Steem: Community hardfork proposal - Implement "Reverse" (STEEM->SBD) Conversions

[TimCliff]

The original implementation of SBD created a conversion process to allow a user to convert 1 SBD token into "approximately $1 USD" worth of STEEM. This conversion process currently uses the 3.5 median price feed, provided by the witnesses.

In the recent history of SBD, SBD has held the "floor" of the peg fairly consistently, in that the price of SBD does not go significantly under $1 USD for a prolonged period of time. The conversion process supports the peg in this one direction, because anytime SBD is trading below $1 USD, there is an arbitrage opportunity to buy SBD and convert it into STEEM.

This same mechanism does not exist in the reverse direction however. If SBD is trading above $1 USD, then there is very little that can be done to push it back down. Witnesses have proposed using a price feed bias to artificially increase SBD production, however this has the negative consequence of violating the inflation restrictions.

A change that has been discussed among the community and witnesses is to implement a "reverse conversion" process, that would allow users to convert "approximately $1 worth of STEEM" into one SBD token.

This issue is to open discussion on that change with the Steemit development team. If there is a desire to move forward with these changes, I can work on the development. I will also create a post on the Steem blockchain (after some discussion has been had here) to open the discussion to the wider community.

Benefits

This change will likely provide the necessary mechanism to be able to support the SBD peg in both directions. The potential value behind having a stable SBD token have been discussed at great length in other channels, so I won't go into much detail of that here.

One of the main benefits to this change though (in addition to creating a mechanism to support the peg in both directions) is that it will create a process whereby an increased demand for SBD will directly translate into an increased demand for STEEM. Whenever there is a high demand for SBD and the price starts trading above $1 USD, then there will be an arbitrage opportunity to buy STEEM and convert it into SBD.

[Edit] Limited liability for STEEM holders
_This section was added in as an edit._

One thing to point out is that with the "10% haircut" rule that is in place, the liability to STEEM holders is limited to 10% of the STEEM marketcap. If STEEM->SBD conversions result in more SBD than 10% of the STEEM marketcap, then the existing mechanism that is in place for SBD->STEEM conversions will reduce the amount of STEEM that is printed when users do the conversion.

Concern over abuse

One of the concerns that has been raised regarding the addition of a reverse conversion mechanism is that it opens up the possibility of a malicious actor to exploit the system by manipulating the price of STEEM down and doing a large STEEM->SBD conversion, then pushing the price of STEEM up and doing a large SBD->STEEM conversion. They could then (theoretically) repeat the same process over and over, allowing them to create a (theoretically) infinite supply of tokens, in violation of the inflation restrictions.

Based on discussions with other witnesses, we believe that this potential for abuse by an actor who is able to manipulate the price of STEEM will be dwarfed by larger market forces at play. Even if a malicious actor is able to manipulate the price of STEEM up and down over a short period, in the long run their price manipulation will be overrun by larger swings in the market.

• If there is a large unplanned shift in the price of STEEM during either of their conversions, then the converter will lose tokens instead of gaining.
• With the 10% "haircut" rule in place on SBD->STEEM conversions, if the price of STEEM goes down by a lot and the debt level exceeds 10% of the STEEM marketcap, then the converter will lose tokens on the SBD->STEEM conversions due to the haircut rule.
• If the price of STEEM goes up by a lot, then the gains they have made will be offset by an even larger reduction in the overall inflation, due to the fact that less STEEM will be required to pay the "approximately $1 USD worth of STEEM" for the existing SBD tokens.

An additional mitigation that could be implemented would be to use a longer duration (such as 7 days or more) on the reverse conversions, to extend the period that a malicious actor would need to retain control over the market in order to be effective.

[aggroed]

I have concerns over this approach.

My first concern being that this won't actually create a stable peg. As you note in the limited liability section it's entirely possible that the blockchain will print up to 10% SBD, and then experience a dip in price. At that point every holder of SBD is the recipient of a "broken peg" in that they can't get $1 worth of Steem for for their 1 SBD. The backlash of a dysfunctional peg in that direction is exponentially larger than being able to trade SBD for more than $1 on the market. This "fix" isn't "fixing the peg" it's exposing us to a broken peg in the opposite direction where SBD holders are likely to get irate when they find out their PEGGED SBD can be worth less than the $1 it "promised."

