The Steem-Backed Dollar (SBD): Having your cake and eating it too
EDITED TWICE: Smooth makes a very good point in the comments below that SBD totals only $1.2M or only about 4% of STEEM market capitalization. Therefore, clearly, my concern about SBD bleeding STM dry is exaggerated. END EDITED TWICE
TL;DR – We should keep SBDs
but we can only afford to do so by unlinking them from STM
(previous discussion about eliminating SBD is here)
SBDs are currently (and have almost always been) too good to be true. Low risk (theoretically, since the whole Steem enterprise would have to die to crash it) and a high interest rate (or, at least, *much* higher than any other low risk investment that most non-rich Europeans or Americans can make).
SBDs = low risk + high interest rate
Given that there is no such things as a free lunch (all the “free” money that the rich make is sucked out of the poor) –
who is paying for that “too good to be true”?
As stated in the Steem White Paper, “The Impossible Trinity says that Steem Dollars either need to restrict capital movement, have an unstable exchange rate with the dollar, or have limited control over the interest rate.” Yet, SBDs appear to be doing the impossible . . . .
The trick (the “man behind the curtain”) is Steem itself. Steem Dollars don’t “need” to restrict capital movement to avoid the Impossible Trinity because it sucks any capital it needs out of Steem itself. Again, as stated in the Steem White Paper, “If the value of the network is flat or falling, then any interest offered will only make the debt-to-ownership ratio [of Steem] worse.” Not only has the perceived value of STM dropped but the actual capital behind it has been sucked into SBD. Worse, this is a downward spiral as the leaving capital further reduces the value of STM . . . .
So how do we solve this problem (seize this opportunity)?
I believe that SBD provides great value to the Steem platform – not only because it provides simplicity for newbies but the stability is necessary for vendors.
The answer is to separate SBD into a totally separate currency/pool and destroy STM when it is converted into SBD (and vice versa). Similarly, more SBD is created whenever bought with dollars and destroyed when sold for dollars. SBD can be kept in sync with the dollar by both positive and negative interest rates – with the only downside being that the current high interest rate will obviously immediately disappear.
The current user experience will remain unchanged!
This change can easily be implemented with a hard fork and shouldn’t roil the markets that much (SBD will become less attractive and STM will become more attractive – but that is what we *really* want anyways).
(Note: Tags include "ned" and "news" because that is where the discussion started. Recommend that we all move to a SBD tag instead.)
Your understanding of SBD is slightly off. SBD can only ever be created by rewards or to pay interest and is only ever destroyed when "burned" or "converted at feed".
Every article I have seen addressing the top of SBD's impact on STEEM has been entirely one-sided, when in reality it is "neutral".
STEEM has a natural level of volatility. SBD removes volatility by transferring that volatility to STEEM. No volatility is created nor destroyed, it is merely transferred.
SBD is also not RISK free.. it is a reduced volatility asset with a much higher risk profile than many dollar pegs. Most of the risk shows up in short-term volatility that can be +/- 2% these days (aka Liquidity issues).
The interest paid on SBD is simply compensation for accepting the risk.
SBD adds to the STEEM market cap, it does not take from the STEEM market cap. Those who hold SBD are lending the network money and are choosing not to hold STEEM. As a result they are contributing capital to fund rewards.
There are two ways of financing, debt and equity. There are two types of capital available in the market (lenders and investors). SBD allows us to tap both sources of capital.
When STEEM grows, SBD gives all STEEM holders leverage! So those who are long-term bullish on STEEM make more money when steem grows with SBD than without SBD.
SBD is "bad" for investors when STEEM is falling in value only because lenders have a higher priority than investors.
Most founders prefer debt financing because it means they get to keep more of the fruit of their labor. If you use equity financing then you are sharing the gains with more people.
Hi Dan!
The most important point is that the high positive interest on SBD IS a one-sided drag on STM. IF the interest were allowed to go negative and were properly managed, then YES, what you say would be true. Unfortunately, the interest rate is managed to make SBD attractive which then transfers all the downward volatility PLUS that attractiveness tax to STM.
IN THE REAL WORLD - The interest actually paid on SBD is MUCH HIGHER than should be the case for simply compensation for accepting the risk.
SBD + STM == STEEM Market Cap
If you give SBD too high an interest rate, STM suffers massively and the downward spiral begins. The lenders of your scenario are charging too high an interest rate and are bleeding the community dry. We need to separate STM from them if it is to survive.
P.S. I do understand when SBD is currently created and destroyed. I am proposing a radical change to that scheme.
I agree with your assertion that the interest rate is too high and I've been continually active in trying to convince other witnesses to lower it (my current vote for the rate is 6% and I intend to go lower still). However, as with most of these SBD arguments your statements are incredibly hyperbolic. The total amount of SBD outstanding right now is about 1.2 million. 8% of that (the current APR) is about 100K/year. That's 0.3% of STEEM's market cap. That is the cost of the interest. This is hardly bleeding anyone dry now, nor will it ever.
The same applies to all of these alarmist arguments about SBD in terms of allegedly excessive selling pressure from conversions, the supposedly enormous cost of feed discounts which are sometimes used to support SBD value and incentivize conversions, etc. It is a story people want to hear when the price is falling because it feels good to have something on which to attach the blame, but when you work out the numbers it ends up being very much like the above, and it doesn't hold water.
