the quality of the content would likely tank), so that's not really a good source of additional SBD.

The STEEM blockchain also has another means to create SBD: the Witnesses can set an APR interest rate on it, such that people who already have SBD start gaining more of it just by holding it. This is looked at as a way to stop the price from going too low (with the idea that if SBD units are selling for less than $1.00, for some reason people are wanting to sell them off in large amounts; exchanges have too much liquidity. If those assets start returning an interest rate, people might be more inclined to keep the SBD and gain that interest, and not sell. So they'd remove their "sell" orders and the exchanges would lose liquidity and the price would rise).

However, wouldn't it also work in the other direction, to keep prices from going too high? Right now, exchanges don't have a lot of liquidity, so the price creeps up. If the interest rate on SBD were raised, in the short-term it would likely spike the price (a cryptocurrency that gains interest in itself? Cool!), but longer-term, would cause more SBDs to be in user's hands, and cause inflation and devaluating of the currency?

I'm not an economist, so might be way off on this; anyone else want to weigh in on wether we should be encouraging a high SBD interest rate currently, to attempt to drive down the SBD price, or not? Are there any other downward-pressure tools that the STEEM blockchain can employ to counter the general cryptocurrency FOMO happening worldwide?

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