My second concern is that it won't help merchants and businesses like folks hope. Steem Monsters has sold over 50000 booster packs. As crypto prices are dropping sales are slowing drastically. A strong SBD makes it so that purchasing power is much greater, and folks seem happy to turn 1 SBD into multiple booster packs, but hesitant to spend more than 1 SBD on a single booster pack. By purposefully depressing the value of the SBD we're hurting the purchasing power of those who have it, earn it, and use it. It's easy enough to set the price in USD and take a flexible amount of SBD/Steem to pay for goods/services. What benefit do we receive by reduced purchasing power of our community?

My third concern is that I highly doubt it will work at this stage to take the place of stable coins like tether. The main pitch of this idea is that people will use it as a stable currency in transactions. There's no evidence to support that. 90% of this is held on exchanges. People are using it as a speculative coin, and they were doing that even before the last pump showing just how high SBD prices could go. The challenge is that this coin and this ecosystem is too small to trust with a huge holding or even be widely circulated. We don't have a major exchange willing to work with us. We don't have a massive buisness willing to work with us. Eventually USD will just be the stable currency crypto is traded against. I think this is a losing effort. Making SBD "stable" won't suddenly make it widely used. Without partners looking to use us as a stable currency we're simply devaluing or keeping it from rising it without seeing any benefit.

My fourth concern is volatility. In order for SBD to remain constant Steem is going to experience wild price swings. In the upward direction this could be euphoric in nature as the excess value otherwise pumped into SBD is captured into Steem this will have the likely effect of shoving that price higher. That's great, until the necessary correction obliterates the value the Steem to hold SBD at $1. This will make Steem one of the riskiest investments out there and hardly a way to achieve stable growth. The amount of risk associated with Steem could very well keep investors away especially anyone thinking of powering up and locking their coin into Steem for 3 months while the price swings vigorously in either direction.

My fifth concern is the userbase. While this plan may have some potential for short term extraordinary pumps of Steem that will make investors happy it will shrink the benefit to active bloggers and content creators by reducing post rewards. High SBD effectively makes for high post rewards, which is essentially like increasing the wage on Steem to post content, which is the single most effective draw to bring people to the platform. Since I think the two things that effect price the most is the price of BTC, which is out of our control, and the number of active users, which I think we can influence, I believe it's in our best interest to make post rewards high. I know for a fact we can do that in a good BTC market with high SBD. I'm unconvinced that we can reward active users to the same extent in a reverse conversion environment. I get in theory if Steem goes up so will post rewards, but I'm left unconvinced that this will make for long term stable increases in the price of Steem. It will make Steem an even riskier and more challenging place to start an inde publishing venture, which is what nearly all active accounts are.

If Steem is able to organically grow it's user base, grow the amount of SBD in circulation to a much higher number, and infiltrate more businesses and be used in more transactions I think we have a much better shot at having the reverse conversion be successful. Despite my concerns written above I think the conversion has a place and can be quite successful, but Steem is too small right this second to get the benefits and will instead experience price swings that make starting an account or running a business here highly unattractive or at best only function during the good times.

I suggest tabling this for now and coming back when we're a larger ecosystem where it's conceivable we actually can capture the benefits of the proposal without the incredible risks associated with it.

[eonwarped]

My two cents on these points by @aggroed

1. Black swan scenario-- if we're in this situation, the peg will be the least of our concerns. In fact the jump off the peg is a measure to increase the stability of the system overall, because it will be much worse for steem if it isn't.

2. What? Of course people are less willing to spend with SBD if the cost in SBD is higher. The peg actually would have made this more predictable for users.

3. All speculation. This is a chicken egg scenario it seems. Though I do have to say I have a suspicion that you are right about the ecosystem being too small to withstand manipulation of the system with the reverse conversion in place. However, my concerns are less as the suggestion has checks in place for the spread and the delay.

4. I don't agree with the premise of this analysis. Why do you think it will necessarily cause wild price swings?

5. So users are currently enjoying a premium relative to the intended system. But let me ask you this: Why would you want as a user to have to worry about the SBD in their wallet suddenly dropping in market value? We already have to worry about fluctuations in the actual payout day due to the fluctuations in steem price. But I also have to worry about my holdings too? There's a better alternative here for sure.

