https://steemit.com/steemit/@ats-david/thoughts-on-steem-backed-dollars-and-holding-the-peg

SBD are meant to be pegged to USD in a 1 to 1 ratio so as to give holders of SBD some stability and some tether to fiat currencies.

Component: 1 to 1 SBD Peg to the USD

In order to try and maintain this peg, the Steem blockchain, through its witnesses, employs an action common with central banks: varying the interest rate earned by SBD. Open market operation is another action common with central banks that could be useful in maintaining the peg when the interest is zero and negative interest rates are not an option.

Interest Rate

Witnesses being able to vary the interest rate earned by SBD was meant to vary demand for SBD and therefore vary its price so as to maintain the 1 to 1 SBD peg to the USD.

If the price of 1 SBD fell below 1 USD, increasing the interest rate would result in increased demand and a SBD price increase. If the price of 1 SBD rose above 1 USD, decreasing the interest rate would result in decreased demand and a SBD price decrease.

What happens when the interest rate is 0% and the price of 1 SBD rises above 1 USD?

Negative Interest Rate?

https://www.investopedia.com/terms/n/negative-interest-rate-policy-nirp.asp

This is where SBD holders lose a percentage of their SBD for the privilege of holding SBD. In other words, SBD held would dissipate at a certain rate. This could still result in the USD value of SBD to rise even more as its supply would be decreasing.

Proposal: Open Market Operations

What is the difference between "Circulating Supply" and "Total Supply"?

Circulating Supply is the best approximation of the number of coins that are circulating in the market and in the general public's hands.

Total Supply is the total amount of coins in existence right now (minus any coins that have been verifiably burned).

https://coinmarketcap.com/faq/

STEEM Reserve for SBD

The SBD debt system could be revised so that all SBD in circulation are backed by STEEM of equal USD value at the time the SBD are issued. The STEEM would be held by an autonomous account similar to Hive account@null, let us say Hive account@steemreserve for easier illustration.

A hardfork would be necessary. During the hardfork, STEEM of equal USD value to the current supply of over 10 million SBD would be created and issued to Hive account@steemreserve. This would increase the total supply of STEEM but not immediately increase the circulating supply. The STEEM held by Hive account@steemreserve would only be autonomously traded for SBD in the decentralized internal market when the value of 1 SBD drops below 1 USD. This would be done in tandem with increasing the interest rate earned by SBD. As long as the price of 1 SBD is above 1 USD, the circulating supply of STEEM would not be increased by the market activities of Hive account@steemreserve.

The SBD traded for STEEM when the value of 1 SBD drops below 1 USD would later be traded back for STEEM when the value of 1 SBD rises above 1 USD. Hive account@steemreserve would always trade its STEEM and SBD according to the three and a half day moving average of the STEEM median price from the witnesses. Hive account@steemreserve would always value 1 SBD as 1 USD. For example, if the price for 1 STEEM is 2 USD, Hive account@steemreserve would trade 1 STEEM for 2 SBD and 1 SBD for 0.5 STEEM.

Guessing Market Reaction

The sudden increase in the total supply of STEEM would most likely cause a drop in the price of STEEM due to the speculative nature of the market. If the STEEM price collapses and the SBD value of STEEM drops considerably, the speculative nature of the market could also result in an immediate increased demand for STEEM from SBD holders who believe the price collapse to be temporary.

If people buy the drop in the price of STEEM using SBD, there would be upward pressure on STEEM prices and downward pressure on SBD prices and the value of 1 SBD might drop to 1 USD. At this point Hive account@steemreserve would start trading its STEEM for the SBD to accumulate a reserve of SBD, reduce SBD in circulation and maintain a low debt-to-ownership ratio. The SBD held by Hive account@steemreserve would not form part of the debt owed by the blockchain as Hive account@steemreserve would not be allowed to convert its SBD into STEEM from the blockchain in the process that takes three and a half days.

Disclaimer: this is hopeful guesswork.

Sustainable Debt to Ownership Ratios

If a token is viewed as ownership in the whole supply of tokens, then a token-convertible-dollar can be viewed as debt. If the debt to ownership ratio gets too high the entire currency can become unstable. Debt conversions can dramatically increase the token supply, which in turn is sold on the market suppressing the price. Subsequent conversions require the issuance of even more tokens. Left unchecked the system can collapse leaving worthless ownership backing a mountain of debt. The higher the debt to ownership ratio becomes the less willing new investors are to bring capital to the table.

A rapid change in the value of STEEM can dramatically change the debt-to-ownership ratio. The blockchain prevents the debt-to-ownership ratio from getting too high, by reducing the amount of STEEM awarded through SBD conversions if the debt level were to exceed 10%. If the amount of SBD debt ever exceeds 10% of the total STEEM market cap, the blockchain will automatically reduce the amount of STEEM generated through conversions to a maximum of 10% of the market cap. This ensures that the blockchain will never have higher than a 10% debt-to-ownership ratio.

The percentage floors used to compute STEEM creation are based on the supply including the STEEM value of all outstanding SBD and SP (as determined by the current rate / feed).

https://steem.io/SteemWhitePaper.pdf

Increasing Circulating Supply of SBD

As more SBD are distributed to those who earn them as rewards, STEEM of equal USD value (at the time the SBD are issued) would also be issued to Hive account@steemreserve. This way the debt-to-ownership ratio would be kept low even if the circulating supply of SBD were to increase.

Users could then be given the option for 100% SBD for author rewards in addition to the current 50% SBD plus 50% SP and 100% SP. As more author rewards are issued as 100% SBD, the circulating supply of SBD would increase and its USD value would decrease to 1.

Steem Monetary Policy Summary

The value of 1 SBD could be maintained around 1 USD by:

Steem witnesses varying the interest rate earned by SBD
Hive account@steemreserve autonomously varying the supply of SBD in the decentralized internal market

Disclaimer: beware of potential ridiculous flaws.

Benefit: Stability

Stability is an important feature of successful global economies. Without stability, individuals across the world could not have low cognitive costs while engaging in commerce and savings. Because stability is an important feature of successful economies, Steem Dollars were designed as an attempt to bring stability to the world of cryptocurrency and to the individuals who use the Steem network.