How does the Steem Dollar peg work?
Recently, there has been a lot of rampant confusion in crypto circles about how steem works. I think the major issue is that we have got a bunch of people who don't really understand the system discussing how the system works and they just get people more and more confused because nobody is injecting answers into this, there is a continuity of questions.
One issue that has come up over and over again is " how does steem-backed dollars work?" and "how does it's peg to the dollar work?". In the real sense, it's simpler than what most people make it look like. So in this article, I'll be explaining how the dollar peg works.
A steem-backed dollars (SBD) is a smart contract, that is, a contract that is enforced programmatically by the blockchain; all of the rules for how that Contract is enforced and the procedures for enforcing it and fulfilling it are all programmatic and they are written into the blockchain.
A steem-backed dollar represents $1 worth of debt from the steem blockchain as a whole to every holder of a steem dollar. What it means is that for every steem-backed dollar possessed, the blockchain owes you $1 worth of steem. Now you can do a couple of things to that contract; you can either sell it to someone else, in which case we expect it to sell for about a dollar because it's worth $1 of steem at some point in the future. You can also decide to execute the contract. That would be saying "I want this Contract to run, and I want it to make me the steem to pay this debt". What happens when you decide to execute the contract, is that the steem dollar gets locked up for one week and one week after you locked it up, the contract finishes executing and what happens after that is that the blockchain destroys the steem dollar which is the $1 debt and prints $1 worth of new steem at that days price and gives that to you.
The reason for the one week delay is to avoid Market manipulation attacks. So if it were to convert immediately, individuals with high stake (whales) would be able to dump an enormous amount of money under the exchanges which will completely alter the price. If they could then execute the contract at that price, then they could get a very maliciously weighted price in their favour. So the blockchain puts in place that one week dely so that attackers cannot fully dictate how much they get once the contract finishes executing.
Ultimately, what the steem-backed dollar is, is nothing but a debt that the steem blockchain owes you. It represents a dollar worth of steem that has not been created. So no matter what the price of steem does in the mean time, unless it crashes to $0, the blockchain should be able to print enough steem to cover that debt.