The accumulate, pump, and convert strategy to show that the proposed two-way SBD peg can be abused

This post is intended to be an improved version of my earlier post, Why the proposed two-way SBD peg is a very bad idea, and the goal of this post is to alert the Steem community about how the proposed two-way SBD peg can be abused. In case you aren't familiar with the proposal, the proposed two-way SBD peg would allow people to convert SBD and STEEM in either directions over a 3.5 day period with SBD pegged at $1 and the conversion rate calculated from a 3.5 day average price of STEEM during the conversion period. Note: Currently you can convert SBD into STEEM, but you can't convert STEEM into SBD.

The accumulate, pump, and convert strategy (APC)

Phase 1: Quietly accumulate STEEM

The goal of phase 1 is to accumulate a lot of STEEM which will be converted to SBD in phase 3 while the STEEM price is pumped up. The technique used to accumulate STEEM in phase 1 is to avoid buying STEEM in the markets so your purchases don't increase the price of STEEM and to instead use dollars (USD) to buy SBD on the markets and then convert that SBD into STEEM. It is desirable to accumulate as much STEEM as possible in phase 1 because the STEEM acquired in phase 1 will provide the highest rate of returns.

Phase 2: Pumping up the price of STEEM

Unlike Phase 1 where a conscious effort should be made to not buy any STEEM on the markets, the technique of phase 2 is to use USD to buy a lot of STEEM on the markets with the goal of pumping up the price of STEEM. It is going to take a lot of USD to pump the price of STEEM up in phase 2, but that is a good thing because the STEEM bought in phase 2 will be profitable.

Phase 3: Convert STEEM into SBD at the pumped up price

Convert all the STEEM accumulated in phases 1 and 2 into SBD at the pumped up price. It is important to keep the price of STEEM pumped up for 3.5 days because your conversion rate is based on the 3.5 day average. To keep the price pumped up you will need to buy some STEEM at the pumped up price, and the STEEM you buy in phase 3 will likely result in losses, but it should be possible to find ways to keep these losses relatively small when compared to the profits on the phase 1 and 2 STEEM. For example, the STEEM purchased very early in phase 3 could be converted right away and benefit from having spent most of its 3.5 day conversion period at the pumped up price.

Expected outcomes

Phase 1 profit: The percent profit from the STEEM accumulated in phase 1 is calculated as (pumped_up_price - initial_price) / initial_price. For example, if STEEM were initially at $5 and it were pumped up to $20, then the percent profit would be ($20-$5)/$5 which is a 300% profit so if $50 million were invested in phase 1, then it would become 200 million SBD in phase 3.

Phase 2 profit: The profits from the STEEM bought in phase 2 will depend a lot on the markets. The percent profit on the STEEM bought near the start of phase 2 will be close to the profit percentages of phase 1. However, STEEM bought toward the end of phase 2 will only do slightly better than breaking even. For example, if STEEM were initially at $5 and it were pumped up to $20, then the STEEM bought early in phase 2 at $5.25 would result in a 281% profit while the STEEM bought toward the end of phase 2 at $19.75 would result in a 1.27% profit.

Phase 3 losses: The losses on the STEEM bought in phase 3 will depend a lot on the markets. The STEEM bought around the start of phase 3 could be converted right away resulting in only minor losses, but the STEEM bought toward the end of phase 3 might have significant losses if the price of STEEM drops significantly after phase 3 ends. However, after phases 2 and 3 are complete, there probably won't be too many people left with STEEM to sell below the pumped up price because for 3.5 days they already declined the opportunity to sell their STEEM at the pumped up price. Also, depending on how much time was used to pump up the price of STEEM in phase 2, the supply of STEEM people have available to sell is likely to remain scarce for at least another two or three days until the markets are flooded with a wave of powerdowns trying to sell STEEM at the pumped up price. 

Conclusion

It seems pretty clear that the profits from phases 1 and 2 have significant potential to far outweigh the phase 3 losses, and this makes it possible for someone to abuse the proposed two-way SBD peg. If you disagree, then simply increase the amount of STEEM accumulated in phase 1 until you agree. The reason the APC strategy can work out this way is touched on in the following excerpt from the "Minimizing Abuse of Conversions" section of the Steem whitepaper.

"If people could freely convert in both directions then traders could take advantage of the blockchains conversion rates by trading large volumes without changing the price."