But actually, all that said I'm still pretty worried about what will happen with reverse conversions on. Worst case we can just turn it off though?

[TimCliff]

@aggroed thanks for your feedback.

1. This is a valid concern, and I'm glad you brought it up. The new proposal for reverse conversions is not 100% "bullet proof" and this scenario is one of the biggest risks. There is a lot of "what if" surrounding it though. A lot of what makes a peg stable is just the trader's belief that it will remain stable. Even if there are periods where the peg dips below $1, and there is not a $1 USD SBD->STEEM conversion in place (because the debt ratio is over 10%), there is still a good possibility that traders will see < $1 SBD as a buying opportunity, and continue to support the peg based on future predictions of the price recovering. That said, it is a risk. The alternative / next likely reality in this scenario would be that it would be what causes SBD to fail beyond a state that we are willing/able to repair.

2. It is hard to respond to this, because you are arguing in favor of keeping SBD the way that it is, and I hear very little support from the major stakeholders to support this path. Next to making attempts to "fix" the peg, the second most popular route that stakeholders are pushing for is to eliminate SBD. I have been in support of keeping SBD in it's current form during the time when the SBD price was booming, because it did have a positive impact on the short-term health of the platform and it would be bad to introduce a change that would likely cause the SBD price to crash, but IMO leaving SBD in it's current form as a long-term plan is a bad idea for the platform. Your MSP user-base is happy with it, because they have mentors who have taught them how the system works, but the three token economy (STEEM, SP, and SBD) that we have today with a broken SBD is too confusing for new users who don't have the benefit of finding a mentor group to justify keeping in place.

2b. As crypto prices are dropping sales are slowing drastically. In my opinion this adds support to the argument of trying to fix SBD. The whole idea of SBD is that users who are holding it should not have to worry about their purchasing power going up or down with the whims of the market.

1. The main pitch of this idea is that people will use it as a stable currency in transactions. I disagree that this is the "main" benefit, but it is one of the reasons that people are pushing for stable SBD. There are a lot of other reasons to make the change too. More than being a stable currency in transactions, a stable token offers a place to store funds when trading crypto currencies. Especially once SMTs come into the picture, having a stable token available on the internal market is a huge plus. The other main reason for proposing this change is to offer a path where "demand for SBD" translates into "demand for STEEM".

3b. We don't have a major exchange willing to work with us. We don't have a massive buisness willing to work with us. IMO this is a chicken and egg problem.

1. Regarding the volatility, it is really important to underscore the fact that the mechanism to push the volatility to more extremes on the downside is already in place. If your concern is that downward spikes in the SBD price will lead to downward pressure on STEEM, then really the logical thing to be pushing for would be to eliminate SBD, because problem as you describe is already there today.

2. Users want higher rewards. They do not care as much what form they are in. Currently high demand for SBD leads to higher SBD prices, which leads to users' higher rewards. With the reverse conversion system in place, higher SBD prices would lead to more demand for STEEM, which also leads to higher rewards as well. The difference being that users would get more SBD tokens that are worth less, as opposed to less SBD tokens that are worth more.

5b. There is no way to determine without pure speculation which of the two scenarios will ultimately lead to higher rewards for users.

[aggroed]

Believe me Tim. I'm well aware I represent a minority opinion relative to large stake holders (of which I don't consider myself one). It's a worry every time that I speak out that I'll lose a vote from a major backer who disagrees on this issue.

That said, I founded the Minnow Support Project and think my place is to state what I think is best for the Minnow community. I trust that some portion of the other 19 top 20 witnesses will speak on behalf and focus on the large stake holder concerns. Many are pretty far removed from Minnow status. Hopefully I can share some input that can help them see the concerns of the active user/content creator population.

In this regard I think high post rewards are key. I don't really care if that comes in the form of high steem and low SBD or if that's low steem and high SBD or frankly if there's no sbd. I'm not really partial to the type of high reward payout so much as there is one. The only reason I'm somewhat partial to allowing for high SBD is that I've seen it work.

