# Witness Run: My outline of the Economics of the system. What to do to keep the SBD peg at \$1USD and why we should.

in witness •  2 years ago

Being a witness has a lot to do with understanding economics. Here I'm going to outline my basic understanding of economics and how it relates to Steemit currencies through the lens of my mission statement with a current issue as an example. Yes, this is what I choose to do on a long weekend.

https://steemit.com/missionstatement/@aggroed/my-steemit-mission-statement

## The value of a currency is proportional to the amount of goods and services provided

Ok, so this post is going to have some equations. I'm sorry. But this is an economics post and I'll try to use only basic math rather than calculus or something more complicated.

## Total Currency Value ∝ Total Goods and Services

∝ means proportional

This is considered a direct relationship. If your good and services goes up then your total currency value goes up. If your total currency value goes up then you are able to purchase more goods and services with it.

Both sides of this equation get more complex!

## Total Currency Value is the combined value of Steem Power, Steem, and SBD

To figure out the total value it's the sum of total SP, S, and SBD value.

That means it's SP times the value of SP plus the amount of S times the value of S plus the amount of SBD times the value of SBD.

XVSP + YVS +ZVSBD = Total Currency value
X= number of SP in existence
VSP= value of SP
Y= Number of Steem
VS= Value of Steem
Z= Number of SBD
VSBD= Value of SBD

## A gauge for goods and services

The amount of goods and services is the total output of the economy. So, you add up all the physical stuff produced. Then you tack on all the services (labor) that was sold. While it's not perfect I think the fastest and easiest way to approximate total economic output is to figure out how many people are in your economy. People purchase goods and labor. People provide labor. So, the number of people is a pretty easy handle to figure out your total economy size. Furthermore, the rule of thumb in crypto is that you can approximate the number of people by the number of transactions in that currency per day. So, it's pretty easy to track on the block chain how many transactions there are per day so it's a really easy metric.

The right side looks like this

Amount of Goods and Services ∝ Amount of People ∝ Number of transactions

So, my new total equation looks like this

XVSP + YVS +ZVSBD ∝ Number of Transactions

## Let's run through some hypotheticals

1. Steem is cool and more people use it. The number of transactions increase. What happens to the value of the currencies?
With more transactions, more people, and more goods/services and assuming the amount of currency in circulation stays the same then the value of the currency will go up. Currency deflation
2. Steem is uncool and less people use it. THe nuber of transactions decrease. What happens to the value of the currency/?
With less good and services your currency is now in excess supply. That means it will take more of it to purchase something. Currency inflation.
3. Steemit prints a shit ton of coin but the amount of goods/services stay the same. This is inflation. There are now more coins in circulation than the amount of good and servies so the value of each coin will drop.
4. Steemit stops printing coins and people destroy or lose some while the amount of goods and services stays unchanged. This is deflation. There are less coins in circulation so it will take less of them to purchase the goods and services that one can buy.

## What's happening in the real world?

Steemit increases coins in circulation at a rate of 10% annually. That's 24million coins this year. The total size of the American GDP is 19T dollars. World GDP is between \$75-110T. So, STEEM only has 0.000032% of the amount of currency in play. This is to say we temporarily have a very small marketshare of the amount of goods and services traded in steem. We're in a super tiny pond and with events like 1btc>1ozgold crypto is going through mainstreaming and expansions. Because this thing is easy, cool, and popular it's going to keep increasing the size of the economy it's involved in.

So, the value of steem in circulation is slowly increasing (barely perceptible increase), but every time another company, industry, trading group, or nation comes to steemit the total goods and services provided takes a giant leap up. These kinds of changes are putting a very strong upward pressure on the price of steem currencies.

## What's the issue?

One of the big questions that witnesses are coping with is "SBD is worth more than 1 USD. What should we do?"

We basically have two options.

1. Get rid of the 1SBD=1USD peg and let the currency value go up.
2. Inflate the currency as new people come on board to keep SBDs around 1USD..

There are various approaches to each.

Who are the stakeholders?

