RE: Now Is the Time to Reduce Feed Price Discount
I can't agree, and the white paper agrees.
Quoting from the white paper:
If the debt-to-ownership ratio gets dangerously high and market participants choose to avoid conversion requests, then the feed should be adjusted to increase the rate at which STEEM paid for converting SMD
This is exactly the current situation. The debt ratio is ratio is dangerously high and market participants have avoided conversions; both aggregate amount and number of participants doing significant conversions has decreased.
There are some statistical errors, or at least unsupported conclusions in your post:
The fact that you have made a profit doing conversions retrospectively does not mean that conversions would necessarily be highly profitable going forward. If people believed conversions (in the future week) would be highly profitable, then market participants would engage in more of them, not avoid them. This is due the SBD price being higher. The (expected) profit margin on conversions is equal to the current SBD price discount plus the feed discount, so the SBD price increase has already had the effect of a large reduction in conversion incentive. Since Dan's post when SBD was trading at about 80, this has removed about 20% from the conversion incentive. Feed discount has only added back a 6% (at current discount) incentive. This is insufficient incentive and that is why the market participants have been avoiding conversions.
The negative correlation between debt ratio and conversions is very likely reverse causality. The conversions have increased as the debt ratio increased because in seeing the higher debt ratio witnesses have increased the feed discount (and earlier, there was a large SBD price discount as well) and concerned participants have engaged in more and larger conversions regardless of expected profit (for example the approximately $400K of conversions that took place when the debt ratio reached 9%). Also, as the debt ratio increased above 2% and then above 5% it became more difficult and then literally impossible for debt amount to ever increase because SBD creation was reduced and then stopped.
After the fork, the economy will be quite different. I agree the discount should be reduced, probably, and I agree that we have to be reactive. Not, as you suggest, to what the price may have done in the past few weeks, but to whether debt is dangerously high (it is, and likely will be after the fork unless there is a huge price increase) and whether conversions are being avoided (this is less clear as the 3.5 day period may make them more attractive so we may see more occurring), as the white paper explains. We will have to reassess both conditions after the fork.
The debt ratio issue is complicated since it is a function of SBD and STEEM that are connected each other. Empirically, the correlation does not suggest any casualty so it be interpreted in any direction (To identify casualty, we need Granger causality analysis). But an obvious fact is that STEEM price is much more elastic than debt(SBD) amount, so reducing negative impacts on STEEM price would be a more efficient way to reduce the debt ratio.
It is very hard to find the best parameters in the dynamic market. But in my opinion, a good indicator is SBD price. If it goes up far from $1.00, it implies that we are too much incentivizing the demand side of SBD (probably a large part of them is converters given almost no usage of SBD this moment), while too much giving down-pressures on STEEM price.
Regarding the debt ratio, I don't agree that attempting to manipulate the STEEM price is an effective method, nor is it one that witnesses are charged with doing. I am highly doubtful that SBD conversions have more than negligible net effect on STEEM price other than possibly short-term fluctuations, but even if they did, merely not reducing the STEEM price by reducing selling pressure is not sufficient. To actually reduce the debt ratio by manipulating the STEEM price would require making the price and market cap go up. If there were some magic button one could press that would make the price reliably go up, we'd all be pressing it every day. There isn't. In general it requires making the network more useful and increasing demand for STEEM, which is something that can only happen with sustained successful efforts of the developers and community over time. (Of course, I exclude short term fluctuations which can and do happen in either direction.)
Regarding paying attention to the price, I wholeheartedly agree but this is why we also must reduce the interest rate before we pay too much attention to the price. Quoting the white paper again:
In effect, with interest we are disincentivizing supply, raising the price, incurring a cost in the process, and failing to reduce debt. Since this competes in terms of SBD price increase, it works against our ability to sufficiently incentivize conversion with the feed discount. The white paper gives two reasons for feed discount (increasing SBD price and reducing debt); both have high debt as a precondition. If we did not have high debt, we should never have had a feed discount to begin with, at least not a large one (we did in fact have high-ish debt, though much higher now, so the feed discount was and is okay). However, with high debt we should not also have a high interest rate.
These two policy inputs (high interest along with a feed discount) are working against each other and probably should not coexist. The haircut rule complicates things, which is all the more reason (aside from a resulting loss of confidence in SBD and the Steem platform generally) to further reduce debt and get a safe distance away from the 10% debt ratio where a haircut could occur. The current ratio is 5%, which is too close. Relying on there not being a 50% price decline in a highly volatile crypto asset is a bad gamble.
Don't get me wrong. I didn't meant to manipulate STEEM price, rather I am attempting to reduce manipulation on STEEM price, which comes from the discount.
It is up to by perspectives, but please be advised that converters consist of the biggest proportion (31%) of the net influx to STEEM markets. (Plaease see here)
Again, this is not what I meant.