This proposal seems like a way to funnel money beyond $1 SBD into Steem. I can see why investors like that plan. It will, at times, make their investment go up. It may make them skyrocket when prices spike again. However, it doesn't help the active community very much because they own less than 7% of that Steem. When they do earn in the good times they earn mostly through SBD (during recent price spikes SBD accounted for up to 90% of the reward on a post). At one point I did the math and realized that in order for the payout to be the same under recent high priced conditions the price of steem would have to quadruple. I don't see how this proposal is going to do that. Can you tell me how you think it will lead to the price of Steem sustainably quadrupling compared to just letting the system work as it is? If the answer seems plausible I'm willing to change my mind.

Another concern is that the benefit is mostly going to go to Steemit as a 50% stake holder in Steem. I'm not clear how boosting their war chest is going to help this community grow. I'd rather see them continue to divest holdings rather than watching their account grow in value. Especially when that growth would have been spread to 60k active people if this plan hadn't been enacted.

So, I'm not a fan of this change at this stage. I think this whole thing benefits 30-100 invested Steem holders AT THE EXPENSE of the 60k/day active user base. I also don't think it will work other than high temporary spikes and epic crashes. So, I think it hurts the ecosystem.

On the down trend I think it also seems like a way to crash Steem if $1 SBD is being threatened. The severe high and lows of crypto being amplified to hold a coin with small circulating supply at a constant value seems remarkably wild for price. I don't think that builds communities. A steady increase in price and community is what I think does that. I don't trust the proposal will do these things.

I'm open to being wrong and hope that I am because it seems like we're going this way despite my objections. There's a lot of other very smart people with a different vision of how this will work. I haven't heard a convincing story on this topic to date though because usually it's a "well if we had a stable currency this whole thing would be different" when I don't see any evidence to justify the claim.

It's all just $0.02 though. I'm just one of 20 and it's ultimately the large stake holders who will decide how this happens.

[iamsmooth]

@aggroed High SBD as a reward source just isn't sustainable. It leads to an inevitable boom-and-bust cycle because it disables the intended sink process by which conversions absorb SBD supply which can then get recycled as a new supply for rewards. Without that functioning cycle, the SBD supply just spirals upward and upward until it reaches a breaking point (either a crash or disabling of printing, which means no more benefit to users even as SBD speculators may love it).

The whole situation now is much more destabilizing than keeping the peg steady at $1 with STEEM->SBD conversions would be (that has pitfalls too, but this is an exercise in tradeoffs). A lot of what you wrote about crashing STEEM if SBD drops below $1 is already playing out right now since the scenario described above is exactly what has happened. SBD reached the peak of the boom some time ago and is now well into the bust phase. Except its actually happening in a more painful way because of: a) the long build up of supply, and b) many users having lost a lot of money on the SBD decline and are now pissed off or worse.

You speak of the benefits of the boom phase, but what you are missing is that the only way for that to repeat is: a) to now massively contract the SBD supply to the point where a long period of printing is again possible (which BTW would involve a lot of STEEM dilution into an already weak market); or b) a huge STEEM pump (of 4x as you described as unlikely, or even more). Failing one of those two, there _can't be a large amount of new SBD printed as rewards_; the capacity of the system simply won't allow it. So none of the benefits you are claim of high-priced SBD will occur.

I don't know if the reverse conversions would actually work. There is still limit on supply creation (in most of the proposals I've seen) and perhaps speculation will drive SBD demand beyond those limits, allowing it to pump anyway. Likewise other discussions about paying beneficiaries in SBD (increasing the normal supply rate) and increasing the print cap may or may not help meaningfully in maintaining the peg in practice. However, to the extent that these features do discourage SBD from becoming the target of speculation and remain more steady at around $1 (or at least recover there more quickly), that will be stabilizing to the overall system more than it is destabilizing.

[aggroed]

So,. the main thing that I think will end all of this discussion naturally is growing. When Steem and SBD have a bigger active userbase, a higher market cap, and a higher supply of SBDs in circulation I think it will be a lot easier to maintain the peg. it's pretty easy to move a currency when there's 11M in supply. It's pretty hard to move a currency when there's 11B in supply or 11T.

