Steem Dollar Economics
I wanted to chime in on the Steem Dollar discussion because so few seem to grasp the full economic picture. This post is for educational purposes only and is not an attempt to sway the discussion in either direction or to indicate my preferences. I believe that everyone should be operating from an accurate as possible understanding.
Law of Conservation of Risk
At any given moment in time risk can never be created nor destroyed, only transferred. In this case, the risk we are referring to is the volatility of cryptocurrency. This volatility is rooted in changing market perceptions which in turn impact the supply and demand.
In order to create a price-stable currency, such as the Steem Dollar, you must transfer risks from one group of people to another. The Steem Dollar transfers its volatility to STEEM. This means that the profits from holding STEEM increase when STEEM is growing and the losses increase when STEEM is falling.
There is an even trade between STEEM holders and Steem Dollar holders. When STEEM grows value is transferred to STEEM, when STEEM falls, value is transferred to Steem Dollars.
Impact of Interest
Normally people have to pay interest in order to borrow money. This means that there is a cost associated with purchasing leverage. This cost is worth it anytime the growth of STEEM is greater than the interest rate paid on STEEM Dollars. If STEEM grows slower than the interest rate, then borrowing SBD is a bad investment. If it grows faster than the interest rate then it is a good investment.
Long Term Perspective
If your long term view is that STEEM will be worth less than it is today, then buying Steem Dollars and converting to STEEM at the low makes the most sense. If your long term view is that STEEM will be worth 10x or more, then you want the network to have as much Steem Dollars as possible.
Only 10% of STEEM is used as collateral for outstanding SBD
The term's of the SBD smart contract are that only 10% of the STEEM network is pledged as collateral for the debt. This means that the network's maximum "loss" is 10% of equity. There is no "infinite dilution" caused by SBD; instead, there is a hard upper limit.
The Steem Dollar serves as a competing currency to STEEM, but it also serves as a bridge into STEEM. SBD existences makes STEEM more volatile which detracts from its appeal as a currency. It is hard to bootstrap currencies without bridges from existing currencies. Ultimately the market will pick the best currency. The Steem Dollar's fate is tied to the Federal Reserve and may die on its own.
So either STEEM falls and the SBD becomes pegged to STEEM or STEEM grows and SBD contributes to boosting the gains.
The biggest risk is unrealistic expectations of normal users who would be unjustifiably upset if SBD was suddenly pegged to STEEM.
It is a tough call..
On one hand, there is a risk to both the network and SBD holder due to the debt level reaching high levels. I have covered the main reasons against SBD in this post here: SBD Debt Issue - Riding the STEEM Price Roller Coaster.
As far as reasons for SBD, here is what I wrote in another post:
SBD is beneficial for merchants. Merchants are really the ones that need a 'stable' currency in order to function.
For an actual business to try and sell their goods and services (which have fixed costs to produce) they need to be able to set fixed prices. Having a stable and widely used currency will attract more merchants to sell their goods and services using the digital currency.
Merchants are beneficial to STEEM holders because "non crypto" users will have more things that they can do with their earnings from the site.
I remember trying to explain the money thing to my non crypto friends, and lots of people lost interest when they heard you have to register in an exchange, provide your bank account information, trade your SBD (or STEEM) for BTC, and then sell the BTC to get cash. I did this on behalf of many of my friends, but not everybody is going to know somebody who can do this for them.
If someone could see that they can take what they earn and go buy an i-Phone (or whatever other good/service they are interested in) in the internal marketplace using their earnings from the site - that would be huge!
One small thing that I think could help would be to introduce a way to "throttle" SBD production in ways other than the forced measures that get imposed when the debt gets too high. One simple way to do this would be to give users another payout option: 50% SP / 50% STEEM. At the very least, it would slow down the rate at which the network produces SBD, which would reduce the amount that SBD exaggerates the volatility of STEEM.
