The Steemit Ecosystem: Profiting from Pegging SBD to STEEM

in steem •  last month

The recent rises in the price of both STEEM and SBD (Steem Backed Dollars) has been a source of much excitement on Steemit.

But there has also arisen a sense of confusion regarding the relationship between these two currencies? Isn't the SBD supposed to be pegged to the US Dollar? Indeed, when rewards are paid out, the 50% allocated to SBD are calculated at 1 SBD per US$1 (whatever the current market price). So a payout of, say, $10 will appear in your Wallet as 5 SBD but not 5 STEEM.

Let's take a price snapshot with some easy numbers. As I write this, we have STEEM = US$6.30, SBD = US$7.00 and thus STEEM = 0.9 SBD.

When you look at your rewards, the numbers expressed in the two currencies just look very different: 5.00 SBD and (almost) 0.80 STEEM. They are also worth different amounts: your STEEM is obviously still worth US$5 but your SBDs are worth US$35! Your reward payout was not US$10, but rather US$40! Nice!

I trust that everybody has been claiming their post rewards at 50-50, and not 100% SP.

So what has happened to the idea that the SBD is truly pegged to the US Dollar. Well, from what I've seen, having two currencies has had a balancing effect, but not with the external US$ - the system balances SBD with STEEM. Let's take a quick look at what has happened in the last month.

Firstly, note that SBD rallied mid-December and peaked at around US$16 on 19th December; it peaked again at about US$15 two days later.

Whatever the exact cause of this rally, the important thing is that it was external to the Steem ecosystem.

The price of STEEM did not immediately respond, peaking two weeks later on 3rd January. So much so, that there was a period during which you could have purchased 1 STEEM for about 0.15 SBD or less; put the other way, 1 SBD would have bought you about 7 STEEM.

Since then the relative price of STEEM/SBD has been drifting towards parity, irrespective of both their trading prices in US$. As I write this, we are at about 1 STEEM = 0.9 SBD.

What can we learn from this? Firstly, that there is no automatic mechanism that pegs 1 SBD to US$1; there are ways this could be achieved but it requires consensus among witnesses and active intervention. Leaving those discussions aside, what having two currencies has done is to provide a mechanism whereby the internal market reaches an equlibrium.

This is not the promised equilibrium of a parity between SBD and US$, but a parity between SBD and STEEM.

So if the external market creates an imbalance in the STEEM/SBD rate, the internal market will compensate for this by trading in the most profitable direction. In the last couple of weeks, that trade has been to convert SBD into STEEM.

For example, if you had 100 SBD and converted them into STEEM at a rate of 0.2 SBD per STEEM, you would have bought 500 STEEM. If today, you did the reverse trade at 0.9 SBD per STEEM, you could have bought back 450 SBD - a profit on the trade of 350 SBD, or 350%. All of that without leaving Steemit and without any transaction fees.

And, perhaps more importantly, that trading profit has been achieved without even looking at the external market US Dollar prices of the two currencies - all you needed to look at was the price imbalance within the internal market.

One last thought is that the distribution of rewards and the internal market of Steemit have facilitated this drift towards STEEM/SBD parity without any further interference. The system achieves balance - just not the one assumed.

Hope these insights will help you manage your Steem currencies in the most efficient manner in the future.

images: coinmarketcap [1], [2].


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@rycharde manages the AAKOM project and the MAP forum.

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a peg to usd or some other stable fiat is the holy grail of crypto, and I doubt we'll see it for a number of years until the markets level out a bit, by then fiat currencies might not matter anymore :shrug:

hey, if we the people have all the value in crypto, and government money becomes worthless across the globe... we may just silently and peacefully win a war that began before recorded history!

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When countries try to peg to the USD, they think they are creating stability but they actually create huge stresses: they are usually developing nations who need to concentrate on growth, with some inflation, and to boost their own currency. Instead they find they need to limit growth to maintain their peg. What the peg really does is maintain the value of that nation's debts towards its creditors - that's the real aim.

On Steemit, I think we can now see the mechanism of having two currencies - and how to trade them with respect to each other. We don't have a debt-economy and, whether intended or not, the "peg" is working, just perhaps not how many expected it to.

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well, sbd is debt to steem... in a way, it allows the blockchain to award bloggers, without spending as much in the immediate moment. the concern is inflating the supply of sbd enough to bring price to $1 would create A LOT more debt to the blockchain... so of course, witnesses are wary of doing that. however, having such a strong steem value inflates sbd quite naturally, anyhow.... still not anywhere close to the volume required for that $1 peg... again, I think the mythical $1 peg won't show up for some years... however, while the fed and the us govt continue to deflate the usd, and cryptos help that process along by taking away that huge store of value from the central banks... they really gotta be spinning their gears on how to co-opt this movement... otherwise generations of power will become powerless... they always let a generation think they are winning for only so long :-( hopefully we don't buy into their co-opting scheme as easily this time

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Steem for Steemians ! Next meeting at $ 10.70

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Keynes taught that a country can either have external stability or internal stability, but not both at the same time. External stability is constant exchange rates. Internal stability is normal growth, not distorted by exchange rate pegs. Maintaining external stability requires adjusting interest rates to keep capital flows from changing the exchange rate too much. Maintaining internal stability requires countercyclical interest rate policy: lower in recessions, higher in booms. Hence, the conflict.

