Boost Steem Value by Backing Steem Dollar
We created Steem Dollars with the intention of keeping value within the Steem network. The idea behind Steem Dollars is that people would be more willing to hold their Steem Dollars than a volatile cryptocurrency. The interest rate on Steem Dollars was designed to attract capital.
In my opinion, the Steem Dollar system is only working at 10% of its potential because the frequency and duration of time that Steem Dollars have traded between $0.80 and $0.90. This level of volatility means many people still prefer to “run to the exits” rather than hold on to their Steem Dollars and earn 10% interest. The market has spoken, Steem Dollars, as they are managed today, are not worth $1.00 even with 10% interest.
Disclaimer
What follows is my personal opinion and should not be taken to represent the opinion of Steemit, Inc. This disclaimer applies to all posts I make from this account.
Why Steem Dollars are Discounted
A Steem Dollar does not represent the current value of Steem, but the 7 day median price. They are not backed by immediate delivery, but by delivery in 1 week. These two characteristics mean that the market prices in the cost of a 1 week option into the current price. The more volatile Steem becomes the higher the option premium.
The price of options go up when there is strong market sentiment on the expected future price. In a down market the cost to buy an option to hedge against future losses is much higher than the price to buy against future gains. In a bull market the opposite is true.
Why we should Improve the Peg
A strong peg of Steem Dollar vs Dollars means the market will have a strong degree of confidence in the Steem Dollar. The more confidence the market has, the more value / demand there will be to hold Steem Dollars. This in turn means there is a ready and active market for those who earn Steem Dollars to sell into when they want to.
Having confidence that there will be market liquidity at around $1.00 when you want it goes a long way toward people being willing to trust their wealth to a currency. It goes a long way toward merchants being willing and able to accept Steem Dollars at face value. All of these things help grow the value of the Steem network by making it easier to use and building trust.
How to Improve the Peg
There is a simple and straight forward means to improving the peg that can be performed without a hard fork and completely within the options outlined in the white paper. It requires Witnesses to publish a price feed that is adjusted by an amount proportional to the current option premium.
Lets use a simple market scenario:
The current price of STEEM to Dollars is $0.50
The current market price of a Steem Dollar is $0.80
Then the price feed should be 0.40 SD /STEEM
Todays price feed of $0.50 would cause 100 SD to yield 200 STEEM. With the adjusted price feed, 100 SD would yield 250 STEEM which would clearly make Steem Dollars more valuable.
With this adjustment to the price feed, speculators have greater financial incentive to trade toward the peg because the volatility risk associated with converting at the feed has been largely mitigated.
If at some point in the future the Steem Dollar starts to consistently trade at more than $1.00 then the interest rate can be reduced or the feed can reduce its premium.
Keeping a lid on Steem Dollar Supply
The result of making conversion from Steem Dollar to Steem more profitable means it will be utilized more frequently whenever the price of Steem Dollars fall below a dollar. This in turn will help shrink the Steem Dollar supply which helps keep a low debt-to-equity ratio and improve overall economic stability of the platform.
Transparency of Witnesses
I think it is incredibly important that witnesses establish fixed and predictable offsets in their price feed so that other market participants can make more informed decisions about the expected future redemption prices of Steem Dollars.
Raising Interest Rate would be Ineffective
Some people have suggested raising the interest rate as a means of increasing demand for Steem Dollars and restoring the peg. The problem with this approach is that interest rates are only effective when volatility is contained. Why would someone buy Steem Dollars at $1.00 when there is a high probability that they could be forced to sell at $0.80 if the interest rate is only 10% per year. Interest rates help with long-term price support, but do little in the face of large swings in volatility.
When Steem Dollars are trading at $0.80 there is an implicit market interest rate of 30% assuming Steem Dollars eventually revert to $1.00 within a year. Those who believe in the economic fundamentals behind Steem Dollars don’t need more interest and those who don’t believe in the fundamentals would require significant interest to compensate for the long-term risk.
Because there is only one interest rate, we end up paying all holders of Steem Dollars much higher interest rates in order to attract each additional Steem Dollar buyer. When we increase the STEEM backing of a Steem Dollar it actually costs the network nothing.
Reduce SBD Creation Rate
When we adjust the price feed we also reduce the number of Steem Dollars awarded to posts which in turn reduces the supply of Steem Dollars. This helps keep the network solvent while simultaneously biasing the estimated payouts in a conservative manner. It is always better to under promise and over deliver. Currently, Steem Dollars are over promising and under delivering.
Why Steemit, Inc cannot play Market Maker
For some time the Steemit account has attempted to buy Steem Dollars with Steem to support the peg. Our actions have had a two-fold effect of causing us to realize capital gains and introducing more STEEM on the market (driving down the price of STEEM). This is not a long-term sustainable approach for Steemit, Inc nor the Steem blockchain and may result in undesirable tax consequences.
When the blockchain through witness price feeds performs the same actions of supporting the price through redemption requests there are no tax consequences and no dependency on a limited pool of funds that are unable to sustain the peg long term.
