Witness clayop Interest Rate Update

in witness-category •  2 years ago

Given higher SBD price than the peg, I have decreased my interest rate to 7% while I kept the discount rate at zero.
If the market seems strong uptrend, I will put premium instead of discount on feed price.

For your information, here is a short summary about the rules in the white paper p.14 (while some numbers are required to be updated)

1.If SBD > $1.00, then no interest

Any time SMD is consistently trading above $1.00 USD interest payments must be stopped.

2.If debt ratio is low and SBD < $1.00, then more interest

If the debt-to-ownership ratio is under 10% and SMD is trading for less than $1.00 then the interest rate should be increased

3.If debt ratio is high and SBD < $1.00, then feed discount

If SMD trades for less than $1.00 USD and the debt-to-ownership ratio is over 10% then the feeds should be adjusted upward give more STEEM per SMD

4.If debt ratio is dangerously high and inactive SBD conversion, then feed discount (the expressions are somewhat subjective)

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.

IMO, we were in the third case when Dan suggested the discount (but not exactly matched since debt ratio was 2.8% and increasing and SBD was $0.88). Now, SBD is over $1.00 and debt ratio is 4.9% but not increasing since November, so there are less demands to have discount (at least at high rates). However, the fourth case can be still valid, so we are testing whether removing discount will causeinactive SBD conversion.

I personally continue to convert SBD until reaching the break-even point. Currently I earned 14.3% or about 1,000 SBD so there is some margins to keep working on it.

Best,
clayop

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Ok, that makes a bit more since thank you.

Good summary of the rules. Thanks for posting.

I would also add

Changes to the interest rate policy and/or any premiums/discounts on the STEEM/SMD conversion rate should be a slow and measured response to long-term average deviations rather than attempting to respond to short-term market conditions.

Possibly this is important to the "no interest" portion of rule 1 (I guess interest shouldn't be completely stopped just for brief rises above $1).

I don't really agree with charging a premium unless the situation is extraordinary. I think this might be failing to honor the contract to pay 1 USD worth of STEEM.

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Thanks for highlighting the rule of thumb.

IMO, "extraordinary situation" means ambiguous since there is no ordinary situation in the market. Instead, as the white paper says, long-term conditions are more objective (still "long" is debatable). And my argument is also based on long-run conditions of the market.

  1. STEEM price hit $0.10 in Nov. 3 then has been increasing for about a month.
  2. During that period, SBD price was no significantly deviated from $1.00 on average, and currently the price is greater than $1.
  3. SBD conversion is still active. SBD was converted 519k(and 300k was by @abit), and last week it was 46k. In percentages, we burnt 29% of SBD in November and 3.6% in the last week.

We cannot hastily conclude that the market is strongly rising, but at least, I think we can conclude that the market conditions are not in strong downtrends. Therefore, my opinion is that we don't need the same level of discount in the previous market conditions.

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IMO, "extraordinary situation" means ambiguous since there is no ordinary situation in the market. Instead, as the white paper says, long-term conditions are more objective (still "long" is debatable).

True, that was purely my view, based on such a premium failing to honor the promise to convert into "1 USD worth of STEEM". It would systematically convert into less. The white paper does not give any situation where a premium would be charged, although the word premium does appear, suggesting it is possible.

This is an entirely different question from whether less discount is needed. As you know I have agreed with reducing discount.

As an aside, I don't think we can rely on @abit's conversion to measure a rate or trend. It is an outlier.

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As an aside, I don't think we can rely on @abit's conversion to measure a rate or trend. It is an outlier.

True. If we remove abit's from the calculation, the number is 12% (close to 3% per week)

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3% per week is, in general, a dangerously low rate at this point. It means we can not tolerate more than one or two 50% price drops in the next 15 weeks (for perspective, we just had five) without reaching peg failure at 10%. Maybe we will get a little lucky and that won't happen, but going forward we will need a better plan (could include more aggressive action at lower debt ratios, where it is less painful, assuming we do get lucky and climb out of the current hole).

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Sorry I cannot understand why "we can not tolerate more than one or two 50% price drops in the next 15 weeks" If STEEM price becomes 1/4 while SBD amount is the same, is the debt ratio around 18%? That is dangerously high number but will it trigger the black swan event?

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Sorry I cannot understand why "we can not tolerate more than one or two 50% price drops in the next 15 weeks" If STEEM price becomes 1/4 while SBD amount is the same, is the debt ratio around 18%? That is dangerously high number but will it trigger the black swan event?

By "tolerate", I mean without serious failure, at least of the peg, and possibly with much more serious consequences for the rest of the Steem. (I actually wrote "without reaching peg failure at 10%" in the above comment.)

First, due to the "haircut" code, the debt ratio won't ever be >10%. However, this will cause the SBD peg to be abandoned, which has to be considered a failure of a pegged asset, and will cause serious damage to the Steem brand as critics will (correctly) point to it as evidence that the design does not work (in practice at least, given witness timidity to make hard decisions). I would also make it even harder for people to ever trust the SBD price with additional (costly) supports, such as even higher interest, since it will have been proven to sometimes fail.

