For the last couple of months SBD (or Steem Backed Dollar) traded way above $1, thus creating a large avenue for speculation. This speculation unfolded both in the internal market and on external exchanges, like Poloniex or Bittrex.
The inconsistencies between what the price of SBD should have been and what the price of SBD actually was, created gaps sometimes bigger than 30% between the values of Steem across various marketplaces.
The temptation to jump over a fast 30% increase in short term profits is big, I admit it. But if you don't know what is the actual cost of this profit, you may create more harm than good. I'm convinced that many people had no idea what they were trading when they were selling SBD like crazy over the last few months.
What follows is my humble attempt of explaining what SBD is in the STEEM blockchain, what is its role and why we should see it as a store of value, and not as a liquid asset.
Tokens versus Convertible Notes
According to the Steemit White Paper, SBD is not a token, but a debt instrument. Its fundamental role is to increase the stability of the STEEM network:
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.
So SBD is a stability smart contract.
Steem Dollars are created by a mechanism similar to convertible notes, which are often used to fund startups. In the startup world, convertible notes are short-term debt instruments that can be converted to ownership at a rate determined in the future, typically during a future funding round. A blockchain based token can be viewed as ownership in the community whereas a convertible note can be viewed as a debt denominated in any other commodity or currency.
So when you hold SBD, you're actually holding debt, denominated in Steem and pegged to the value of USD. Generally speaking, selling debt is not a smart thing to do.
But it gets even more interesting. What happens if the amount of debt is bigger than what the network (or the economy) could support? In other words:
What Is A Sustainable Debt To Ownership Ratio?
And here we get to the core of it.
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.
Now you understand why is important to keep a healthy balance between the debt and the issuance. In other words, to trade your liquid STEEM and use SBD as a store of value.
What happens when there is too much STEEM on the market? The debt to ownership kicks in and the SBD gets printed more. That's what happened after HardFork 16, which shortened the power down interval from 2 years to 13 weeks. Because of massive power downs, the market was flooded with STEEM, so the liquid rewards were paid in SBD only (which is still happening). But ideally, you should get your 50% liquid rewards in SBD and Steem, (and the remaining not liquid 50% in Steem Power). Until HF 16, this was the norm.
How much SBD is printed anyway? Well, according to the White Paper again, here are the numbers:
For every SBD Steem creates, $19.00 of STEEM is also created and converted to SP. This means that the highest possible debt-to-ownership in a stable market is 1:19 or about 5%. If Steem falls in value by 50% then the ratio could increase to 10%. An 88% fall in value of STEEM could cause the debt-to-ownership ratio to reach 40%. Assuming the value of STEEM eventually stabilizes, the debt-to-ownership ratio will naturally move back toward 5%.
So in an ideal world, for every $19 worth of STEEM you own, you should also own 1 SBD. Roughly. That will keep the debt to ownership ratio at about 5%.
I don't have the exact numbers, but I suppose once the power down pace will slow down significantly (which I think it started to happen) then we should see STEEM as a reward token again.
That should take out the pressure from SBD, and give back its role as a stability blanket.
P.S. If you think I misinterpreted the White Paper, feel free to correct me in the comments.
I'm a serial entrepreneur, blogger and ultrarunner. You can find me mainly on my blog at Dragos Roua where I write about productivity, business, relationships and running. Here on Steemit you may stay updated by following me 
https://steemit.com/~witnesses
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