A way to stabilize the price of Steem dollars
The problem
Currently, the price of Steem dollars is down to around $0.76, which is significantly off the $1 they're supposed to be pegged to. I think the reason for this is that it takes 7 days to convert Steem dollars to Steem and you get the average price. If Steem is dropping, then that means the conversion process will charge you too much for Steem, resulting in getting significantly less than $1 worth of Steem per Steem dollar.
This is a problem because it makes the system dangerously unstable. If the price of Steem is dropping for any reason, it will pull the price of Steem dollars down with it. If Steem dollars are significantly off $1, confidence in the ability of the entire system to maintain stability and keep its promises is undermined. A low value for Steem dollars could be seen as a market signal that Steem as a whole is failing.
The peg is not reliable because a downward trend in the price of Steem causes the value of Steem dollars to drop -- exactly what the peg is supposed to prevent.
The solution
I propose a change to fix this: Instead of the redemption rate for Steem dollars being the average over the 7 day conversion period, it would be changed to the better of either the 7 day average or the price at the time the Steem is delivered.
This would help Steem dollars hold their pegged value better even if the price of Steem is dropping. In fact, the more Steem dropped, the more Steem dollars would see some upward pressure, helping to maintain confidence in the system, even if the price of Steem is falling. It would also permit Steem dollars to be a bit of a hedge against a reduction in the price of Steem.
I haven't completely thought this through, but it seems like an improvement to the reliability of the dollar peg and a way to maintain confidence in the system as a whole.
I'm not sure my exact proposed change is the best solution, but I'm convinced that some change to the way the rate is calculated is needed to make the peg work even if the price of Steem is dropping.
Any peg costs money. The cost = exactly that of a Long Straddle (buy one call at the money + buy one put at the money). Since STEEM is extremely volatile relative to most securities... a STEEM peg should be very expensive to maintain.
By employing unusual back-of-the-envelope methods to maintain a peg, you get the wild $0.80 to $1.40 range that we've seen in the last 2 months.
Actually it is extremely cheap to maintain A peg. As cheap as transaction cost on the existing exchanges plus 7 day of Steem interest. Add to that that there is no logical reason for the 7 day wait period , 1 day will do just fine.
{hint}: You do not need no Straddle to hedge a now long [after the conversion request] Steem position... all you need is :)
The community/devs need to find a way to generate a stable external demand for STEEM. This could fund the gap. Much hated advertising could do the job but no doubt all the brains here can find a more elegant solution. Meanwhile it is better to save the calf while we ponder over this...
David, I suspect you as Ripple's Chief Cryptographer wouldn't write this other way to stabilize the price of Steem because readers would think is biased towards the company you are currently working for.
But since I am independent from Ripple, I could share this view and I would be honored if I have your thoughts regarding this article:
How Steemit could learn from Ripple's funding strategy
Now the SBD peg is failing in the other way. The price of 1 SBD has been considerably more than 1 USD for a while now.
I agree with you that the SBD monetary policy should be revised to be more reactive to market changes.