Steem Dollars have Limits

in #steemit8 years ago


Safety, security, stability, and sustainability are very important design characteristics that our team is always attempting to maximize. We must balance many variables when creating cryptocurrencies, smart contracts, and economic incentives. In particular it is important to design systems that remain robust and predictable in all market conditions.

Steem Dollars have Limits

The idea behind a Steem Dollar is that it should almost always be worth about one US dollar. We have set rules in place to make this statement true 99% of the time by making the Steem Dollar convertible to a dollar worth of STEEM.

Anyone who promises you that any asset will always be worth something is either ignorant to some risks or a liar. This is true for bank deposits, gold coins, and crypto currencies. Banks can seize your funds, go bankrupt, have a bail in, or hyper inflate the currency until it is worthless. In other words you are never guaranteed purchasing power.

When it comes to the Steem Dollar, their purchasing power depends upon the market demand for STEEM. The Steem Dollar is really nothing more than a smart contract for a variable amount of STEEM depending upon an oracle. If STEEM is worthless than the Steem Dollar will also be worthless.

As the value of STEEM falls, the amount of STEEM required to represent a U.S. dollar worth of value approaches infinity. If left unchecked, the Steem Dollar could render STEEM worthless and when that happens all Steem Dollars become worthless too.

Black Swan Events need a Plan

It isn’t possible to prevent all black swan events, but it is possible to establish a fair set of rules for handling them. It is always best to define the rules before they are necessary so that everyone can take full responsibility for the consequences of their trading decisions.

There are two major black swan events that the Steem community and traders should have a contingency plan in place for. The first black swan is if the value of STEEM crashes so far that Steem Dollars represent an insurmountable burden on the STEEM price that sets off a chain reaction pushing the value of STEEM toward zero.

The second major black swan event is when the US dollar hyperinflates and becomes worthless as a day to day currency. In my opinion this is the more likely outcome.

Price Feed defines Value of Steem Dollar

The price feed can be viewed as a mathematical function that traders and speculators can trade against for determining the value of the Steem Dollar at any time. Right now we have defined the function to always equal the approximate marginal price 1 STEEM fetches on the open market.

There are two extreme cases, black swans, that must be considered. In one extreme the price goes to 0, in the other extreme the price goes to infinity. It is in the interest of everyone involved that the value of a Steem Dollar never hits either extreme. This can be implemented in objective terms by setting hard limits on the exchange rate range that is allowed.

We can set a maximum and minimum Steem Dollar price as follows:

maximum price = SteemSupply / (10 * SteemDollarSupply)
minimum price = SteemSupply / (10000 * SteemDollarSupply)

With these rules in place, Steem Dollar holders are protected against US dollar hyperinflation and Steem holders are protected against US dollar “hyperdeflation”. The witnesses are trusted to publish a honest price feed relative to dollars at all times, but the blockchain will enforce these hard limits.

In other words, the market cap of all Steem Dollars will always be between 0.01% and 10% of the Steem market cap. This will become a mathematical reality with the addition of two lines of code to the method that calculates the conversion price.

Sustainable and Fair

These rules would make the economic system of Steem sustainable and fair in all circumstances by clarifying the meaning of a Steem Dollar. With the clarified meaning, a Steem Dollar is allowed to have values above or below a U.S. dollar under certain market conditions. All traders can be aware of those conditions and trade accordingly.

By implementing these rules long before the STEEM / USD price gets near either extreme all market participants have ample opportunity to adjust their positions.

No Promise of Value

Steemit, Inc cannot and will not promise that the STEEM token, Steem Power, or Steem Dollars will have any value now or in the future. We aim only to create fair rules to approximate the relative subjective value each member of the Steem community brings to the table. Any value these tokens have will at all times be set by the free market through voluntary exchange.

Benefits over Alternative Approaches

In a prior post I outlined a solution that would covert 1% of Steem Dollars to Steem Power as a means of correcting the imbalance. This solution had the nice property of only exposing 1% of a person’s steem dollars to volatility at a time, but had the down side of making the life of exchanges and smart contracts everywhere very complex. Every smart contract would have to factor in the potential that a liquid asset like Steem Dollars could be partially converted to an illiquid asset such as VESTS. This great complicates things such as escrow transactions and side chains and exchange deposits. In other words, it had all of the negative properties on 3rd parties that could be associated with negative interest rates.

