RE: Is It Time For SBD To Grow Up And Peg Itself To Bitcoin? - A.K.A Dump The Dollar
SBD is essentially not a real crypto in the true sense of the word. It is a container which has a smart contract within it, to always have $1 worth of Steem inside it.
So if you imagine you have a bunch of apples and each of them is worth a different amount day to day, and I say to you, no matter the price of the apples, I will always give you a carrier bag with at least $1 worth of apples inside it.
That means if the apples are worth $0.25, then the bag I give you will have 4 apples in it. However if the apple price rises to $0.50, then I'll only be giving you two apples. Of course if the apple price rises above a dollar, say to $2, then you will only have half an apple in that bag, so if you pay more than $1 for it, you're crazy! :-)
So SBD are a container and at the moment, with a Steem price at circa $3.19, they have less than 30% of a Steem in each one.
However the mechanism that determines all of this, is apparently not that great (I personally do not know about it enough to verify whether that's true or not), so it doesn't work so well at capping the price, although apparently the witnesses did some jiggery pokery with the interest rate last time this happened, and it seemed to work, or of course could have been complete coincidence . . .
At the end of the day, nobody will notice that there's less than a third of a steem inside each SBD as long as Steem stays above $0.05 because at that level the contract breaks down. The promises is to fill the bag with $1 worth of apples, and to produce 20 times more apples than bags (Steem than SBD).
So in other words, 20 Steem is the maximum any one SBD can contain, if the price goes below that, SBD collapses. The last time Steem approached that price ($0.10-$0.07), Steemit stopped producing SBD for awhile in order to protect it from collapse, and it worked.
So, rather lengthy reply, but I hope that's cleared it up for you! :-)
Hello Cryptogee,
Thank you very much for the thorough reply. I did learn something new after all.
I already understand that the way SBD works is that it was supposed to be a fixed/pegged to the dollar currency worth $1USD or more. Whatever the price of Steem is, if you want to sell your SBDs you'll get an amount of Steem that makes up $1 USD or whatever the price of SBD is. Thus if $1 SBD = $1 USD and I want to sell it, if the Steem price is $0.50 then I'll get 2x Steem. If the Steam price is $2, I'll get 0.5 Steem.
I was not aware that there can't be more than 20-to-1 ration between SBD and Steem. If I understand correctly if the Steem price is $1, I can't have a SBD price of $20.01 or more.
Do you recall the article where you read this ratio limitation? URL? If it's not too technical I'd be happy to take a look.
And as you say "However the mechanism that determines all of this..." is what I'm interested in. What is the mechanism that determines the price/value of SBD? Is there some formula? Right now it's hoovering around $10 USD +/- $2. I'm just curious how did this number appear. Why didn't it stay at $1 USD.
Or maybe it's not that easy to peg your currency to the USD without having a significant reserve yourself. Say you're a central bank and you peg your currency to the USD/EUR. If your population sells too much of your local currency it floods the economy, so the central bank will buy all the excess currency to keep the 1-to-1 peg alive. Could it be that the small Steem economy won't be able to buy up all the excess steem if most of the users decide to sell it off?
It's easier if there is too much demand for your local currency/Steem in this case. Then you just print more to keep the 1-to-1 peg alive. Is the SBD inflation lower than the SBD demand and thus we have this $10USD = $1SBD situation? Maybe. Haven't seen a document yet describing exactly how SBD works, so these are my guesses.
-Ivan