Part of what makes the dollar sorta stable is that there's a lot of it, so it's hard to move to the value of the currency (although hyperinflation seems to be working to make it worth less, but takes time).

My main thought is that we should let the boom and bust play out in the early stages of the company. This thing is 2 years old. It's not going to form a stable currency overnight. it has to get big enough and that's just not going to be a linear process. it will happen in leaps and bounds in part due to macrocyclic things well outside of our control. Let that happen, and as it happens we'll grow and as we grow their will be new supply, and as there is new supply this whole thing gets more stable.

So, I suggest we focus on growth and the rest of this stuff will come. As it turns out the easiest way to focus on growth in these intial stages is having a high SBD price. The institutional investors are going to start moving soon and entering crypto and treating it like other asset classes. SBD is going to go up quite a bit and we'll be able to offer high wages to people that want to participate here. As Clayop noted it comes with the benefit that we didn't have to pay the high wages. Speculators did, so it doesn't even come out of our pocket.

We are but a drop in the ocean financially. Trying to steady ourselves against the tide is poor idea. When we grow we can dictate more terms. Until then I think we're stuck with some boom and bust as our new company in a new industry faces macrocyclic elements way outside of our control.

[clayop]

Thanks @aggroed for raising insightful concerns. I also think that pegging does not promote mass adoption of SBD. Inherently, SBD is just a inferior imitation of USD so that its position among merchants is really vague. Paypal or Applepay is more useful when we are shopping on Ebay or Walgreen. They even do not adopt Tether, which is pegged perfectly to USD or BitUSD, which already has bilateral peg.

My another concern is a black swan event. The nature of SBD is derivarative backed by the native token (STEEM). If the backing is not strong, the peg will broken easily. Currently, we have limited printing rate and limited conversion rate beyond a certain (10%) debt ration.
However, this two-way peg exposes the backing mechanism to risks. For an extreme instance, what if 50% of STEEM is convered to SBD? Then SBD->STEEM peg will be broken and the SBD price is going to below $1, say around $0.2. An abuser can utilize this vulnerability of economic policy.

[TimCliff]

@clayop thanks for your feedback

For an extreme instance, what if 50% of STEEM is convered to SBD?

This could actually be a really good thing. A significantly reduced liquid STEEM supply could have a dramatic affect on the price of STEEM. Theoretically, it would actually still be possible to stay within the 10% debt limit, with a high enough increase in the STEEM price. (Wouldn’t this be nice 🙂.)

The other possibility though, is that with this much SBD production, it would take the debt ratio beyond 10%. At this point, STEEM->SBD converters are taking the risk that they may not be able to get their “dollar worth of STEEM” if they run the conversion in reverse. This does put the peg at risk of breaking (in the opposite direction that it is broken today).

There is still a decent chance that if traders/converters felt there was enough safety in SBD on the way up, that they would see enough of a buying opportunity at any price significantly less than $1 USD on the way down - but there is no guarantee of this. Bottom line is that passing the 10% debt limit threshold does put SBD holders (and the peg) at risk.

An abuser can utilize this vulnerability of economic policy.

Can you elaborate on this? How could such a scenario be exploited, and to what effect?

[IamChijamz]

I have read everyone's deliberation on @TimCliff's proposal and I truly
agree with @aggroed,which is summarized as

"initiating a peg on the top of SBD wouldn't give us the results we are
looking for, rather growth will."

Some points I have to drive this home:

1. IMO,Relative STEEM/SBD increase in the market would largely lead to
   influx of traders who will buy off STEEM and trade with other currencies
   for huge gains, leaving a large lacuna in value for Investors and users.
   Steemit has over 1 Million users and as @aggroed said, 60k daily active
   users, in the cryptoverse, we are still a little boat in the sea. What we
   need to do is to out for global acceptance, where SBD would be used for
   normal local transactions in every country of the world, in as much as
   this is not an easy task, that should be the goal, where one can use
   SBD/STEEM to so much as buy a flight ticket or even get a bottle of Coke.
   This would be achieved via utilizing resources to reward users with higher
   payout and not pegging of SBD.

