Witness update

I will be upgrading my witness to the upcoming 0.16 fork assuming no technical problems are discovered before December 6.

I have reduced my witness SBD interest rate (APR) setting from 13 to 9%. I do not expect this to have an immediate effect on the median rate being paid on SBD (currently 10%) because many witnesses are still using 10% and some are above. However, I hope that other witnesses will join me in lowering the interest rate.

The white paper indicates that the interest "must be stopped" any time SBD trades consistently above $1, which SBD has done several times, and is currently. It also indicates that a higher interest should only be used as an incentive to support a weak SBD price in a low debt situation. We are currently in a high debt situation, with payouts being made in STEEM instead of SBD and the debt ratio only slightly more than one 50% STEEM price drop away from SBD dropping off the peg and taking a haircut.

While I believe the "must be stopped" language is a bit abrupt (gradual adjustments to assess the effect are probably better most of the time), it is clear that it is not useful to be paying high interest (if any at all) to encourage people to hold something that we have too much of. Instead, the SBD price peg is currently being supported at par by a feed discount which both increases demand for SBD and encourages conversions of SBD to Steem, reducing debt. Some witnesses have suggested reducing the discount to prevent SBD from strengthening too much, and while I agree this would be a good idea if we were not already (and probably inappropriately) paying high interest, I believe we should reduce or stop the interest first, and then assess the continued need (if any) for a feed discount. This is the process implied by the monetary policy rules given by the white paper and it is the process that I support.

The internal market maker bot has gotten a real workout the past few days with all the action on the STEEM market, and has performed well with no downtime. Instant exchanges continue to be available all the time up to 40 SBD (about 225 STEEM) with approximately 0.5% spread. As I've ramped up the available liquidity, I've noticed steadily increasing use from Steemit users (aside from bots) which is a good sign. People are finding the internal market much more useful now.

After the fork, despite the 80% reduction in witness pay, I plan to continue existing sponsorships of ecosystem projects (steemcleaners, busy, and the food/cooking contest, others on a case-by-case basis) on existing terms until at least the end of the year. These are already exceed the weekly witness power down, so I will continue to cover the difference with outside funds. I don't intend to change the witness power down during that period, so it will remain at the same (two year vesting) rate as before.

Rewards from this post (in whatever form received -- STEEM, SBD, and/or SP) will be converted to SBD and burned, as were previous witness post rewards.

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I don't think this qualifies as a "high debt situation" at this point... the price feed is showing a debt ratio of 4.73% because it is using a discount. if it was not using the discount, it would be reporting 4.26%.

That's on the high side of manageable.

It may soon move down, though... your most recent price feed update would register a debt ratio of 3.06% ... or 2.71% if you were not discounting.

I'm pretty sure that we have different thresholds for what we consider high debt... But if the sbd_print_rate is non-zero, I'm fairly sure we're not in a situation like the example from the white paper. It defines high debt (beyond which interest payments should be discontinued) at 10%... and I think currently 5% is more appropriate (beyond which sbd rewards are discontinued)... but, we're significantly below 5%.

But, setting that aside... I have a much more substantive problem with how you conceive of the discount and its effects. I am very concerned with what seems to be your embrace of a permanent discount and your movement to reduce the interest on SBD.


The discount is intended to be used in the case of SBD trading below $1 (when debt is high... when it is not high, the interest rate should be raised instead, according to the part of the white paper you cite). This is intended to increase demand for SBD. The underlying logic is that if people aren't willing to pay $1, it is because they determine that they won't get their $1 back... so you offer them more steem upon conversion so that they are assured they won't lose money.

This is only necessary when the market is anticipating a decline in the price of Steem. When the market expects some measure of stability, the $1 of steem produced from an unadulterated price feed would provide the same value proposition that you're attempting to reproduce with your discount.

Really, when you apply the discount you are just trying to increase the real value of SBD to $1, when the blockchain wouldn't otherwise provide $1 worth of value.

The discount is pushing the market price of SBD above $1, because the market is anticipating relative stability in the steem price. The real value of the SBD, given the discount, is significantly more than $1. If people are buying SBD at $1.03, it is because they are confident that they won't lose money (and I think since they are paying a premium, they likely expect to make money... given how the market has been over the past 2 weeks, I'd say it's a reasonable expectation)

The correct thing to do at this point in time is to start reducing the discount until SBD is no longer above $1. Unless the market starts trending down again, I'd expect parity to be achieved with no discount. But only after removing the discount entirely, if SBD is somehow still trading above $1, consider reducing interest.