Interest rate is also a tool for the market. And I want to quote this in the white paper too;
"Abuse of this power can harm the value of STEEM so SP holders are wise to vote for witnesses that can be counted on to adjust the price feed and interest rates according to the rules outlined above"
You are vaguely using the term debt, and mixing debt amount and debt ratio, while the white paper obviously mentions debt ratio(the debt-to-ownership ratio) as an issue.
Most importantly, your argument is based on a presumption that SBD conversion(decreases in numerator part of the debt ratio) does not negatively impact on STEEM price (decreases in denominator part of it). Theoretically, it is quite unclear since the circulation of conversion(what you and I are doing) includes STEEM sells, and can pull down the price or block the price going up at any degree. Without evitable proofs of the independency, arguing for higher discounts is a careless approach and can potentially harm the network.
The bold portion is key. The rules outlined above do not include witnesses refusing to increase the feed discount (or worse decreasing it) because they take it upon themselves to try to protect the STEEM price from (conversion-induced) selling that very much built into the system design and the rules given to witnesses as outlined above. The risk of harming the STEEM price from not following the rules comes from failing to reduce debt. This is because, regardless of what is done, a price decrease (even a large one) can't ever be ruled out. If such a decline occurs without the debt (amount) having been reduced, the situation (debt ratio) will be even worse. The rules outline a procedure to protect the system from the greater harm, not one to ensure that the STEEM price is protected from selling.
In large part the current situation exists because action was not taken earlier (at much higher prices) to prevent debt from becoming too large. This was due to a combination of lack of action by witnesses until the problem had grown severe and also general lack of understanding of the mechanism in the community (i.e. no one else pointed out the debt problem either). In an almost exactly analogous way, if significant debt reduction does not continue now, there is the greater risk of a (possible) further drop in the STEEM price leading to even bigger problems later. Again, we can't predict, rule out, or prevent a further price drop. We can only reduce the risk that the debt poses in the event of such a drop (by reducing its amount).
It does, and it gives instructions to witnesses to increase the feed discount when the debt ratio is high, a measure which has as its effect the reduction of the debt amount (the only thing that can be directly controlled by witness actions). The instructions do not say that witnesses should attempt to model or measure the price action of STEEM and set whatever discount they feel appropriate based on their expertise as speculative market economists. That is completely different.
That is not my argument, it is the instructions in the white paper (though I happen to agree with it). There is no other mechanism that exists to control debt other than by incentivizing the reduction of the debt amount. The system design depends on the assumption that STEEM price, even if negatively correlated with debt reduction (in a meaningful causal way), is less-than-proportionately reduced by such debt reduction. Otherwise it would never be possible to usefully reduce debt, and the system wouldn't work (sooner or later, there would be an increase in debt ratio that could not be reduced and the system would certainly fail). We need to make that assumption until some other system is designed that doesn't depend on it (or SBD is removed, which is another option that has been suggested).
You again seems to be back to debt amount, while I talked about debt ratio. Don't forget debt ratio has two components and you still don't prove they are independent.
It is debatable. Why do you think so, and can you verify it?
"Do not cross the bridge until you come to it"
Instead I think a more conservative SBD printing policy (e.g. the cut-off point is where debt ratio is 2%) is efficient.
I personally don't see any rationale for a negative price discount (as this would be seen as breaking the social contract of SBD converting to at least $1 worth of STEEM. I do agree on the need to constantly monitor and adjust discount rates and agree it will vary according to market sentiment.
I don't see SBD buyers tacitly agreeing not to compete with each other. I think prolonged SBD prices above $1 should be met with decreases in the interest rate as well as the discount rate, but think the interest rate should go to zero before the discount does.
If by "negative price discount" you mean a premium, I mostly agree. I haven't come up with a good explanation for how or when it would be reasonable to do that. The white paper only mentions it in one place the context of "discount/premium" but never describes a situation where it might be used.
I agree with you about the interest rate going to zero first, and when you put all the pieces together, that's essentially what rules in the white paper imply. I'm working on post to explain how the rules fit together and identify some missing pieces and ambiguities, so this should become more clear when that is ready.
Negative discount (premium) can be given when SBD demand is too high so we need to discourage part of buyers(converters). High discount + low interest is effective to SBD price, however it cannot reduce converter's profit, which comes from all other STEEM stakeholders pocket. Let me explain with quite extreme numbers. Given high discount rates (e.g. 20%) converters are more confident not to lose money at higher SBD price (e.g. $1.05) since unless STEEM price drops about 35%(202-5) after a week, the discount rate will protect them. If we lower the interest rate and facilitate SBD sells, SBD price can decrease (e.g. $1.00), but converter's expected profit will go up to 40%(202-0). Where does this 35 or 40% come from? It's from the network that sells STEEM cheaper than the actual market rates, and cheaply bought STEEM is sold to the actual markets, which results in decrease of STEEM value and all other stakeholders worse off.