Some people suggested things like bootstrapping an economy around Steem Dollars or buying them back with Ad revenue. It isn't a matter of finding buyers for Steem Dollars, it is a matter of maintaining a debt ceiling. Simply moving Steem Dollars from person to person does not solve the problem.

Thanks for Feedback

We would like to thank everyone for the feedback they have provided and invite additional feedback. We are all in this together, lets make Steem the best platform for everyone involved.

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I don't agree with the minimum price formula. That means if all SD in existence right now except for 1 SD was collected into one account and then converted to STEEM with a single conversion request, that 1 remaining SD would likely be able to claim 13503 STEEM (which at current prices is worth approximately $19,444 USD) through a later conversion. Now obviously, that is a ridiculous example, but it demonstrates how a sudden large decrease in SD supply due to conversions, can cause later converters to get a lot more STEEM than they should due to that minimum rule, even if the price of STEEM in USD doesn't change.

There is no need for the minimum price. If the USD hyperinflates (which I disagree with you regarding it being more likely than the other type of black swan), then the witnesses could just transition to tracking the price of some other asset with reasonably stable value. For example, the witnesses could instead track the price of some other currency, or if necessary maybe even the price of gold. An appropriate factor would be included into the definition of the price being tracked so that there isn't a discontinuous change in the SD/STEEM feed price during the switch over from tracking USD to some other asset.

The social contract regarding the price feed should not be to track USD, but rather to track an asset with relatively stable purchasing power that has a well-defined computable price relative to STEEM, whichever the best asset for satisfying those conditions is at the time. Obviously, we would also want to avoid switching the assets we track unless it is truly necessary to satisfy that social contract. And the decision to switch and the particular asset to track instead should only be made after extensive community discussion (and enough time for stakeholders to reflect their views through witness vote changes) which includes the opinions of both relevant parties: SD holders and STEEM/SP holders.

If the USD hyperinflates (which I disagree with you regarding it being more likely than the other type of black swan), then the witnesses could just transition to tracking the price of some other asset with reasonably stable value.

We should have in parallel more that one "stable" assets. Why waiting the $ to collapse and then making the switch? (it will be too late if it happens too fast) We should give the option to the steemit users to get paid on any currency they want! Steem Dollar, Steem Gold, Steem Bitcoin, Steem Silver, Steem Yuan etc.. So in case one of the"stable" steem currency collapses only a part of users would be affected and not all the project! Right now we are vulnerable to a one point of failure and that is the US dollar value (how ironic would it be the steemit project to die because of a FIAT currency fail!)

At some point it might sense to switch to Bitcoin. Bitcoin would need to be much more stable and much more widely accepted before this is feasible but I don't see hyper inflation or deletion anytime soon.

There are trade-offs either way. US dollars will likely bring in more users outside of the crypto world, but it has a real threat of hyperinflation, given enough time. Too many markets, as you suggested, would cause confusion and create illiquidity in markets. Gold may provide a nice balance. Its likely to never hyper-inflate and its a single market that most users on earth can relate to, although with a bit of perceived volatility.

People perceive volatility in gold because they are measuring its value against fiat currencies whose prices float against each other. "Two sides to every coin", so to speak... which asset is volatile? the metal or the paper currency? It's a reflection on the instability of the fiat money system that exchange rates on currencies fluctuate so much against each other and nations engage in currency wars to game the system.

I don't understand how your conditions could be met if USD fails quickly.

Perhaps that is a good reason to find an alternative to the US dollar sooner rather than later.

Can u explain why you do not like this and downvoted Dan?

I posted a comment that I like the proposal. I downvoed it because I don't like seeing thousands of dollars sucked out from the reward pool day after day every time he posts a proposal or update on the development process. That's not Dan's fault, it is just my disagreement with some of the other voters.

@liondani, Yes communication from the team helps bring confidence but I'm pretty sure this is not the way to do it. When investors see thousands of dollars being paid to founders day after day, including voting for themselves to do so, it contributes to the narrative of this being a scam that is set up to enrich insiders. It isn't necessary at all, since the team already has a $100 million "pre"-mine and should be sufficiently well-compensated to post updates without draining the reward pool doing it. If not, then something else is very wrong.

As far as the trending list, i want a sticky feature for team updates or some other way of organizing them that does not drain rewards. 100% of well-run projects already keep their investors and users well-informed without being individually paid thousands of dollars for each update. This is not rocket science!

