As Steem falls, we're printing more of it.

Yesterday @timcliff made a long post about how SBD works and it make me realize something about the system as a whole. Tim points out that SBD are essentially a method of enforcing holding liquid Steem:

What is interesting is that when liquid rewards are paid in SBD (instead of STEEM), those SBD tokens essentially have the same economic benefit as a user buying STEEM and not selling it, i.e. HODLing. For as long as those SBD tokens are in existence (not converted to STEEM) that is less liquid STEEM being traded/sold. Even if a user receives a SBD token and turns around and sells it right away, that is not putting any downward pressure on STEEM.

I think the idea that holding unstaked Steem is a universal good is oversimplified and sketchy at best, and there's a long post coming about that soon. But there's something else important about this, which is that if we think of SBD as essentially a mechanism for holding Steem, that means that the total supply of Steem has been increasing substantially as the price falls. And this is how the system thinks of it - the rewards pool is based on the "virtual supply," aka all of the Steem that exists and all of the Steem that could exist if SBD were converted.

As the Steem:SBD price falls, the number of equivalent Steem locked up in the SBD mechanism increases. If you're used to looking at the real Steem:SBD price that may not seem like a huge deal - it's been 1.4, or .9, but it doesn't move all that much. But remember that the system caps SBD at $1, so a few months ago when Steem and SBD were both $3.5 the effective Steem:SBD price for this part of things was 3.5.

It's easier to look at this through the debt ratio, which expresses how much of the total value of the system is locked up in SBD. In the spring when the debt ratio was 1%, even though SBD was overvalued by the market, the system behaved as if the total supply of SBD was only 1% of the total supply of Steem. Today the debt ratio is 6.1%.

That actually means quite a bit. At a 1% ratio today we'd have a total system valuation of about 276.5 million Steem. Instead we have a total valuation of 291.7 million Steem. That extra 15 million Steem comes from SBD holding its value better (again because the system doesn't see numbers greater than $1) than Steem over the last few months.

This also matters a lot for how much inflationary Steem we're printing to feed the witnesses and the rewards pool. We're printing 0.127 Steem more every block under the current debt ratio than we would be under the 1% ratio - around 3650 more Steem every day. Relative to the total pool size, this effect has caused a 5% increase in the amount of money printed through inflation.

I'm still thinking through how much this matters to the functioning of the whole system, but one thing that's clear is that the existence of SBD does put downward pressure on Steem when the price of Steem is falling, because we print more of it. It also puts upward pressure on it as it's rising, because the reverse factor is also true: as Steem goes up we print less of it. So at the very least it increases the swinginess of the market.

Whether we should do anything about this, I'm not there yet. Maybe it's fine. The system caps the debt ratio at 10% - after that the way it perceives the value of SBD will decrease to keep things in line - so we're already more than halfway to the maximum effect.