RE: [ECON 101 For Witness] Welfare Analysis on Discount Rate
Hi @clayop - I do agree with the idea that witnesses should discount as little as possible, while still maintaining an optimal USD peg and conversion rate. The "Smallest Effective Discount" as @bacchist called it.
Without having to rehash all the points we have discussed over the past week, I will just bring up one thing that I am curious to know your thoughts on.
If you assume that I am a SBD market participant that is going to try and maximize my own profits- Let's say I have $100 SBD that I am going to convert. I am going to try and get as much STEEM as I can, so I am going to try and wait for a low point.
If I wait to cash out until around the time of a 20% price drop, I am going to get around 20% more STEEM. In that scenario, wouldn't the network have been better off if it had incentivized me to convert before the drop with a 8% discount?
No. Think in dollar term. If you convert 100 SBD now with 8% discount, you will get STEEM with 108 USD value.
If you wait 20% STEEM price drop, or even 50%, then convert without any discount, you will get STEEM with 100 USD value. The STEEM amount will be greater in the latter, but in USD value the former is $8 greater, and the network pays $8.
I see your point of view. It is a completely valid way to look at it, and using that measurement the network is 'loosing'. With the 100 USD case though, there is also a higher dilution of STEEM. This has a cost to the network/ shareholders as well.
Your example is a relative thing based on an assumption. Suppose you won't convert unless the price drops 20%. If there is no discount and STEEM price goes up 20%, in contrast to your example, there will be no dilution. If the network provide 8% discount and you convert 100 SBD, there will be additional unnecessary dilution to the network.
So, it makes sense that the discount should be provided when STEEM price is in downtrend, but not in uptrend. If STEEM price seems more likely to increase, more discount just generates unnecessary dilution(sell pressure).
I agree 100% with this. If we knew with relative certainty that the price was going to go up, then a discount would be a horrible idea. Incentivizing people to convert at a 'discounted' rate when the network could have paid it back later for less (with no discount) is obviously a big loss for the network. I don't think that we can ever know this though, so we always have to assume that either direction has close to equal probability.
True, it can work out either way. People are motivated to wait until low points to convert though, so it is reasonable to assume that more conversions will happen during low points than higher ones.
This is actually the point for waiting to convert when the price drops...you get more STEEM. The hope is that the STEEM price will then rise at a later date, increasing your account value.
If you hold SBD from now until the price of STEEM doubles or triples - or more, you're not gaining anything because your SBD will still only buy $1 of STEEM. So, if STEEM is worth $0.50, you only get 2 per SBD. But if it's worth $0.05, you'll get 20. If you think the price will rise long-term, it makes more sense to convert the SBD when the STEEM price is low, regardless of any discount.
With 1 SBD, you can buy those 20 STEEMs at $0.05, then - if the price rises to $0.50, you just turned that 1 SBD into $10. No conversion discount will really give you that kind of profit.
The greater amount of STEEM means nothing if the price drops more. This seems little bit off-topic from my point of view.
This is exactly what I'm waiting to do. That time may come within the next couple of weeks. I can take my $700+ SBD and exchange it for a million STEEMs!
Hehe. Careful, it might just keep going up ;)
To the mooooon!
But first...to new lows. Then I make the dough. Then I get the khakis. Then I get the girls.