AHA! I didn't realize that there was "only" 1.2 million in SBD. I had believed that it was much higher. Thank you for the education. I now agree with your conclusions (and will edit my post accordingly).
TL; DR - The interest payouts on SBD are far higher than they should be which is a drag on the entire system that shows up only on the STM side. All the equity is bleeding from STM to SBD and making the community-building voting and payouts MUCH less valuable.
Thanks for explanation dan. Why on earth every one have to be forced to involve this shorting smart contract instead of let individual choose to like BitShares?
"The current user experience will remain unchanged!"
The current user experience is anything but unchanged. It has been rewritten, those who learned to vote optimally, are now relearning. Those who were making the wages of a full time job for just voting (with a 10k investment in SP) are now making less than 60 dollars per month. It has all changed - even the interested rate on SBD's has changed from 15% to 9% to 8% and all you need to do is look at it again tomorrow to see what else they are doing to it.
The change that I am proposing will not affect the user experience. Of course I'm not saying that the user experience hasn't changed.
Sorry. The line tripped a trigger - I am having to deal with huge pendulum swings by the developers which have made every "help" and "tutorial" post null and void. Nothing against your post.
I invested 1 bitcoin in SBD a month ago - or $741 sbd.. and have yet to receive .001 of interest on it. At the same time, I watch the published interest fall as well. Now, people are telling me that I have to have a transaction in order to trigger the interest payment.
So, I started the 3 day withdrawal process to "Send myself some SBD" in order to trigger the algorithm to send me an interest payment. Then someone sent me a small payment. Still nothing.
I am sure it works - Just seems really 'mickey mouse' in the way it's written.
Your last SBD savings interest payment was 2016-11-29T14:13:09. You will get another one the first time your balance is changed after 30 days, so the earliest would be 12-28. You can probably see this information at https://steemd.com/@qubes (I used the CLI wallet).
Thanks for digging that up. I really don't recall ever having a balance of SBD until I deposited the value of one bitcoin into savings. At the time, it said I would be getting 15% interest. Hehe. bitcoin would have rendered $120 profit had I left well enough along in my wallet. Still, I am looking for somewhere to park money without having all my eggs in one basket. SP did quite well for me until the recent end to interest.
It's definitely a research project . . . . The beta tag isn't there because of bugs (Steemit seems to only have as many as your average non-beta commercial code and less than most websites) -- but because we are in uncharted territory here (and the constant navigation changes make creating and maintaining documentation and keeping user knowledge current nearly impossible.
The current value of my Steem holdings is way below what I've put into it. Hopefully that will turn around and Steemit will thrive. These changes, as painful as they are, are, I believe, the highest probability path to that goal.
Very valid points, I think something like this is the way ahead
How do you convert SBD to Steem without the market? The market matches buyers and sellers. I don't perceive a means to burn anything, unless @steemit enters the market. I can't see that as a good idea.
Uhhhm . . . . Steemit already has an internal market that converts SBD to Steem. The change is in changing the total amount of each that is tracked and, unless I'm mistaken, both can already be destroyed (SBD is destroyed when promoting, there may be some coding to destroy Steem but it should be major).
Also, I'm sure that a deal can be worked with one of the larger, more reputable exchanges (Kraken is what I'd recommend) to provide an instant SBD <==> dollars <==> STM conversion at the current market rate with Steemit burning the appropriate initial currency as required as capital flow (when anyone else does it, it isn't/doesn't need to be burned).
The point is that we need to stop the never-ending tie between Steem and SBD by allowing for true capital flow between the two -- not the current non-transparent parasitism.
Yeah, they can burn it. Smooth has burned SBD and there are mechanisms in play that do so. But does Steemit actually enter that market? Wouldn't that make Steemit a market maker?
Maybe I'm just missing the boat. Wouldn't be the first time. :)
Some have proposed that Steemit simply burn a percentage of the Steem it's holding in order to decrease its market share as well as total supply, thereby increasing the value of Steem. It may be a great idea. But is Steemit actually in the business of buying/selling SBD/Steem?
No, you are not missing the boat. You are correct in that Steemit is NOT "actually in the business of buying/selling SBD/Steem" -- it is the operation of the blockchain itself that creates and assigns new SBD/Steem.
Can you give me seudo-code or more specific implementation?
Currently, the SBD pool is "insured" by "effectively" holding a certain amount of STM which limits the available amount of STM. This would be fine EXCEPT when STM goes down, the SBD pool "effectively" immediately "grabs" any necessary additional STM.
This proposal does a one-time destruction of STM rather than a constantly open flow. You can also buy up SBD with STM and reverse the operation but, once again, the transaction is frozen at the instant of completion -- not subject to the constant variance in value of STM.
Note: I suspect that the above explanation is what led Dan to believe that I don't understand SBD creation and destruction. The point is that it is the perceived total Market Cap of STEEM + SBD that is generally perceived to be constant. If that is true, any increase in value (or payout) of SBD affects the price of STEEM. The converse, of course, is true as well. EXCEPT the interest payouts on SBD are far higher than they should be which is a drag on the entire system that shows up only on the STM side.