Thought Experiment: What would be the effect of crazy-high SBD interest?

Continuing our thought experiments about interest payments on SBDs, let's now consider the case of extreme interest payments for SBD savings. Let's imagine that the blockchain pays 100% APR on SBDs for a time period of 1 year. What would be the impact of such a crazy-high inflation rate?

FWIW, I think 100% is the max allowed

  if( itr != props.end() )
  {
     uint16_t sbd_interest_rate;
     fc::raw::unpack_from_vector( itr->second, sbd_interest_rate );
     FC_ASSERT( sbd_interest_rate >= 0, "sbd_interest_rate must be positive" );
     FC_ASSERT( sbd_interest_rate <= STEEM_100_PERCENT, "sbd_interest_rate must not exceed 100%" );
  }

As before, I'm not proposing any course of action. I'm just putting forward a thought experiment to help us start getting a better understanding of the possible impact of interest payments.

All numbers here should be considered "back of the envelope" calculations. I'm just making rough estimates, and they could be wildly wrong. If so, please feel free to reply with corrections.

In particular, this thought experiment depends heavily on my understanding that SBD interest does not get paid to SBDs in the SPS wallet, currently ¹/₃ of all SBDs. If that assumption is wrong, all bets are off. 😉

Baseline

Here is how the virtual supply, interest rates, and new STEEM production are expected to look in the future with 0% SBD interest.

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In short, the current virtual supply is 516 million, and in a year, the virtual supply would be 550 million (ignoring other factors such as possible STEEM price changes, token burning, and missed blocks by witnesses).

SBD supply information - before and after

Unfortunately, I don't have any visuals that can show the potential impact of SBD interest, so we'll have to look at the raw numbers. For the sake of today's post, "Liquid SBD" means SBDs outside of the SPS wallet. Here's what we see today:

Current values

1. SBD supply: 13,422,915
2. SBD locked up in SPS: 4,475,832
3. Liquid SBD ([Row 1.] - [Row 2.]): 8,947,083 / 67%
4. Contribution of liquid SBD to virtual supply ([Row 3.] * 4 STEEM): 35,788,332 STEEM / 7%
5. Contribution of all SBDs to virtual supply ([Row 1.] * 4 STEEM: 53,691,660 STEEM / 10.4%.

The SBD print rate is currently 0%. Let's assume that adding SBD interest either hurts or doesn't help the price of STEEM. This means that the print rate stays at 0% and the price threshold to resume printing would go up. This is basically (I think) a worst-case scenario, and it also simplifies the calculation because we don't need to worry about SBDs from future posting rewards.

Now, what do the related numbers look like in a year? Let's also assume that every liquid SBD in existence goes into savings and earns 100% APR (never mind the impossible effect that would have on external market prices).

Other Assumptions:

• Liquid SBD paid in interest 8,947,083
• STEEM equivalent of SBD interest ( 8,947,083 * 4 ): 35,788,332
  • Note that this is based on the current SBD print threshold, which (overly) maximizes the values below. In actuality, the SBD print threshold would increase, which would drive the SBD:STEEM conversion factor and the STEEM equivalent values to be lower.

New values in a year:

1. SBD Supply: 13,422,915 (550/516) + 8,947,083 = 23,254,453
2. Virtual supply = 550 million STEEM + ( 35,788,332 STEEM ) = 586 million STEEM
3. Liquid SBD ( 8,947,083 * 2 ): 17,894,166 / 77%
4. Surplus virtual supply: 36 million STEEM / 6.5%
5. Contribution of liquid SBD to virtual supply ( 4 STEEM * 17,894,166 SBD): 71,576,664 STEEM / 12%
6. Contribution of all SBDs to virtual supply ( 4 STEEM * 23,254,453 SBD): 93,017,812 / 16%.
   • It's also worth noting that any substantial STEEM price increases above the SBD print threshold would dwarf this effect. For example, if the price of STEEM goes to a dollar, that would reduce the liquid SBD value to 17,894,166 STEEM and the overall contribution would reduce to 23,254,453 STEEM. In that case, the virtual supply would be roughly the same as today.

So, the potential downside at the blockchain layer is

1. An increase of 6 ¹/₂% in the virtual supply.
2. A doubling of the supply of liquid SBDs, which would increase the percentage of liquid SBDs from 66% to 77%.
3. A 9 million increase in the overall SBD supply (40%).

But that downside is countered by a potential upside of increasing the price of STEEM, which would reduce the virtual supply below these upper boundaries, and conceivably even below today's levels.

Caution

This is all vastly oversimplified. I hope that it captures the essential features, but it is definitely incorrect and incomplete. In particular, the conversion factor between SBDs and STEEM is constantly changing, and it ignores the possibility of distributions from the SPS wallet.

What happens at the social media layer?

I posted here about the effect that SBD interest might have on a variety of stakeholders, but the two key effects that I want to focus on here are both impacts on SP holders.

1. SP holders who are currently delegating their holdings to delegation bots and posting overvalued content daily could get a better rate of return by simply powering down, trading their STEEM for SBDs, and putting the SBDs in savings to collect passive interest.
2. Other SP holders who are not really interested in curating could go through the same exercise.

These powerdowns would have the follow-on effects that curators who continued curation would have less competition for curation rewards and SP interest, so their returns should go up.

Another follow-on effect from the powering down of delegation bot users would be an improvement in accurate valuation of content on the blockchain.

Last points:

• Curators can always reduce the SBD supply by giving preferential treatment to /promoted posts.
• If SBD interest gets turned on and it all goes horribly wrong, we can always turn it off again.
• If increased supply decreases the price of SBDs to below a dollar, the blockchain conversion function is available to reduce the supply and stabilize the price.

Conclusion

Is 100% the ideal rate? I doubt it. I also don't have any reason to believe that the current value of 0% is ideal. This is a question for the witnesses, why is your sbd interest parameter currently set to 0?

Again, I'm not proposing that anyone follow this course of action, but I am proposing that we need to get a better handle on the potential impact of SBD interest on the health of the Steem ecosystem. This is a potentially powerful lever that is currently being totally ignored (as far as I can tell).

The primary stakeholder who I can imagine would be opposed to such a strategy would be the delegation bot operators. However, their voting influence comes from their delegators, so their opinion almost doesn't matter. If it makes sense to act then the ones to persuade would be the delegation bots' clients, not the operators.

It has been about 3 months since I first started thought experiments on this topic. It would be useful to hear opinions and a more careful analysis from some of the top witnesses, who are responsible for understanding and setting this parameter.

It would also be useful to hear from the community. What are your thoughts on how to best make use of the sbd interest rate parameter to improve the health of the ecosystem?

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Thank you for your time and attention.

As a general rule, I up-vote comments that demonstrate "proof of reading".

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Steve Palmer is an IT professional with three decades of professional experience in data communications and information systems. He holds a bachelor's degree in mathematics, a master's degree in computer science, and a master's degree in information systems and technology management. He has been awarded 3 US patents.

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^{Pixabay license, source}

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