By Leon Fu Dot Com, The Oracle of Austin
Many people are asking what are Steem Dollars (SMD). They are intended to be a stable value currency on the SteemIt platform. I will try to summarize my understanding of the white paper, for those don’t want to read, or don’t understand it.
- SMD's are generated by the blockchain when SteemIt posts are up voted by readers. SteemIt calculates the value of a post by the number of up votes and the STEEM Power each of those up votes have. The value is split 50/50 between SMD and STEEM Power. This is how SMD’s come into existence.
- First thing to know is that there are no USD’s backing the value an SMD. The value of an SMD is pegged to a USD solely by the SteemIt’s blockchain’s ability to create unlimited amount of STEEM’s, destroy the supply of SMD’s when they are redeemed for STEEM, and speculators/users willing to hold and buy STEEM’s for BTC or USD. When 1 SMD is created, $19 worth of STEEM are also generated to back that SMD.
- The second piece of the system is electing people to provide an honest price feed of STEEM to USD. These people are elected by STEEM holders to provide this price feed. They are compensated in STEEM for this service, and there is a formula to average the price from feed providers. If they don’t provide accurate data, they can be kicked off the system and a new price feed provider can be elected. This allows the blockchain to redeem an SMD, for the fair value of $1 USD worth of STEEM.
- Another tool SteemIt uses to peg the value of a SMD to USD is with interest rates. Holders of SMD are paid interest in additional SMD’s. If SMD were to fall below USD, interest rates could be raised to increased demand of SMD.
- Right now, SMD’s are trading above 20%-30% above USD. Think of SMD’s as debt denominated in USD the community must pay back with interest in STEEM. If SMD’s trade above US$1, it means the market is willing to lend more credit than the debt the community is willing to take on. There’s not much that can be done than setting interest rates to zero, unless the system charges negative interest rates, which it can’t do right now.
SMD’s are designed to be a stable value currency to be used within the system. It uses a combination of price feeds, the ability of the blockchain to create new STEEM’s to back SMD’s, and interest rates on SMD’s to stabilize its value to a USD. There are no actual USD’s you can redeem for SMD’s. You must sell SMD directly for BTC, or convert the SMD’s to STEEM’s and sell those for BTC on an exchange, which you can sell for USD or whichever fiat currency. If the system works as intended, you should always be able to redeem 1 SMD for $1 USD worth of STEEM or better.