Should we be concerned about STEEM-Backed Dollars and the inconsistent peg, or is it too soon to worry?
Over the past five and a half weeks we have seen the SBD price trend upward after consistently holding the peg near $1.00 since mid-November. Although this seems like a great advantage for anyone acquiring or holding SBDs, some have argued that losing control of the peg could end up being detrimental for the system overall. After a few conversations with witnesses, such as 
Looking back at the Steem Whitepaper (which is largely outdated at this point), there was considerable thought given to the concept of "Steem Dollars" (SMD). But it ultimately boils down to one quote for me:
It is our belief that these rules will give market participants confidence that they are unlikely to lose money by holding SMD purchased at a price of $1.00
In perfect market conditions, the idea is to have a stable debt instrument that can be bought and sold for one U.S. Dollar. The primary emphasis on stability in the case of such an instrument is to not lose value when investing in it. If you were to purchase one SBD at $1.00, then you should not lose more than an insignificant amount of value at any given time in the future when that SBD is sold.
What happens if SBD is valued at $2.00 in the future?
If you bought them at $1.00, then you should obviously rejoice at your 100% profit! If they are given to you as a reward at a presumed value of $1.00, then again, this should please you. You're earning double "face value" of your SBDs and can sell them for an instant 100% premium.
The question is: Are there long-term negative effects of such a premium and what should be done, if anything?
First, we have to acknowledge that a few things are likely happening to cause the price of SBDs to increase steadily like they have been.
- Demand for SBDs is outpacing creation.
- There is a lack of SBD liquidity in the markets.
- The individuals/bots responsible for maintaining the peg are not performing their duties, are performing them improperly, or they simply cannot overcome the supply/demand and liquidity issues.
If the problem is either of the first two - or both - then the solution would be to increase the supply and incentivize selling on the open market in order to put pressure on prices and help to drive them back down. With the price of STEEM rising over the past couple of months, SBD creation has been on the rise. However, the price of SBDs has also steadily risen over the past month, despite more creation and distribution to content creators.
Whether or not we should be concerned about this rise in price depends on whether or not a higher price is actually harmful. Other than internal conversion rates being sub-optimal, there doesn't appear to be a negative impact on any particular aspect of the system or on the system overall. In light of that, any proposed solutions should be made with a long-term outlook for stabilizing the peg as opposed to a short-term reaction.
There have been a few solutions discussed that could help bring the peg back towards $1.00.
Right now, I do not believe that relatively high SBD prices pose an immediate concern. So, with that in mind, here are a few ideas that have been suggested.
- Implement a reverse conversion function in the Steem wallet (STEEM-to-SBD), as mentioned by @timcliff.
- Have witnesses set a higher bias, which would create and distribute more SBDs per post payout - a position supported by
- Do nothing, but continue monitoring prices and liquidity. (My current position.)
It should be noted that option 1 can be very easily manipulated and was seen as an avenue for abuse in the original whitepaper - and intentionally not created as a blockchain function.
If people could freely convert in both directions then traders could take advantage of the blockchains conversion rates by trading large volumes without changing the price. Traders who see a massive run up in price would convert to SMD at the high price (when it is most risky) and then convert back after the correction. The Steem protocol protects the community from this kind of abuse by only allowing people to convert from SMD to STEEM and not the other way around.
The blockchain decides how and when to create SMD and who should get it. This keeps the rate of SMD creation stable and removes most avenues of abuse.
Steem Whitepaper - Minimizing Abuse of Conversions, page 11
Is this a problem in need of an immediate solution? Is it necessary to hold the SBD peg at or near $1.00 at all times?
In my opinion, I don't think this is a serious issue right now. As long as SBD holders are able to sell the token for at least $1.00, then the peg "works." At prices above $1.00, buying SBDs carries much higher risk and should probably be avoided.
SBDs were intended to be a stable instrument that held the value of one U.S. Dollar. If it holds the value of more than one U.S. Dollar on free-market exchanges, then that's a positive sign for the STEEM currency and SBDs. It shows that there is confidence in and demand for the Steem currencies/assets. It's essentially an extension of credit to the Steem ecosystem, which is a positive sign.
However, these are just my views. I do believe that SBDs can play a huge role in a marketplace, even if we sometimes can't see their usefulness at the moment. But should we be concerned about the inability or unwillingness to hold a stable peg at $1.00? I'm curious to know what the rest of the community thinks...or even if this is something that is thought about in general.
**A Final Note on SBD Conversions
If you are not aware, it is not ideal to be converting your SBDs to STEEM. You will receive much less STEEM using the conversion function in your wallet than you would selling the SBDs through the exchange and purchasing STEEM. This will also put downward pressure on SBD prices and upward pressure on STEEM prices. If you wish to convert SBDS to STEEM, consider using the internal or external exchanges. It would be beneficial for yourself and both currency prices.