1. Just as @aggroed also said, the mechanism for this proposal would be
   unwittingly building up STEEMIT war chest of Holdings, rather than
   encouraging much interactions, I am no steemit witness, haven't been here
   for long though, but I have seen the discouragement in the faces of people
   over low payouts which is what we should be about (coupled with the
   downtrend of Bitcoin, which is also affecting everything), we are rather
   envisaging on adding a peg to the over spiral growth of SBD which as we all
   know happened by forces beyond our control.

2. The USSR been used as a model for pegging SBD has not been fully
   appreciated and accepted by most Exchanges, we see the lack of acceptance
   from the purported lack of Value of the USSR as opposed to USD which has
   several value backing potentials. I believe what we need to do is to
   introduce several value adding systems to the STEEM block chain with SBD as
   rewards, SMTs is a right move on the right path, but without introducing
   SBD based rewards, I don't know how we would achieve this.

Would we want to make SBD a pegged currency, what we need to do is to add
VALUE to it.Create a backlog for what we are planning on, before we go
ahead to peg, without this, abuse is inevitable.

[eonwarped]

The main point that hasn't been brought up is that the peg from above has a natural downwards pressure already from SBD printing rate, tied to STEEM's price: it's just very slow. The better STEEM does, the faster the pegging mechanism.

Funnily enough, this is a reason to leave things the way it is, as well as a reason not to use high SBD prices as the motivator for growth (because it won't stay like that forever).

This issue seems to be mainly about timing. It doesn't seem like anyone here disagrees that a peg is desirable.

It sounds like one path is "let it be" -> "adoption" (which isn't even a given) -> "steem up" -> "peg naturally reached". The concern with this approach is that the downwards pressure from printing SBD is not fast enough to react to large up swings. And that means even farther down the line, the currency is not stable enough for merchants / potential integrators to get on board.

From what I'm reading it looks like the main questions are:

1. Quantifying risks / costs / effects of reverse conversions.
2. Potential upside for successful peg (this seems pretty hard to quantify, maybe someone else knows this).

Again, I'm still pretty worried about reverse conversions, but we don't know that it won't be successful in pegging. And if it can sustain these swings, I think it would be extremely valuable (and again, not easy to quantify or predict reaction here).

[iamsmooth]

@timcliff "This does put the peg at risk of breaking" [referring to an over-10% ratio situation]

I wouldn't put it that way exactly.

As long as SBD is _defined_ as only convertible, in the aggregate, to 10% of the market cap, it isn't unconditionally pegged to USD. The peg target is a variable function which tracks USD _if STEEM is worth enough to have the realistic ability to do so_, and reverts to tracking STEEM when it isn't.

So the peg doesn't really "break" here and in fact there is no possibility of a "black swan" where the pegged asset can't be supported by the underlying stake and both can potentially crash to (at or near) zero. Instead, the peg bends during STEEM bear markets to avoid breaking. In effect, this addresses one common criticism of pegged assets, which is that they make an impossible promise (to always maintain a value). SBD in its present (and proposed) form does not make that impossible promise. Instead its promise is explicitly conditional on the value of STEEM.

What is unclear is whether STEEM will remain healthy and worth enough to support a stable value for SBD (which, obviously, is what makes it useful). Obviously we hope it does (and indeed some of us believe that having a stable value token that makes the platform as a whole more useful makes this more likely), but if it doesn't, then no one is worse off for having tried, and the only way to try is to have a mechanism that at least _functionally_ allows for a stable peg (which the current system, with no real time upper peg, does not).

@clayop. In the current proposal the 10% hard cap is unconditional and remains. No matter how much SBD is created it can never dilute STEEM by more than 10%. An abuser who creates massive quantities of STEEM is going to lose money (in effect donating it to the rest of the Steem community) by paying about $1 (worth of STEEM) to create the SBD and then seeing that SBD crash in value to (hypothetically in your example, $0.12). That's hardly a useful attack, and if your argument is that someone with money (in your example it would require buying up 50% of STEEM; is that actually realistic??) can mess with the markets by burning that money, well I would agree but find SBD irrelevant to the point.

It is also possible to cap the conversion function according to the 10% rule as well, which would make converting 50% of STEEM (even if not already implausible) impossible. That means that the conversion function would "shut off" and could not be used when the STEEM value is too low. It is debatable whether this is actually desirable (why discourage people from buying and converting STEEM–reducing its supply–when the price is low?) but it is certainly possible.