Call to Action
I think all witnesses need to pro-actively manage the price feed such that a Steem Dollar never falls below $1.00 for more than 1 day per week. This means adjusting the price feed and interest rate in what ever way they can to ensure that a Steem Dollar never breaks the buck.
The benefit of having a value of more than $1.00 is that market participants can begin to rely on its value. If people can rely on its value, then there is no reason for them to cash out into their bank account. In fact, there may be every reason in the world to move your money out of your bank account and into Steem Dollars.
If you want to boost the price of Steem, then we must support the Steem Dollar by adjusting the price feed. I call on all voters to carefully consider how the witnesses you vote for support the price feed.
Lets all vote to support the Steem Dollar and give investors confidence in storing their hard earned money on the Steem blockchain.
Downvoted for irrelevant clickbait title. You did not explain how stabilizing SBD helps the value of STEEM. You didn't even give a poorly reasoned explanation. You gave no explanation. Downvote will be removed upon the addition of a reasonable explanation.
P.S. Moreover the price has been very stable between $0.80 and $0.90, so this really isn't about stability, it is about raising the value of SBD relative to what it is now. That means, necessarily weaker STEEM, because strong SBD represent more STEEM. If the number of SBD are fixed, then that means the supply of STEEM will be greater, meaning the price is reduced according to supply-demand laws.
It could be very stable between $0.50-$0.60 also... The point is to stabilize nearer and tighter to the $1 value, between $0.99-$1.01 for example. Why should he explain the obvious?
I try to appreciate SBD for the sense of security it provides to newbies - like training wheels, sort of... but I keep circling back in my head to "why do we even bother with this?" I'll bet that it would work out just fine to remove SBD entirely and let newcomers think that steem isn't real money at first. It might even be a good thing because they'd probably feel less intimidated by it if it felt more like play money. I dunno, do you think I'm overlooking some other value that it provides that's worth holding on to?
The dollar is a necessary bootstrapping mechanism. It is much more likely to bring users to the system. Perhaps at some point in the future, when steem and SP are known by mainstream as having real value, then the secondary assets can be done away with completely.
I used to think that too but I'm not quite buying it anymore. I've been observing a lot of newcomers and helping them get into the game without any prior crypto experience (which is still most people in the world). They usually feel like Steemit is like a game with steem serving as a sort of play money. They only start to get intimidated when the connection is made to "real" dollars.
I was just looking into storing my money on the steemit blockchain. I see interest payments on accounts that do and it looks very nice indeed. I agree with everything you are saying. But
But.... I live in a country where the paper has collapsed and prices on everyday things is $2-$4 higher every time you go to the supermarket for the last 2 years. Milk has gone from $0.80 to over $29.00. The dollar has done the SAME (but over a 50 year period) eg; the same loaf of bread was $0.29 in 1980 and look at it now.
When the dollar collapses, I would rather not have a hard peg (or at least an instant way of pulling out from the pegged asset). That is why I have ALL my money in either gold, silver, btc, eth, dash, or steem.
I think we as a community can move Steem Dollar to a Steem Silver backing when the time comes. I think it would be worthwhile starting a discussion on when the Steem Dollar would switch its peg so that investors and speculators can factor in this added benefit.
It is clear that hyperinflation of the U.S. dollar is something that we should consider and any kind of "protection" that we can offer would probably help boost the value of Steem Dollars relative to bank dollars.
Why not have more options in parallel right now? When an author post a new story ask him if he wants to get paid in Steem Dollars or Steem Euro or Steem Gold ... The blockchain will then define the right supply for each Steem Asset!
That would get too complicated IMO and the learning curve would steepen further. If you can't hold a peg to USD right now, then other assets most likely won't be able to hold a peg either. I would say maybe introduce one, and only one, new asset in parallel: gold. That would ease the inevitable migration from USD to a more dependable asset... and maybe attract some goldbugs to the platform.
Now you're talking.
The idea of 'supporting the value of steem dollars' against market forces is a bit like asking people to pay more taxes than they ought, just to support the good ol usa, be patriotic. If the 'value' of the steem dollar is less than the dollar, then it is so. Only by improving the value of what the steem dollar represents can the steem dollar increase its value relative to the dollar. In fact, there is no rationale for having any 'peg' or backing to the steem dollar other than what the steem dollar is good for by itself, such as spending it with people and businesses who want to receive it, and using it as a savings account, as it seems there is actually a real return, provided you wait to cash out at the lower 'dollar' valuation, or some other valuation depending on the alternate currency or commodity. Leave it up to the individual to decide what they wish to exchange their steem dollars for, so they can pick the one they like, whichever the best value is at the time, such as bitcoin, maybe.
If there were to be a 'peg', which is just an arbitrary thing anyway, as people can if they like sell the steem dollars for $0.01 each or less, then the 'peg' should be an average of the global currencies and metals, like gold & silver & copper & palladium & etc., and the 'dollar' and the 'yen' and the 'yuan' and the 'euro' and the 'pound' and so on. Average all those valuations, however the money magicians do it, and say your 'steem dollar' is worth that, which technically it is. But people can and always will choose to sell lower and buy higher, and vice-versa.
