This processes can be incentivized by offering a short-term premium conversion rate that gives each Steem Dollar holder $1.25 worth of STEEM when they convert. This is possible by having the witnesses temporarily adjust the price feed.

Can you clarify this? Do you mean they would "fake" what the exchanges are actually offering for SBD on the open market? That, to me, seems odd, but I get how it would work, given the current mechanisms that are already in place. It just feels... icky.

Also, would this be widely communicated via a notification on the site? Seems like an important change people would need to know about.

It seems to me an active marketplace for SBD is the best long term solution here. Even if the value of STEEM dropped, a market place for SBD could (in theory) prop up the value of STEEM beyond what cryptocurrency speculators invest in it.

Do you have a timeline for the birth of that marketplace?

I run an ecommerce platform with thousands of merchants and already demonstrated how people could sell products on Steemit blogs right now. All we need to make this go mainstream would be official integration and a SBD payment system such as http://www.steempayments.com/.