The Steemit Ecosystem: Profiting from Pegging SBD to STEEM

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.

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@rycharde manages the AAKOM project and the MAP forum.