1. Steem currency holders. Arguably the most powerful group. Investors want the currency they hold to go up in value.
2. Merchants- These peeps just want a stable currency. Thats really fricki' hard in crypto land, but it's understandable. If you want to sell a shirt in SBD you don't want the value of the SBD fluctuating all day. Boom and bust isn't safe for business.
3. New folks. These guys don't really have a voice, but we have to consider them as we want this place to grow. They want it to be easy to understand. They want to be able to buy in. They want a distribution that doesn't give all the power to a handful of people.
4. Authors and curators. These guys want their posts and curation to have value.

So, what's my answer to the problem?

XVSP + YVS +ZVSBD ∝ Number of Transactions

As long as number of transactions (new people, and new good and services) is going up the value of the currencies is going to go up. But they don't have to go up equally. I think the answer is to hardfork and change how SBD is generated. I think that's the best pressure release valve. I don't want steem flying through the roof. That will exacerbate the problem with concentration of wealth into whales. I don't want to hurt merchants by letting all this shit freely fluctuate. I think the answer is that when the value of the SBD goes up then steemit starts cranking out more SBDs, but the inflation of steem and Steem Power stays at the current planned rate.

The current plan is to put downward pressure on SBDs, but it's no match for the expansion crypto is going through now that 1 BTC> 1Oz. Gold. So, I don't think it's going to do what they think it's going to do.

If we crank out SBD when it's above \$1USD while not increasing the amount of steem and Steem power then the 4 stake holding groups are happy.

The investors are happy because the steem/SP won't inflate like crazy, should have some scarcity, and will continue to go up in value.
The merchants are happy because they can sell in SBD and not go through boom and bust.
The newbies come along because steem is easy to understand and the system's distribution doesn't get worse.
The authors and curators are happy because they'll get paid a lot of SBD for their posts.

## Class Dismissed, be safe out there, and please support my upcoming witness run

PS Pro tip- When SBD > \$1USD then go 50/50 on your posts rather than 100%SP for max rewards.

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witness vote cast, i wish you much success.

By the way I outlined here a proposal how to keep the steem dollar peg, would be nice to have your feedback: https://steemit.com/steem/@arcurus/improving-steem-liquidity-through-using-buying-selling-pools

In short for every created steem dollar the same amount of steem is put into a so called buying pool. If the steem dollar price is higher than the peg, new steem dollars are created and exchanged for steem which is also added to the buying pool. If the steem dollar price is lower than the peg, the steem in the buying pool is used to buy back and destroy steem. This would also help to provide liquidity in the internal market.

On top of that the selling pool proposal would make the manual conversion of steem dollars obsolete and therefore guarantee, that steem is not more inflated per year as promised by the inflation rate even in case of a bank run.
This would also simplify the system because no manual conversion is needed anymore.

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Hi there. Its been a while. Still remember me? :)

🍒 I just saw the price of SBD and it's going down down down, I guess that's why, lately, they pay us here on Steemit with SteemPower, instead of SBD

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If you leave the payment option at the default (50/50) you should be earning BOTH SBD and SP. If your payments are very small (like mine), you will not see the payment of something like 0.000034 when only 2 digits are displayed (it will appear as 0.00), however there is actually a small amount added to your account.

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Hey @happyme thank you, that´s very good to know, how did you know about that?

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For the past week (after opening my account here at steemit.com), I have spent roughly 4 to 5 hours each day reading and learning about steem. There are quite a number of tutorials that discuss steem, but there are few that answer all my questions. I'll be doing some experiments and will write about my discoveries to answer what I could not find.

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Interesting, pass me the link of that post, once you get it done :D

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Finally finished that post! It took me much longer than I expected AND I couldn't find the data I stumbled upon before that listed who was doing the most flagging. I'm rather disappointed I was unable to find that link but I just couldn't afford to spend any more time searching for it.
I hope you enjoy the article!

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Hey, you remembered! :D thank you @happyme I will read it

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Thanks for your interest @mariacherries. I made a paper note to remind me. I hope you find it worthy. I also welcome any corrections or criticisms.

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I will try to remember to do that.

Thanks for this informative post!

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Glad you liked it. Vote for Pedro.

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Great article @aggroed. Thanks for using the simple math. I am trying to promote steemit to everyone on my social media networks..just imagine if every current member recruited just 10 friends, those ten bring 5 with them. We would be unstoppable. You got my vote my friend.

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Thanks Boss!