I still think Daniel's post's bring more value than it "sucks out" due the confidence it brings to the shareholders ! At least that is the case for me! Every-time he post's updates it gives me one more reason not to Power Down but to Power Up... I certainly want his posts on the top of the trending list to be sure nobody misses it...of course it doesn't need to be on first place or having a big gap from the next posts in value...

@smooth I agree with your action. Ned downvoted Dan's previous post from the same reason - to remove the reward from the post.
As Dan mentions below, an option to 'not pay rewards for this post' would be nice.

Also, did the Comment Reply chain get reduced to 4 instead of 6? I would have replied below to @liondani's comment but can't anymore.

Maybe votes' functions should be tied to how those votes are voted by others. You know, similar to what we have with typical democracies, not like the USA though. Current voting structure with Steemit resembles American elections - Money talks. Votes' effectiveness should move from bottom up. That is votes that are upvoted should count.

@smooth I think it would be helpful if there were a feature to "opt out" of the reward pool. still show the "value" for trending but some way of saying that you are giving the reward back, and have that be built into the system.

My question is what happens after the federal reserve can't push their forward guidance to the people any more, and they stop believing in the USD, their for cutting down its purchasing power.
And or if quantitative easing is brought back this time being bigger then the last three and the USD index drops .does that mean Steem dollar drops with it.? @dantheman thanks for the read your articles have been great to read.

SBD is linked to the US dollar (including all of the US dollar's warts) as long as that is feasible to do. Dan's post and the previous one are about what happens when it isn't feasible any more.

I LOVE the idea of pegging the value to gold instead of USD as USD will collapse at some point in time as all fiat currency's will. Yet gold has been used as money for thousands of years and will continue to be so.

As long as we are only pegging to the VALUE of gold, and not to the commodity itself, which can just as swiftly be confiscated or withdrawn black swan style.

And I do not agree with the max price. This means that SD would be worth less than 1 usd in (the very likely imho) scenario of steem having market cap of less than 21 mil USD , as of this writing for example. In other words the promise for about a dollar value of SD will not be valid for all current SD holders in the very like scenario of steem price returning to the levels we saw just 1.5 months ago.

I agree that it would be important to switch the peg if needed. Also agree that the idea of sd is stability and not fix to USD, although right now USD is the best way to do this.

Howev, does a limit not make sense anyway? To prevent black swan events?

Why do you think the US dollar is the best peg now?

The social contract regarding the price feed should not be to track USD, but rather to track an asset with relatively stable purchasing power that has a well-defined computable price relative to STEEM, whichever the best asset for satisfying those conditions is at the time.

Yes, very well said. Most important is that we have some kind of stable currency, not that we have a currency pegged to USD.

Perhaps that could be a long term solution if the Steem Dollar hits the minimum price or appears to be close to hitting the minimum. But I think it's important that some sort of safe guard be in place in case of an extremely rapid price change.

You're not going to be able to switch what is being tracked on a dime, and even if you could, there's no way to know if what ever you're automatically switching to has the same problem as he USD.

Good one @fyrstikken!

I have my mac set so that Option+Esc runs the built in text-to-speech feature on selected text. I love it.

wow fyrs .. you rock man

Great post! It is always important for anybody who is looking to get into crypto or investing/trading in general to remember that there is no such thing as a guaranteed (Anyone remember Paycoin's outlandish $20 guarantee, that fell flat on its face?) as things change as new issues arise, new competitors form, and other things which are out of one's control.

Finally I'd also like to remind everyone that you should only invest what you can afford to lose. I know that I personally don't want to see posts down the line saying "X made me lose my house," or "I'm broke thanks to X."

@dantheman is committed to build a perfect stable coins on Blockchain.

IMO. The rules of Steem Dollars peg to U.S Dollars is so complex, you are always do challenging things! : )

#smartcoins in BitShares 2.0 is so easy to understand. And smartcoins like bitCNY, bitUSD is so stable for a long time. I like smartcoins : )

I much prefer this approach. Nice job to you and the team coming up with this alternative.

I'm still downvoting as a platform update though.

I still did not see theory with 100% cases covering. that mean that will appear some which will manipulate by wikness sides in market

You state in this post that the rules you put in place make it so that the SBD is worth $1 about 99% of the time. In my experience it is hardly ever worth $1. Right now it is worth around $0.90. I have read your caveat that you make no guarantees, but in the past month the SBD has been worth $1 less than 1% of the time, not 99% of the time.... I'm just wondering why there is such a disparity.

