STEEM 101_3: IS THERE A SHORTAGE OR SURPLUS OF SBD?

in steemit •  6 months ago

The recent price surge of SBD happened as a result of a combination events that tells us a very unique story. There's been a lot of confusion surrounding this so I wanted to get a but deeper into it for those who understand finance or want to get into finance a bit more. For the record, I am not in finance by profession. I am a structural engineer! So if you notice something factually wrong, please comment and I will edit to correct!


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HOW IS SBD CREATED?

SBD is created out of inflation and then distributed to authors from the rewards pool. The inflation rate can be adjusted through hard forks as it has in the past. The inflation started off at 10% and will reduce by 0.5% each year. Which means the current inflation rate is 9.5%. Existing SBD is inflated to create fresh SBD which is distributed to authors and curators each day.

HOW IS SBD DESTROYED?

SBD is destroyed by converting SBD to STEEM. This conversion takes 3.5 days to complete and is purposely done so to prevent conversion abuse. This process will literally take SBD, pay you out with STEEM and then destroy the SBD, thereby removing it from the supply chain.

WHAT MECHANISMS ARE IN PLACE TO STABILIZE SBD AT $1.00?

When SBD is trading below $1.00, interest is paid to users holding SBD. Whenever an interest paying financial instrument is trading below it's cost, it will often be purchased and held for its cost + interest payment. This encourages people to buy SBD below market value and hold it for interest payments. Holding SBD is what stabilizes the price since it is a liquid asset that can be destroyed at any moment, but is only created at a fixed rate. Over a long enough time, interest rates paid to people holding SBD results in SBD to typically float around $1.00 at any given moment. The expected range in the white papers is 0.95 to 1.00 USD

Before we move on, lets summarize the two ideas a bit.

MONETARY POLICY

  • SBD can only be created through inflation and the rate at which it is created is fixed.
  • SBD can only be destroyed by converting it to STEEM. There is no mechanism to control people destroying steem except for community recommendation.

METHOD OF STABILIZING VALUE

  • If there is a surplus of SBD, the price should fall, and the interest rate should increase to encourage people to buy and hold.
  • If there is a shortage of SBD, the price should rise, and interest rate should go to zero to encourage people to NOT HOLD the SBD. But this is where there is a problem lies.

SURPLUS AND SHORTAGE OF SBD

The only physical way you can have a surplus of SBD is if people are not destroying it fast enough, i.e. they are not converting it to STEEM (not enough users investing in the platform). Likewise, if there are too many users converting SBD to STEEM(in order to power up to SP, there can be a shortage of STEEM.

Unfortunately this results in a yo yo effect since behavior of users cannot be directly controlled, which is something that we are seeing right now. Let's use an example.

If there is nothing to spend newly generated SBD on, then users will either power up what they earn (which reduces the amount of circulating SBD), or trade their SBD in the open market. If everyone converts their SBD to STEEM(thus destroying it) and then powers up, there will be a shortage of SBD the moment a service comes around and accepts SBD as payment (such as bots).

If everyone sells their earned SBD into the market then there will eventually be surplus of SBD, IF AND ONLY IF there aren't enough new users to gobble it up.

Now, lets discuss a bit about how upvote services work.

HOW DO UPVOTE SERVICES WORK?

A user spends their banked SBD to buy upvotes. What is being done is actually the transfer of existing SBD for newly created SBD.

The new SBD ends up in your account when you get upvote and paid out, and your existing SBD ends up on the bot operators account.

Bots typically lease SP and pay a TREMENDOUS cost for leasing it. Bots who operate under leasing agreements typically provide a fixed return. Usually on a daily,weekly, or monthly basis. Some bots provide some sort of unique value proposition for borrowing the SP to offset direct cost. Others invest their own money into bots.

Since vote buying does not provide an exact revenue stream, it is entirely possible that bot operators lose money, and then get trapped into trying to make payments, which is what everyone speculated happened with @bellyrub.

Bots who operate on leased SP are making money on THIN margins, which forces them to gain SP as quickly as possible, which means they are converting their SBD to STEEM and then to SP. They can also TRADE SBD for STEEM and then powering up.

I want to make it a point to say that selling your sbd to someone who wants it in exchange for STEEM is different than converting.

Converting SBD to STEEM is like redeeming a coupon that takes a % off your purchase. EXCHANGING SBD for STEEM is like selling your coupon for cash, and then using the cash to buy STEEM. The coupon doesn't get destroyed in the later case, but it does in the former.