I see the SBD as being very valuable for a future marketplace I hope to see powered by the Steem blockchain. Many people don't think about value in terms of Satoshis and aren't comfortable doing conversions all the time, especially when cryptocurrencies swing widely in terms of purchasing power compared to USD. I've been holding SBD lately in hopes of buying more STEEM closer to wherever the floor ends up being over the next 6 months or so. I understand some of the risks SBD represent, and I try to convert when I want to go back into STEEM in order to cancel the debt (even if that turns into a loss at times). One of the strengths of steemit is to bring "every day" mom and pop people into blockchain and cryptocurrency worlds. SBD I think works as a very nice bridge for that process and the $ sign has real meaning if the rewards are pegged accordingly.
My $0.020 SBD:
We keep SBD. Why? Because over half of the world knows what a damn dollar is.
Anyone who thinks that having 2 or more stores of value on the network is detrimental need look no further than the forex markets.
Personally I think multiple investment vehicles is great for stimulating the STEEM economy.. Anyone attempting to pull the "this over-complicates things" card should seriously look into the volatility of other world currencies and get back to me.
SBD simplifies things.. Else you simply wouldn't have implemented it in the first place. :)
I don't want to spend my STEEM in stores in 10 years. I want to spend my SBD.
Why? Because STEEM is a "status token" where SBD is more of a currency in my eyes.
So you really thing $ dollars will still exist in 10 years from now...
Absolutely.
They will just raise the debt ceiling and keep printing them as they have since nixon axed the gold standard.
There are plenty of countries that use the $ sign too.. If USD somehow dies (it won't) then we could always peg to CAD (Canadian Dollars) or hell even some other wild dollar like zimbabwe dollars.
Money is a form of control over people.. They aren't going to just stop using dollars even though the system is unsustainable.. We've seen it happen time and time again. There is always a bail-out... and always more money to be had.
Not trying to defend the obvious screwed economy we've got going on here... But I'm a realist.
USD is far more likely to be around in 10 years than it isn't. History dictates this.
As long as the oil is traded in dollars the fed can just keep printing, but if the petro dollar is replaced the dollar will have trouble. The economy is so globally intertwined now and dependent on the dollar that even if the shit hits the fan the dollar will last longer than most other fiats.
That is not the point. If the USD will not be the de facto currency standard we can use a different one to peg SBD to.
The key however is to have a currency that is part of the steem ecosystem. steem and SP are not currencies in the sense that they cannot be used to store value. Currency requires stable value to be effective.
Thanks for the clarification, I didn't explain anything about SBD in my post, nor would I be qualified to this extent hehe ;) I noticed you didn't comment at all on that SBD question post, I'm just curious, were you just waiting to address everything in a post like this? Edit: Did something put you off from the post? I also notice you didn't upvote it, no biggy, but I am wondering if there was something about it that bothered you rather than interested you? Thanks for any insights you can provide :) Peace.
As long as only 10% of the liquid Steem is blocked into an alternate currency like SBD, I personally consider SBD an interesting experiment. But just an experiment. From a theoretical point of view, SBD is "working".
The real validation will come if there will be market demand. If people have a way to spend their SBD, then there will also be demand for it. If it's just a theoretical experiment, it will be dwarfed as just a "theoretical experiment".
A currency is ulterior to a market, to a stream of transactions. If there aren't any transactions, as brilliant as the mathematical model behind a currency is, there won't be any adoption.
This reminds me of another experiment, in languages this time. People invented an artificial language called esperanto. Guess what, nobody used it.
The real problem is a marketplace, not a currency. If we have a place where we could sell stuff, we can invent 20 different currencies and nobody will have a problem with that. I'm eagerly waiting for the roadmap of Steem. A marketplace will certainly make all these comments about SBD obsolete. At the end of the day, people just want to be able to buy and sell safely and profitably.
I agree with you except:
Thanks for contributing to the conversation, appreciated it.