Second, it can't really be predicted whether that would cause "run on the bank" type scenario. It depends how happy SBD holders are to be to continue facing the possibility of greater losses but limited gains (at best, they don't lose their $1). Many would likely feel better off holding STEEM with the exact same downside and unlimited upside, or more-likely moving to real USD, Tether, BTC, or some other more stable holding (if they wanted the risk of STEEM they would have been holding that to begin with). This can possibility be counteracted (as I proposed doing the last time we approached the "haircut" level) with very high interest, but that very high interest will have a high cost and further increase the debt (when it is already high). It also depends on how many altruistic SBD holders remain. @abit doesn't appear to still have 300K (I don't know how much he has; it is spread over multiple accounts I didn't add up). The largest current SBD holders are steemit and a dev, so I suspect there is a bit of altruism left, but this clearly can't be relied upon by the system design or witness policies; it won't always be true (high on the list are exchanges which means to a large and growing extent crypto traders are in control). The system, including witness policies, must be able to successfully manage risk without relying on altruism or reaching peg failure, or it simply doesn't work.

Third, it would clearly be far more difficult to retire the necessary amount of debt once that level is reached to restore stability. Every time the can is kicked down the road by saying "the situation isn't that bad yet" the risk of arriving in an even worse situation grows larger. One or two 50% drops is not far "down the road" (speaking in terms of risk) at all. It happens to crypto tokens, STEEM or otherwise, all the time.

Since this post was about the white paper, I will quote:

The primary concern of Steem feed producers is to maintain a stable one-to-one conversion between SMD and the U.S. Dollar (USD)

We are not supposed to be sacrificing the stability of the peg just because it might cause downward pressure on the STEEM price or hinder increases in the STEEM price, or because doing so incurs costs. The peg itself depends very much on trust, and witnesses can only be trusted to manage the peg if they are committed to doing so, consistently, during both good times and bad.

The SBD peg is part of the Steem platform and brand, and contributes to the current and future value and utility of the platform. If we do not believe this is the case, or we think that the costs are not justified, then SBD should be removed.

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I understand your concerns now but there seem some misunderstandings in your thoughts.

First,

However, this will cause the SBD peg to be abandoned

Wrong. If we set enough high discount in downtrend markets to compensate loss in conversion, we can keep the peg.

Second,

"run on the bank" type scenario

This is plausible. But will under 20% debt ratio trigger the bank-run? Unless the bank run causes over 70% STEEM price decrease, the network is still fungible.

Third,

We are not supposed to be sacrificing the stability of the peg just because it might cause downward pressure on the STEEM price or hinder increases in the STEEM price, or because doing so incurs costs.

You are totally misunderstanding and distorting my opinion. I did not propose to sacrifice the peg. Actually your previous stance will break the peg to greater than $1 with more costs. If we can keep the peg at the same time save our money, why don't we do that?

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However, this will cause the SBD peg to be abandoned

Wrong. If we set enough high discount in downtrend markets to compensate loss in conversion, we can keep the peg.

You misunderstood the context of that comment. It wasn't about a downtrend. It was about what happens when 10% is reached. At (what would be) >10% debt ratio, the blockchain code will break the peg. Instead of using the price feed, SBD is converted into STEEM as a fixed ratio of market cap. In effect, the debt ratio is capped at 10%, but SBD is "dropped off the peg". Dan's original post

This is plausible. But will under 20% debt ratio trigger the bank-run?

As I said earlier, we simply have no way to know. The 2/5/10 limits were implemented by the developers because they viewed these levels as increasingly dangerous. I do not believe we should run a live test of the danger level at 10+.

Unless the bank run causes over 70% STEEM price decrease, the network is still fungible.

Maybe I'm misunderstanding but if you are suggesting that a bank run should be risked because the system would survive it, I would greatly differ. SBD certainly would not survive it, at least not the existing holders who would lose a large portion of their supposedly stable-value wealth. This would cause huge damage to the platform in terms of reputation and trust, even if STEEM did literally continue to have a value >0 and the blockchain continued to function. (On the plus side, I imagine Steem would get a fair bit of attention, as NuBits did during its liquidity crisis last year. It is sometimes said there is no such thing as bad publicity.)

You are totally misunderstanding and distorting my opinion. I did not propose to sacrifice the peg.

Sorry if that was not clear, I wasn't claiming otherwise. I was simply making a point that witnesses (as feed providers, and, while the white paper doesn't say so, interest rate setters) are charged with protecting the peg. That can and will incur costs to stakeholders. Our mission is serve stakeholders by protecting the long-term value to the platform supposedly offered by the stability of SBD even if that incurs costs (and at times those costs may be large). I'm certainly open to considering the point of view that the costs are not worth it and SBD should be dropped (or scaled back or modified in some manner).

I do not think you propose sacrificing the peg, but you do propose measures (or express reluctance to take measures due to cost) which I believe increase the risk that the peg will be broken. That is largely a judgement call since there are multiple considerations to balance and many of the actual factors being balanced such as actual risks and actual effects of actions taken (or considered) can not be fully known.

Actually your previous stance will break the peg to greater than $1 with more costs.

No! I never proposed to break the peg by accepting that it would be worth more than $1. I proposed to reduce the value of SBD to $1 by reducing the interest rate, perhaps by a lot (including possibly to the point of "stop all interest" as the white paper states), though we must make more gradual adjustments to assess. A lower interest rate along with an unchanged discount should result in a lower SBD price (ideally bringing it to $1) while retaining incentives to continue conversions. One can never be sure a particular measure will work, but that was what I proposed, not to deliberately keep SBD above $1.

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Right, I also misunderstood (and forgot) what you proposed. The heated point was whether high discount+low interest to keep the peg is desirable or not. Anyway, I think we all agree that our intention is to protect the peg and to benefit the network and stakeholders. I will be more aware of potential dangers of high debt-to-ownership rates.