THE EFFECT OF UPVOTE BOTS

The reality is that most SBD holders can't find anything better to do with their SBD because there just arent enough goods and services which exist on the blockchain yet, so they turn to upvote bots for ROI. And since they can pull the plug on the bot operator at any moment, the bots are forced to use whatever earnings they have to increase SP rather than hold SBD to spend on other projects. This results in less SBD in circulation. If we combine this with everyone's suggestion to take their earnings in SP only AND combine this with market trades, we now have some reason why there just isn't enough SBD out there.

WHAT DOES THIS SAY ABOUT STEEM?

The Steem community needs to find more creative ways to make SBD more desirable to hold. The number one usage it has right now, is to buy SP or to spend on upvote bots. I really don't see any other major uses YET.

That's it! If you enjoyed this, agree or dont agree, then comment below!
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Thank you, it was a very fascinating and well-structured write. Now I feel I have an even better grasp on the economic reality underlying SBD creation and destruction. Also, if you weren't aware, there is another way of destroying SBD: sending it to @null to be upvoted by the @promoted feature.

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Thanks for reading commenting! I avoided including the promotion area because it is seldom used for the purpose of destroying SBD. But aside from sending to @null, there is no other way to destroy sbd except for losing an account pw as I am aware!

What we need is a way to spend SBD like dollars. I don't have the programming chops to make a STEEMbay using SBD as a default token, but I would sell on it if it existed. This would help make SBD work like the US Dollar as a direct medium of exchange, and would help stabilize the value considerably, or perhaps even increase demand for it.

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Steembay sort of already exists. Im bidding on an amazon 25$ gift card right now. search for #steembay to see all the listings (there are VERY few) its cool how it works, but i think we need something better than that!
there are going to be many many ways to establish a business within steemit, I just need to get off my ass and come up with some ideas!!

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It's that "sort of" that is the problem. For widespread adoption it needs a nice front-end interface. Maybe Busy.org's system could be adapted into a listing template and viewing interface?

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this is the point where i wish i could program!

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Yo my man, thanks for the info yet again. i have a few questions tho or just one that i broke down...

Let's use an example.

If there is nothing to spend newly generated SBD on, then users will either power up what they earn (which reduces the amount of circulating SBD), or trade their SBD in the open market. If everyone converts their SBD to STEEM(thus destroying it) and then powers up, there will be a shortage of SBD the moment a service comes around and accepts SBD as payment (such as bots).

If everyone sells their earned SBD into the market then there will eventually be surplus of SBD, IF AND ONLY IF there aren't enough new users to gobble it up.

For the quoted part above in bold, I don't really follow... Can you elaborate?

If they didn't sell their SBD what would they do with it? And if they just held it, what's the difference from them selling it to someone else, and that person holding it?

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Your answer is in the question. If you don't sell your sbd, what else would you do with it? That's part of the problem. Nothing. It's pretty much useless unless someone wants it for some reason. Collecting it and waiting it to go up in value does nothing unless there is demand.

Right now the demand comes form users buying up votes or playing games on the blockchain.

The other part of your question has to do with how sbd is turned into steem and not the other way around. There are two currently tokens. Steem and sbd. Both are awarded, but the sbd that is awarded is brand new sbd created out of inflation. If sbd were unique then it would have a never before seen serial number.

When that sbd enters circulation it can do two things. Be traded to other users, or be destroyed by exchanging it for steem on the blockchain level (as opposed to user to user level). So sbd that is destroyed (forever) will decrease the supply. If collective behavior continues to destroy sbd in this manner it will run into a shortage.

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Ok, so I think I'm getting now, and that this scenario is less likely. And that the answer I was looking for is that people are less likely to hold onto a seemingly useless SBD valued at +/-1:1 USD.

Thus they are way more likely to just trade it in for Steem, or to buy upvotes with it and ultimately create a shortage. Which, as you've pointed out above, is what's causing the value of the SBD to increase...

If there is nothing to spend newly generated SBD on, then users will either power up what they earn (which reduces the amount of circulating SBD), or trade their SBD in the open market. If everyone converts their SBD to STEEM(thus destroying it) and then powers up, there will be a shortage of SBD the moment a service comes around and accepts SBD as payment (such as bots).

I just realized that the above quoted paragraph is what threw me off, in particular the text in bold. I read it in a way that made me think the only way for a shortage to occur was:

there will be a shortage of SBD the moment a service comes around and accepts SBD as payment (such as bots).

It would appear that even without a 'bots service', the understanding that a shortage in SBD could cause an increase in it's value, might (have) influence(d) the market to react in a way to force a shortage...

Ok so now more dumb questions...we know how SBD is generated but how is SBD acquired? How does one get newly generated SBD?
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All new tokens are earned through content creation, curating or through interest payments on existing steem.

And yes, I think the shortage was inevitable. We have high usage of sbd inside steem and also a high volume being traded on the external market. In combination we created an environment where sbd demand is too high.