I agree, but you have to start somewhere, and these cases show that the potential is there. The entire steemit community is very small (probably only a thousand or so very active users) so you just can't expect too many little niches to thrive. But with a large community there can be many of these niches indeed, and larger marketplaces and economies starting to bloom.
Agree. So we're still all very early adopters.
Thank you for that enlightening input. I feel like your comment put a nice perspective on the matter.
Agreed.
If STEEM is the better cryptocurrency to bootstrap - which I think it is - and if bloggers had the choice to be paid out in SP + SBD or SP + STEEM, then would there need to be incentives to encourage users to accept STEEM for payout? I personally see SBD as an excellent gateway cryptocurrency. Once a person has been here a while though, the fluctuating price is not as scary. Would it be up to the witnesses maybe to compete with the price of STEEM on the market...?
That is a realistic possibility.
So one obvious solution is
1.to use only STEEM and SP...
2.what about giving the option to let users (market) choose between more than one bitasset, like steem-gold, steem-euro, steem-bitcoin etc. Is there an easy/simple way to give a plethora of bitasset choices?
A simplier solution is to put a floor on the ratio of USD to one of those other assets or a basket. If USD fails due to hyperinflation, SBD would automatically switch over to the other asset(s) and remain useful. This avoids having to create a stock market environment with even more assets that doesn't fit with the simplicity and user-friendliness that Steem is apparently going for.
It is similar to what Dan was saying is going to happen now if USD fails, except instead becoming tied directly to STEEM (which I personally believe will continue to be extremely volatile for a very long time) would tie to another stable value asset.
Cool. I remember Dan mentioning such a possibility.
@dantheman, here's to the federal reserve crumbling.
From a business owner perspective interested in using either SBD or Steem to accept payments, SBD has more appeal if only for simplifying my accounting and pricing processes. Simplicity is good business and easier to adopt. @ats-david made some good points that clarify this more in his post today.
Your post is a good economic explanation. I do not really see it as a pro or con argument in the current debate. Personally, I think we need to focus on growing STEEM now. As much as I liked SP, I think it failed in this context, while SBD has been something of a distraction. Short term, if you want to scrap SBD, go ahead, because the demand and volume aren't there to utilize it yet.
Longer term, I know that a price stable cryptocurrency is a dream for you and for many people. I can only guess that, if SBD is taken off the boards for now, you will bring back a price stable currency model at some point. And I'm sure you have learned more this time about what works well and what might be improved in that model. Longer term, a price stable currency has an important role. BitUSD, SBD, ? Maybe the third time will be the charm. For now, let's go full STEEM ahead and take down Bitcoin.
@ats-david made some good points for keeping the SBD in his post today. What are your thoughts about keeping the SBD so merchants have an easy way to price items? Businesses that want to accept payments SBDs need a reliable way to price their goods and services and having SBD pegged to the dollar makes this easy to implement and simplifies bookkeeping.
Steem is a real currency now. I don't have any problem with keeping SBD if that's what people want, but I don't see the demand to justify it right now. There are some costs in terms of maintaining it and making conversions; I think we could do without this distraction as we build around Steem.
The ideal of a price stable cryptocurrency (BitUSD, NuBits, Tether, SBD) came in response to Bitcoin's volatility, but that has calmed down over time as people have used it more. I think we can take on Bitcoin with Steem if we keep building this ecosystem. SP and SBD are not really needed at the moment, but even if they were scrapped or sidelined for the time being, they could be brought back into the system later if there is a need for what they offer. If the community wants to keep SBD, then I'm fine with that; I don't see it as a big deal either way.
I like the SBD and it makes it easier to explain Steemit to my friends that are not familiar with cryptocurrencies.
I don't think I fully understand why there's even a discussion about scrapping it. Can you point me in a direction that could clarify why it's even a topic of discussion right now?
Try this: https://steemit.com/ned/@krnel/ned-on-sbd-does-the-community-want-to-continue-to-be-paid-out-in-steem-dollars
Thanks. I saw that video yesterday. It was good.