This post assumes you've read the Steem White Paper
Like anyone else interested in Steem and Steemit, I watch the price of STEEM closely. Over the past month, the value of STEEM has dropped by about 50%, and that's including a large uptick in the price within the last 24 hours. Most people have an intuitive sense that monotonically decreasing price is bad, but the implications of such market behavior aren't always clear. This post will focus on the Steem Dollar (SBD) and what SBD means for the financial health of Steem and the Steemit community.
The problem with SBD
Steem Dollars are essentially convertible bonds, meaning they are a debt liability to Steem. In order to maintain a reasonable dept ratio, Steem issues the equivalent of $19 in STEEM whenever a single SBD is created. If the price of STEEM were constant, this would result in a 5% debt ratio. In reality, the price has continually decreased, so what was worth $19 one month ago is now worth $9.50. Thus, if all SBD were issued a month ago, Steem would currently have a 10% debt ratio. Given that the price is falling without bound, the debt ratio must always be increasing. SBD issued at the peak STEEM price requires more STEEM than the $19 of STEEM created in tandem. If the current trend continues, Steem will eventually become insolvent, unable to honor the convertible bonds.
More evidence something is amiss with SBD
Before proposing a solution to the problem, I wanted to provide additional evidence that something is wrong with SBD. The most compelling of which is the fact that SBD trades at about $0.94. Think about that for a second: A contract for $1 of STEEM that also pays 10% interest is only worth $0.94. If Steem inspired trust, such a situation would be impossible. For example, imagine the U.S. government were to sell bonds with a nominal amount of $1 for a face value of $0.94 and a term of 7 days. People would snatch up as many of these bonds as possible.
What to do about it?
Trading currencies and bonds on an open market is far from a new concept, and there are many things that can be done to solve the current crisis. Two things in particular would make a huge impact. First, creating exchanges that allow short positions on STEEM would help stabilize the price. Second, SBD can be moved closer to $1 by removing the 7-day delay on conversion.
Allowing short positions would greatly increase demand for STEEM. Right now, there is no reason to buy STEEM unless powering up your Steemit account. Clearly this is not generating enough demand for the currency. Allowing short sales would increase demand because short positions would have very good payoffs given the current state of STEEM. Allowing short positions also makes long positions more attractive because there are possible profits to be made by betting against short sellers. Edit: After thinking about it more, the only increase in demand for STEEM due to short selling would be interest paid on loans, and that's assuming anyone would lend STEEM in the first place.
Allowing instantaneous conversion from SBD to STEEM would solve the ridiculously discounted SBD price. The current 7-day delay prevents arbitrage, which is absolutely necessary in any currency or bond market. Removing the delay would allow anyone to make quick and easy money whenever the price of SBD fell below $1, thus keeping the price pegged.
Disclaimer: I have no position in the STEEM or SBD markets