What we are talking about with SBD is a little different though. The idea behind SBS is for it to be worth approximately $1 USD worth of Steem. The proposal is to basically tweak the numbers/formula that is used to calculate how much Steem one SBD is worth, to make it closer to $1 USD.
Is Steem Silver just an example or are you seriously considering this option?
Why not Steem Gold, then? :)
Anyways, it is a good and prudent idea to move from dollar to something with more lasting value.
I agree with this. I think it does not matter as much what is used as a peg, just that a peg works. As you outlined in your article it can be improved right now. Thank you for working on this.
i think ultimately there should be different indexes, that Sbd may be pegged to and witnesses or even better SP holders should be able to vote on what the peg will be. I.e. We could implement a rule that 70% of votes need to vote for a new index, for it to take effect, with a transition phase to make it all smooth.
I'm sure in the future a basket of crypto, gold and stock indexes may make sense, but who knows.
The key is that we make the peg work, once that is accomplished, switching the peg to a different indicator should be easy.
ok i understand 'economics' very well however i don't understand the internal mechanism of the witness system for Steem however my plain simple Question:
in that scenario you should get multiple USD to one SD (in theory) (think Yuan now )
hey a simple Question : what's the current SD ? Yuan cross rate ?
if the Yuan and USD swap in the paper market (swap value) what happens to the peg?
It can be pegged to anything, for example a basket or so. It would be decided by the community and executed by the witnesses. The goal is a currency with relatively stable value.
This reply makes me wish for a "reblog" feature for comments.
Just wondering where your from to be paying so much for milk
a place that is very Cow sparse.
no Jersey cow dare enter that place.
I believe in Steemit and am doing everything I can to support its growth. I am producing lots of blogs consistently, using my votes for posts that have important and beneficial content and make suggestions as to how I feel Steemit can get better.
My accounts power is very low so in that regard I have little influence.
Though despite that and that Steemit is only still in beta I have already begun to integrate Steem$ as a form of accepted trade on my web sites.
I feel this shows a lot of support for the platform and helps grow the economy as being able to use Steem for more and more things makes it more real and valuable.
It also helps bring comfidence in Steem as a currency, seeing it accepted by merchants for tangible valuable goods.
I am invested in Steemit in many ways and taking risks not just with my time on Steemit but with my other businesses as well, by incorporating SteemPay.
All great success requires risk.
I am excited about the potential and will do whatever I can to support the sustainable growth of this community and help bring value to the economy!
Brilliant request @dantheman. At first, I kept Steem Dollar until it started falling. When it fell, I lost confidence and sold it. If SD consistently remained at $1.00 like you propose, I would keep more of it.
With the redemption program it's really something that's been beyond speculation value from the beginning and truly pegged.
This should allow the SBD to start gaining traction, however it might not deliver the results expected so soon. When there exist Steem token, where values soar over 1000% once upon a time, and a certain Steem Power to give people the power, everyone seems to feel that SBD are pretty useless.
I believe we need to give the community more time, and start promoting the SBD too. But still, good initiative @dantheman , i'm sure with the new SD/Steem price feed, SBD will get utilised much better in future.
How much easier it would be to promote Steem Gold these days !
I believe creating more internal demand for SBD can help ease the sell pressure a bit. The post promotion is a good start, though I feel it needs some tweaking so that promoted posts are viewable in a way that doesn't need the Steemit user to click on the promoted tab.
In chat it's been discussed that avatars and blog banner images are untapped resources. Because of the ad-free model of Steemit (so far), avatar and banner additions or changes could be restricted to those who pay SBD for them. This is not unprecedented. I know of community-supported forums that charge money to change avatars.
An avatar is a valuable way of distinguishing one's own account, comments, and posts. I think Steemit could charge a decent premium for an avatar or avatar change. Something like 20-50 SBD perhaps. It may sound like a lot but it's a valuable commodity and would last until changed.
For anyone interested, I have just released a witness feed publishing script with automatic $1 SBD == $1 USD support.
Question: was the steemdollar peg a problem when the liquidity reward was in place (and the bots chasing the reward automatically bought and sold and maintained the peg). If it wasn't, then perhaps a new liquidity reward system needs to be introduced?
I agree with this; a small liquidity reward, that is given only if you push the market closer to the direction of stabilizing the peg.
I disagree. As it is now it makes perfect sense... the problem that a SBD is not 1 USD, is the expectation what happens in the next 7 days... if the expected average would be equal to the expected price in 7 days it would be 1:1. Right now everybody expects the price to go lower... I for example expect it to go below dogecoin level, perhaps 10-15 million marketcap before the dumping ceases...
nice trolling
This was actually a known idea for quite some time, see this post here.
I briefly discussed this issue too in my last witness update, and I am glad to see some more attention to this!
For the past few months I have operated my price feed at a discount related to the difference in SBD to USD (currently 10% discount). Of course, it doesn't matter much as I am a back up witness, so I hope the top19 will adjust as well.
This is a great idea to keep the value of SBD and it is also very easy to implement.
SBD is currently trading at $0.90, I will adjust my feed to reflect a 10% increase in SBD value.