Why would anyone use the conversion function when they can trade their Steem Dollars on the market?
Some users have asked why anyone would use the 7-day Steem Dollar conversion function when they can trade their Steem Dollars on the market instantly. I'll explain in this post with a simple example.
This post involves made-up numbers and a simplified model that does not reflect actual trading conditions -- the model ignores transaction costs, spreads, and exchange rate risk. The reader undertakes any trade entirely at his/her own risk!
First, let's imagine the following market conditions apply to Steem:
- (1) BTC/USD trades at $600 per BTC.
- (2) Steem / BTC trades at 0.005 BTC per Steem.
- (3) The Steem / BTC and BTC / USD prices are steady and will not change much over the next 7 days.
The witnesses report these market conditions to the blockchain in the price feed. You can see the currently reported feed values at steemd.com witnesses page or in the command line wallet. With honest and competent witnesses, we should have the following situation:
- (4) The price feed reflects the value of $3.00 USD / Steem implied by (1)-(2).
Finally, let's look at the Steem Dollar / BTC market, and for the purpose of this hypothetical example we'll imagine Steem Dollars are too cheap:
- (5) Steem Dollars / BTC trades at 0.0015 BTC per Steem Dollar.
The following trade is then possible:
- Convert $5400 USD to 9 BTC by (1).
- Buy 6000 Steem Dollars with 9 BTC by (5).
- Convert 6000 Steem Dollars to 2000 STEEM by (4).
- Sell 2000 STEEM for 10 BTC by (3).
When this trade is possible, market participants with deep pockets should step in and do it, which will drive the price back up toward $1.00 -- it is highly unlikely Steem Dollars will ever trade much below $1.00 for long.
I give you a reason: because somebody didn't know better. And this somebody was me. All I wanted to do, was to convert my 20 SMD to SP because of that: https://steemit.com/steemit/@capitalism/5-reasons-why-you-should-power-up-your-steemdollars-smd-to-steempower-sp
When you convert Steem Dollars to STEEM by (4), what price do you get? The current feed price, or the price that's true in a week when you actually get your STEEM?
And what's the role of the 7-day price feed delay that the whitepaper talks about?
I haven't used that function yet, but does it mean I get the converted coin after 7 days? So in essence, instead of trading instantly on an exchange I will have to wait 7 days but this will help out the success of steem?
This is a very useful article. I wrote one describing how to protect against Steem token depreciation. Upvoted. Also, here are some more thoughts on Steem. https://steemit.com/steemit/@izzy/why-steem-is-the-real-libertarian-platform
I am hoping some day I have steam dollars, busy trying to learn more about them first
theoretical, I thank you for your up vote, I respect your position as a great blogger on economics, etc.
I like this. Even for a small time trader with less to inject, this will still work. I would actually use the profit off each trade to invest back to steem, because of the long term goal.
Danke für den aufschlussreichen Artikel. Ich habe den gleichen Fehler gemacht und über Poloniex konvertiert. Geduld ist nicht unbedingt meine Stärke. Jetzt weiß ich es besser. Vielen Dank nochmal.
Thanks for the insightful article. I have made the same mistake and converted over Poloniex. Patience is not necessarily my strength. Now I know better. Thanks again.
I'd like to see Steem being traded for real world goods like a ticket to this machine gun shootout.
https://steemit.com/guns/@steve-mcclair/the-big-sandy-shoot-festival-for-machine-guns-heavy-artillery-and-gun-enthusiasts
Thanks for explanation! Now i undersand it clearly.