[iamsmooth]

@aggroed As it turns out the easiest way to focus on growth in these intial stages is having a high SBD price

Again, this is just plain wrong. It may have worked as a one time "juice" to growth, but it doesn't work going forward. No matter how high the price of SBD goes, it _stops being distributed to users_ (already largely the case; as I write this 70% of liquid rewards are paid in STEEM, not SBD) and that high price doesn't help growth or otherwise benefit the bloggers and other users that you cite, it only helps SBD speculators.

For this argument to make sense you would need another sink for SBD supply other than having it priced at or slightly below $1 where it gets converted out of existence, allowing it to continue to be distributed as rewards. Where is it?

If you think a boom-bust cycle in rewards is really the way to go then we can do that by changing how the reward pool is paid out. Maybe it makes sense to pay out less for 11 months of the year and then have on 'holiday bonus' period that really juices growth during the higher paid month (the initial 4th of July payout of $1+ million dollars in one day was this sort of event–implemented by design–and it indeed did drive a lot of growth). That's really a separate topic and shouldn't be mixed up into how a pegged asset functions or doesn't function.

The breaking of the SBD peg was an accident due to its faulty design. Nevertheless, perhaps we learned something useful from it in terms of engineering growth. If so, let's build that growth driver directly into the system while also improving the design of SBD, instead of relying on an accidental malfunction to sometimes accomplish the growth driver. After all, what if we leave SBD alone and it never pumps again? Isn't that bad for growth according to your theory? Why leave this to chance?

[clayop]

@TimCliff If lots of STEEM are converted to SBD beyond 10% debt ratio, there is no way to keep the peg only except speculative market. Either with malicious intention or rational decision, people can convert STEEM into SBD and just keep them in their vaults, which can result in higher debt ratios than 10%. Then, conversion from SBD to STEEM (this is the core contract to keep the peg) will be broken and expected value of SBD will be below $1.

Will it happen? Rational people may not want to do. But I think rational attackers can take this advantage e.g. convert $30 mil STEEM into SBD and selling them at $0.99(regardless of being sold or not), in this way an attacker has negligible costs and efficiently breaks the peg below $1 harming Steem contents creators profits.

[TimCliff]

I agree that past the 10% debt limit, there is no longer a built in support mechanism to hold the peg from dropping below $1 USD.

At that point it does become a speculation game.

• Do traders still see a slightly less than $1 SBD as a buying opportunity, given that the SBD would still be redeemable for $1 USD given an increase in the STEEM marketcap?
• Would the added risk of the debt limit approaching the 10% point be enough to put significant downward pressure on SBD, to induce enough SBD selling and SBD -> STEEM conversions to prevent it from passing that point?

(There is really no way to know.)

I agree that there is an inherent risk here, but I also agree with smooth’s assessment of it. There is going to be certain scenarios under which the SBD peg is not going to be guaranteed to stay at $1.

It is mainly a question of if we are OK with those risks (along with the potential benefits they provide), and if it puts us in a better/worse situation than what we have today without the reverse conversion.

[therealwolf42]

SBD as a stable currency is the optimal use-case. One of the biggest reasons why Bitcoin is not seen as a payment form by most of the world's population is due to the volatility. So having a currency which is stable would be a gamechanger and would also attract a lot of people to STEEM.

Now, we currently have Tether and regardless of the FUD, it works because of the immense supply. 3 Billion Tether in comparison to 15 Million SBD is pretty much impossible to tamper with.

If we'd implement a reverse conversion, people would still be able to manipulate the market. While 15 Million SBD is more than 3 Million as before the peg broke - it is not enough.

The reason for the broken peg wasn't due to a faulty internal design (even though it can be improved), but for the actions of outside traders.

I personally think that SBD shouldn't be changed for now and that we should let STEEM & SBD mature.

We still have the lower limit, which prevents it from falling below 1 USD in value internally until the 10% Debt Limit, which could become a problem if STEEM market cap continues to fall, as SBD will be worth less than a dollar in that case until the debt limit goes below 10% again.

And in that case - even a SBD with reverse conversion would break.