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!
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.
- 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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