I think it's partly because many (myself included) didn't understand the role of the smart contract that is the 7 day conversion to STEEM. You and others have done posts on this to explain it so, I think, more people are taking advantage of this now and being rewarded for it. As more people understand this, I think, the price will be closer to $1. Right now, there are just so many technical details to figure out, most people aren't sure what's going on.

most people aren't sure what's going on

Bad information leads to bad decision lead to bad democracy.

Why do we use the Dollar then ? (Steem Dollar)

Did your team consider building the Steem Euro, or Steem Yuan, or Steem Yen ? Or was the choice naturally determinedly turned to the Dollars than towards other currencies ? ;)

We considered and continue to consider all such currencies. Simplicity is prefered if it can be achieved. In this case.

Perhaps, rather than one currency, a basket could be used. That way any strong moves could be absorbed, and often countered by the opposing movement of another currency. It wouldn't have to be complicated, as long as the basket was set and not adjusted further unless there was a major event. In that case, there could be a rule in place that drops a currency if it drops by more than XX% or rises more than XX%.
I don't know if that's a good solution or not... just tossing it on the table.

Dan is allowing that the steem dollar may not absolutely equal "1 US dollar worth of steem". There is the the canadian dollar, the australian dollar, and maybe we can allow the Steem Dollar, as a distinct unit of account. To address the second black swan event. We could have it redeemable for: 12 Japanese Yen, 2 rmb, 0.3 dollars, and 0.3 euros worth of steem. So we have mitigated the effect of US dollar inflation. We need only for the witnesses to modify their price feed of the Steem Dollar, if that is what the blockchain settlement logic uses.

@dantheman after your last two posts dealing with the value and stability of Steem/Steem Dollars I got to thinking.....I know scary thought but here me out please!

You seem to be worried (alot) about ensuring that steem survives and thrives and with the rash of recent problems with other cryptos I can't say as I blame you. So how about:

Instead of Voting Currency coming from a pool that doesn't exist (like the current system) you tie the voting value directly to a persons Steem Power. Meaning if they vote, it is their SP they are giving to the author.

If you combine that with some sort of mathematical functions to automatically limit the voting weight based on the amount of SP the voter has you will also solve the problem of people powering up their accounts and being able to control content or upvote content almost directly to /trending.

I was thinking something like this for the functions:

< 1000 SP vote weight = .001 X SP_Total
1,000 SP to 2,000 SP vote weight = (.001 X SP_Total) / 2
2,000 SP to 3,000 SP vote weight = (.001 X SP_Total) / 3
and so on.

The end result is that everyone's votes are now equal (more or less) and there is no longer any dilution of the currency because you don't have to keep generating massive amounts of Steem Dollars to balance out the system.

PS - If I am missing something, completely off base or just sound crazy please upvote me for trying! Thanks!

The second major black swan event is when the US dollar hyperinflates and becomes worthless as a day to day currency. In my opinion this is the more likely outcome.

Umm, I seriously thought this was already the case, or at least was heading in that direction rapidly.

We aim only to create fair rules to approximate the relative subjective value each member of the Steem community brings to the table. Any value these tokens have will at all times be set by the free market through voluntary exchange.

Surely there is some way to limit the 'free market' effect on the value of the tokens. Something like what the NYSE does if there is ito strong of a push in one direction or the other, they freeze (suspend) trading.

a single exchange can suspend trading, but a blockchain is can not suspend transfers without death.

true, I was only citing that as an example though. There has to be someway to bolster the value if the 'free market' starts driving the price into the ground. How did BTC recover from all the hacks recently? Somehow they staved off the massive slides after every attack......that was where I was trying to go just didn't come out the way I had intended.

The USD will crash and likely in less than a year.
Of course this can't be guaranteed but Gold has been used as money for thousands of years and will very likely continue to be. Even if not as a money it has tremendous inherent value and thus will continue to be valued.

Some people suggested things like bootstrapping an economy around Steem Dollars or buying them back with Ad revenue.

Does my Blockchain "Shop" idea count as "bootstrapping an economy?"

Keep in mind, I had a plan to burn 1.25 million STEEM, just by allowing users to pick an avatar. That's not finding a buyer. That's creating a value add service that the blockchain sells, and since the blockchain doesn't need to buy groceries, it burns the steem again.

Dan, please try and read it if you haven't.

https://steemit.com/steem/@intelliguy/let-s-use-steem-and-consume-it-in-our-new-steemit-shop

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