I think I'll just go to my little rubber room try and get my head around this...learning curve my a__,this Hill is steep!...I think I can ,I think I can...
Namaste

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If it feels hard to figure out you're doing it right.

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LOL...then my life is right...lol... if it was easy then I would worry!...lol
but it could give me a few more breaks , I could use a 6 month vacation! on a foreign beach!...one of these days!...lol

Thanks for the great post. I'm following now.

Great post I learned alot. You have my vote once you decide to make the run for witness

Do I understand it right that you want to get rid of the steem backing of SBD, just like the original dollar ditched the gold backing when they decided to need more?

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What I want to do is satisfy the needs of all the stakeholders involved.

I think it's too harsh to say that in my version it wouldn't be backed by steem. You can convert. It's on the same platform. They are issued simultaneously. I'm not suggesting a complete removal of the backing. I do think we need to inflate the hell out of SBD while going through expansions in order to keep it around \$1USD, but it should still be around \$1USD worth of steem.

We should keep it at \$1USD worth as best as we can to try to help merchants and traders have a steady value and to help newbies understand this place more easily.

I think the two separate rates for how much steem and SBD to issue need to be pretty different. In order to keep the value of SBD low while going through expansions we have to inflate the supply. We're trying to enter the US's \$19T economy with 1.2M SBD in play. Of course these things are going to go up in price if we keep the supply stable. So, to counter act that let's inflate SBD like crazy while not inflating SP like crazy.

Steemit is growing so we have three main pathways.

1. Do nothing
2. Inflate steem/steem power
3. inflate SBDs

If we don't inflate anything (and 10% inflation on 240M is basically nothing compared to government currencies) then SBD will fluctuate along with all of crpyto and not create a good busines climate. SP will go super high making whales rich and stakes for new people completely unobtainable.

If we only inflate Steem and Steem Power it'll be like the last crazy inflationary period where whales got tons of steem, distributions got crazy, and people left in droves.

If we only inflate SBD heavily we can create a pressure release valve for the expansions, it won't lead to a more unequal distribution of steem power, and make a better business climate.

Don't stop backing it, but we should inflate the shit out of it while expanding.

I'm starting my witness fairly conservatively, but I'll be ramping it as I watch us expand.

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But by inflating SBD you're inflating STEEM through the back door.
Not immediately. But as soon as the SBD price goes down again, conversions will go up, creating new STEEM. And if the price of STEEM drops at the same time, the supply of STEEM could go through the roof.

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What do you think the alternative is?

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Let the system mature, and a market evolve. Right now it's all speculation, any steps we take now will probably fall on our feet when the climate changes.
Like last time. When Steem price went low, some paniced that we could have too much SBD soon, and a hard fork limited SBD creation. Without that change, we maybe wouldn't even be in the current situation.
The difference is, that that decision was made to protect Steem and nothing could go wrong. Inflating SBD could lead to a Steem hyperinflation in the future. Endangering Steem to feed into SBD speculation is certainly not the way to go.

As long as our users are able to get at least 1\$ for their earned SBD, I don't see any need for hasty reactions.

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So, your answer is do nothing for the time being? How does that help new people that want to come in? How does that help merchants? I think it protects the current steem owners best in the short term, but won't open this up to more people.

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What's your answer to the obvious problem I now explained in all detail?
Sorry for telling that you didn't think your idea through.

New people that want to come in don't need to buy overpriced SBD, why do you ask?
Merchants shouldn't build upon a non-existing peg obviously. Well, they can of course treat it like it's worth 1\$, because that's the thing we can guarantee. But nobody will buy then.

SBD are debt to Steem owners. You seriously argue that creating more debt for them is in their best interest?

//edit:
no you didn't, misunderstood :D
protecting holders is the most important thing. we don't need new users if the price is breaking the whole system ;)

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I think we agree on some points here. I'm certainly not looking for the price of steem to crash. I don't want the price to moon though. That makes the distribution worse.

If we agree to print more when the SBD is higher than \$1USD then that can maintain the peg.

If we agree to print more when it's above say \$1.1 or \$1.25 that gives us some buffer too in order to prevent a crash.

Debt at 0% interest doesn't scare me. Having an easy to trade token is swell.

I'm trying to balance protecting holders with growing users.

I don't think either of us is wrong I think we just have slightly different objectives.