Reducing the interest while applying the discount will only damage SBD and the platform. Continuing to discount under the current (2 weeks) market will guarantee a sbd price over $1, because that's a fair market price. Eliminating interest will just make SBD useless for any purpose other than converting while you can still get well over $1 for it...

I wouldn't be so casual about suggesting SBD should be eliminated, because I actually agree that the success of the platform hinges in large part on the viability of sbd as a stable currency that people can have confidence in... whether it is your intent or not, I think the course of action you are suggesting (effectively permanent discounts and eliminating interest) puts that at risk in a very real way.

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Posting rewards burn: steemd

UV and RS for you. I have voted for you as a witness. TY for your support online and for the work you do. I appreciate it.

I don't pretend to understand the economics, but it seems that the majority of people are looking forward to the hardfork changes. I am personally concerned that going from 104 weeks to 13. It seems quite extreme. But, it's beta so why not, right? Thank you for the report and for your continued support of steemcleaners and the cooking contests.

do you know if our current power down status will take effect in the upcoming hardfork? do we have to do anything to power down after dec. 6 or just leave it as it is?

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Current power down status and rate will be unchanged. If you want to switch to the faster rate that will be available you will have to restart it.

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excellent, thanks for the info.

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If you want to increase your rate of power down, you must trigger it again after the hard fork.

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ok thanks.

I don't intend to change the witness power down during that period, so it will remain at the same (two year vesting) rate as before.

Do you have a choice on rate of powerdown?

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Using CLI wallet you can power down a smaller amount than the full balance, which sets the rate. However, in this case it is sufficient to do nothing, since existing power downs will continue at the previous rate after the fork if not reset.

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I was wondering about that. Been running an experiment to understand powerdown, and figured I'd let it run through the fork. I've been powering it all back up anyway, but wanted to watch it run.
I guess that means that the rest of us can't set longer powerdown timeframes.

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Right, as before, the ability to power down at less than the maximum rate isn't available on the web site.

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@smooth, It should be - let`s implement the slider like we have on voting :)

Some witnesses have suggested reducing the discount to prevent SBD from strengthening too much, and while I agree this would be a good idea if we were not already (and probably inappropriately) paying high interest, I believe we should reduce or stop the interest first, and then assess the continued need (if any) for a feed discount.

I am not against lowering interest rates in general, but I am against lowering interests as a tool of offsetting excessive demand of SBD caused by high feed discounts, as you are arguing. Here is a simple welfare analysis. (It's very very bad drawing though)

The left graph only has a feed price discount. It moves demand curve upward and increase both SBD price and quantity. But in this graph, the network is paying discount * Q* to SBD buyers and sellers (the distribution is determined by relative elasticity between buyer and seller).

In the right graph, I added lower interest rate that moves supply curve outward, hence we get the same level of SBD price, as you insist. However, we can notice there is more costs on the network, discount * (new Q - Q*), and still have deadweight loss. Your policy seems good in terms of SBD price, and benefits SBD buyers and sellers, but is obviously not good for the network (and consequently STEEM stakeholders).

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obviously not good for the network (and consequently STEEM stakeholders).

Except that your analysis ignores the cost of risk to the network associated with the unaddressed higher debt amount in the first state. That is why the whitepaper warns that failing to follow the rules risks damaging the STEEM price (due to the cascading effects of static debt amount over the course of unpredictable price trajectories, which can easily include 50% drops, or of course much more).

Let me ask a question (preceded by a statement): If we follow the rules, and the system fails (reaches a broken peg or some other negative outcome) then we will know that the system as designed, including those rules, does not work and needs to be changed (or SBD simply removed). If we do not follow the rules, and the system fails (in the same manner) how do we know that the system (including the instructions given the witnesses) did not work? The answer is that we don't. I suggest that we follow the rules and see if they work, which they might. If they don't then changes will be required. Likewise if you have a proposal for how to design a pegging mechanism that not only maintains price parity but also as effectively manages debt risk at lower total cost, then it would be a good proposal. I don't believe that you do.

(You may object that the rules don't precisely address this situation, which is true, but it is clear that the current system state with the peg supported by a high interest is not intended. Increasing interest is only advised during a low debt situation. Since we have had high and cascading debt load (ratio) for months, starting at least when Dan suggested a feed discount, a remedy for a weak peg in a high debt ratio situation, how does it make sense that we even have high interest at all? Arguably it made sense as additional price support in the special situation of closely approaching the "haircut" rule, which risked provoking a run on the bank, but once that situation was avoided it should have been removed. Which of course is part of why I have been and continue to proposing decreasing it now.)