In practice, every commodity peg has been successfully attacked and so have many exchange rate pegs. The only pegs that have been stable (with a notable exception in Argentina) are currency pegs, normally implemented by an exchange board that trades currency to maintain the exchange rate within a preset band. The main problem with this is that the country doing the peggings is importing the pegged country's macroeconomic policy. Argentina has shown that the attempt to enforce internal discipline can fail, too, leading to policy collapse.

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Have you checked bitUSD? That's a pretty damned good peg.

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Looking at this chart, yes over time the peg has been relatively stable, while the market cap has soared recently.... Which means to me they aren't afraid to create a ton of new tokens in order to maintain the the peg..

I may be wrong. I'm going to have to research this topic some more

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Yes, in that case the whole function of the token is to be pegged to USD and, as you noticed, the way to keep the price from rising is to create more tokens. Will they destroy those tokens to keep the price from then falling?

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That's not correct. The system uses a 200% collateral and smart contracts to create new tokens. Basically every btsUSD is backed by 2 USD and that keeps the peg stable.
http://docs.bitshares.org/bitshares/user/mpa.html

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Thanks for the clarification. Perhaps with the rollercoaster ride in cryptos, it is becoming a popular "safe haven" between trades - at least in terms of fiat dollars.

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There is collateral to guarantee the peg. I'm not going to try and explain the details as I am not experienced enough and there are better resources ;-)
Just wanted to let you know.

One source: http://docs.bitshares.org/bitshares/user/mpa.html

This is such an insightful post. Alas, I joined Steemit only recently and was not part of its explosive growth in the past 6 months, neither was I able to use this internal imbalance for profiteering, but I genuinely hope that both growth opportunities and imbalances will be aplenty in the future.

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Thanks for your comment. Although the prices of Steem's two currencies in terms of fiat USD are important for both buying and selling in the external market, those who have an investment in the internal Steem ecosystem should also be aware that the relative price of the two currencies is also important - and can be traded very quickly in the internal market.

As I read these comments (and re-read my article) I get the impression that this is not the last price action and that - most importantly - this may again happen in slow-motion because the external speculators are not looking at the internal market mechanics of Steem. mmm... I can already sense a follow-up to this!

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I also gave it some thought and there may be ways to develop a trading system using these internal price tendencies

The thing is that SBD is half pegged. There is some sort of limited supply and the result is that if there is more demand than supply the price will go up. If the price were to go below one USD things get messed up. You would then be able to buy steem (which has it price in USD) with SBD which would mean profit by doing so. Just and example. Suppose SBD is at 0.5 USD. You can now buy 2 SBD for one USD. With those 2 SBD you can buy one Steem. You can now sell that one Steem for 2 USD. With those 2 USD you can now buy 4 SBD, .... This actually happened in the past. Steem witnesses can adjust some parameters of the system, inflation, to combat this.

So in one direction action is taken, in the other direction not. Hence half pegged.

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Yes, I have seen it in reverse, but was not so extreme (was a few months ago). But if SBD = 0.5 USD and, in your example, 1 STEEM = 2 USD, then the market would notice the trades in selling STEEM to buy SBD, thereby balancing the prices.

Perhaps the markets are not yet very efficient - less so in the early days. I mentioned the 2-week lag in the STEEM/SBD price movement. The trade volume within the Steemit internal market appears small compared to the external exchangers, and speculators may not all realise the relationships between the two currencies, hence the adjustment took longer than I expected at the time.

Now to further the thought, if SBD continues to drop in value the 1 to 1 between sbd for steem will continue to rise making it even more profitable for those who held steem and moved them into sbd. SBD price would continue to fall in relation to steem price. Ideally SBD has it's use on steemit but in the long run people should be holding more SP if they stay on the platform hence own more Steem. The 1 to 1 ratio is nearly here but I wonder if it will grow bigger now in steems favor? Thanks.

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My thoughts too :-)
Never been tested before the parity STEEM = SBD = 6 USD .
I have another observation - the effects of a new game within the ecosystem.

Very helpful in allowing me to understand STEEM and SBD. I'm always looking out for articles that help me understand this platform better.

I am very happy reading your post because I got anything on rewards be paid on steemit. Thanks a lot, regards from Indonesia.

Very interesting information And can be useful for all stemmit users around the world.

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Many thanks - I hope so.
Any questions, just ask!

Only I am doing 50-50 Can you tell me That SP is such a low. 10 $ only 1.2$ SP

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SP is priced in STEEM.
So if 1 STEEM = 8 US$, then 10 US$ = 1.25 STEEM (not 1.25 $ SP, there is no dollar sign)

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Thanks for sharing! Have an amazing day!

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Great job without delay this group of steemit will have a wonderful achievement.

Have just published a follow-up to this: The Steemit Ecosystem: The Rise and Rise of SBD Market Cap!.

Your comments appreciated!

I gave you some lovin How bout you give me some too?

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That's not really how it works. If you enjoyed the post and voted on it, then it would appear he already gave you "lovin" which you reciprocated. Creating value by offering a constructive comment that relates to the content he created would be a simpler way to possibly get the "lovin" you seek, while begging tends to get you ignored.