With the latest Steem upgrade that achieved widespread witness adoption, a change was implemented that threatens the viability of the economic system and violates the social contract which users of the platform have come to rely on.
The release notes for v0.14.2 state:
When Steem Dollars reach 10% of the market cap, the price feed will jump off the peg to keep Steem Dollars at 10% of the market cap and will return to the peg when the reported price feed goes below 10%. Witnesses should still report the real dollar value of Steem for their price feed. The median price feed is automatically capped regardless of what witnesses report.
What Does This Mean?
To understand this change, we have to understand the nature of the smart contract which has underwritten the value of SBD since the very beginning.
The single most important feature of SBD is the smart contract that exists in the block chain, which allows any user to exchange 1 SBD for $1 USD worth of STEEM. That is to say that without regard for the price of STEEM on the market, if you so choose you may acquire $1 worth of it in exchange for 1 SBD.
Therefore, if the market conditions are not antagonistic towards Steem, 1 SBD is worth something like $1 USD... And we can reasonably treat it as such. We can be assured it will retain some measure of its spending power. In other words, we can take it at face value.
As holders of SBD, users have been assured; even when the price of Steem goes down, your SBD is safe. If STEEM goes down to ten cents... our SBD will be worth 10 STEEM. If STEEM drops to five cents, it will be worth 20.
It really is a brilliant mechanism for issuing a stable currency. In a moment of unrestrained excitement months ago, I posted singing its praises:
I can keep my funds in Steem Dollars and happily ignore the fluctuations of the market. It gives me peace of mind knowing that my money isn't subject to unpredictable volatility.
How Has It Changed?
With the relentless decline in the market price of STEEM, there has been a growing concern about the amount of SBD in circulation. It is a concern which is not entirely unfounded. As the price of STEEM continues to decline, potential conversions stand to produce more liquid STEEM... And as liquid STEEM pours into the market, supply and demand effects lead to an even lower price.
The adopted change implements the following:
When the value of Steem Dollars exceeds 10% of the market cap of Steem, conversion of SBD will no longer return $1 USD of STEEM. It will produce as much less Steem as is necessary to reduce the value of outstanding SBD to 10% of the market cap.
In other words…
Unless SBD holders convert their SBD to STEEM and reduce the supply of SBD, the continued decrease in the STEEM price will eventually mean that the value of SBD which are ostensibly worth something like $1 USD will exceed 10% of the total market cap.
At that point, the smart contract that issues Steem to users converting SBD will provide less than $1 worth of Steem. SBD will no longer be pegged to $1 USD... it will be pegged to 10% of market cap, divided by the number of SBD in circulation.
For all intents and purposes, the value of SBD will no longer be pegged to the USD... it will be pegged to the market cap of Steem. If the price of Steem continues to decline, the price of SBD will follow.
Is This Response Appropriate?
The social contract that SBD holders have heretofore acted under has been cemented in code. The block chain provides a smart contract which guarantees SBD holders the ability to convert their SBD for $1 USD worth of STEEM tokens.
As the Steem price declines and the smart contract underwriting SBD conversion produces ever more STEEM per SBD, there is a risk of a death spiral. The lower the price, the more STEEM produced, which pushes the price down even further….
Eventually, people will lose confidence in SBD if this continues.
However, we should not force their hand by enforcing an arbitrary threshold, such as 10%, beyond which the SBD-USD peg is completely abandoned.
We should let the market decide the appropriate debt burden.
As Dan Larimer himself stated in the preface to his appeal to witnesses to begin reporting a discounted STEEM price in order to support the peg:
We created Steem Dollars with the intention of keeping value within the Steem network. The idea behind Steem Dollars is that people would be more willing to hold their Steem Dollars than a volatile cryptocurrency.
SBD exist in order to provide users with a stable currency which acts as a store of value that also instills confidence in the network itself. Without the promise of a stable store of value, represented by SBD, it stands to reason that there would be little confidence in the network or the underlying asset (STEEM).
This is implied by title of the aforementioned post... "Boost Steem Value by Backing Steem Dollar."
The only logical conclusion is that abandoning the Steem Dollar is essentially pulling the rug out from under Steem. The value of Steem relies on broad acceptance of and confidence in the Steem Dollar. Throwing in the towel on SBD signals to the public that Steem itself is not viable.
We can't allow this to happen.
The Purpose Of This Petition
I am asking witnesses to indicate their non-binding support of a future release that eliminates the artificially imposed 10% threshhold for the abandonment of the USD peg which has been widely understood as the the basis of SBD since inception.
What it means is that witnesses supporting this petition are in favor of removing such a trigger in a future release.
It does not mean that a witness expressing support of this petition will refuse to support future releases that preserve the abandonment of the peg at 10%. Support of this petition also does not imply support of any future release which rolls back the previous change. It will remain the responsibility of all witnesses to make a determination of the benefits of future releases as a whole, and whether their adoption is advantageous overall. This is simply an opportunity for witnesses to register their disposition towards a very specific item which may have not received the level of scrutiny and debate which it warrants.