As you indicate in your diagram, any version of the peg has a cost to the network. This is clear as a peg is a manipulated construct that is costly to maintain. It is also a risky construct that requires that its risk be actively managed (in the current version of the system). If not, statistically the result is certain (eventual) failure. This active management includes ensuring that sufficient conversion incentive is offered to effectively manage/reduce high debt, even thought in the short run this clearly has a cost. Price parity is not enough, and that's why the white paper has multiple rules for different situations.

BTW, I'm not sure I agree with your complete analysis of costs. Over time higher interest is an ongoing cost. The longer the higher interest is necessary because more risk is built into the system state, the more than cost accures. By reducing risk both the feed discount and the interest rate can also be reduced (later), which reduces overall costs even more.

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I support that follow the rules idea.
When I signed up I was given three steem on the promise that I could power them down when I got to thirty steem, now I'm told I have to have 300, that goes down the wrong way, for me.
I'm hoping that when I get to three hundred (thank you steemsports) I don't get told that now it's 500 because they raised the signup amount, again.
Thank you for the hard work you have given to us!!

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Unfortunately the way that mechanism is implemented is really poor. I wish it were different. You have my greatest possible encouragement in reaching a level that you can actually power down. That sucks. Sorry.

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Thanks for your kind words, it is of no importance to me, really, I have been powering up, but it could lead to hard feelings from 'regular' users,...

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Except that your analysis ignores the cost of risk to the network associated with the unaddressed higher debt amount in the first state.

You are wrong because the cost of risk comes from high debt ratio instead of debt amount. And again, you still cannot prove that facilitating conversion has no negative influence on STEEM price.

As you indicate in your diagram, any version of the peg has a cost to the network. This is clear as a peg is a manipulated construct that is costly to maintain.

Wrong again. If there is no discount, there is no cost to the network.

I suggest that we follow the rules and see if they work, which they might.

Actually I am doing following the rules now. The white paper says, "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"

When Dan suggested feed discount, SBD price was $0.88 and the debt ratio was 2.8%, which already did not meet the rules, but the debt ratio seems to rusing to 10% so it could be a proactive movement. Now, however, SBD price is over $1.00 and the debt-to-ownership ratio is under 10%, which is totally opposite to the high discount condition. (Please be noticed that the rule is AND statement, so violating either of them can reject it)

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Wrong again. If there is no discount, there is no cost to the network

My account just earned some SBD interest. Who paid that? Interest is a substitute (under certain circumstances) for a feed discount. Both carry a cost.

Actually I am doing following the rules now. The white paper says, "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"

When Dan suggested feed discount, SBD price was $0.88 and the debt ratio was 2.8%, which already did not meet the rules, but the debt ratio seems to rusing to 10% so it could be a proactive movement

Yes, it was explained that the 5% goal and 10% rules in the white paper were not sufficiently safe, after the team had reviewed the SBD mechanism some more. The 2/5/10 cutoffs in SBD stability were written with this in mind as well, to ideally try to keep debt closer to 1% and slow things down should it reach 2-5% followed by the eventual haircut (although I'm personally not convinced any of these rules, including even the haircut, actually do what they intended, but that's what the blockchain is implementing now)

Now, however, SBD price is over $1.00 and the debt-to-ownership ratio is under 10%, which is totally opposite to the high discount condition. (Please be noticed that the rule is AND statement, so violating either of them can reject it)

The debt ratio is higher now.

So, when the fok is this thing going to be initiated already?

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Rather than burning the rewards an alternative could be to power up some minnow accounts - it makes a big difference to morale. Right now (with 104 dollars) you could power up 2 newbie accounts with 1 MV each.

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Give it to the crowd funded whale?
or something similar?

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I'll consider that for future posts. Thanks for the suggestion. At this point I have already promised to voters that it would be burned, and I feel it would be inappropriate to change that now. In a previous post I promised to use it to promote good newbie posts (both accomplishing the burning and giving exposure to newbies), however that couldn't happen because the promoted feature is broken.

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Yes. Obviously if you have promised for this post you shouldn't change it but it would be great if you did it for future posts until the promoted feature gets fixed - I hope it gets fixed soon.

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@thecryptofiend Right , that notion alone makes me think if a person can burn sbd and not give them away what is this platform really worth? Man this is really making me feel a certain way? Something truly is not being stated and truth will come to light!

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I think you are misunderstanding. Burning SBD is not a bad thing in itself. It actually helps to support the economy by reducing the debt burden - this is discussed in the whitepaper. The promotion feature (when it works) does the same thing. Too much unused SBD is the reason for payouts being purely in Steem and SP.

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Thank you for the clarity and responding, cheers!