Hello, everyone! @lemony-cricket here with my feelings on an issue we've all been talking about. I know it's long, but please read it. It's important. It affects all of us.

_{Image from pixabay}

The issue at hand

SBD, the blockchain-issued asset we all get paid in for our posts and comments, is trading much, much higher than it was originally supposed to. This means, among other things, that each "dollar" we see here on Steemit is actually worth more than that; as I write this post it's trading at a 740% premium ($7.40).

Now, I believe that most of this is due to the speculative activity surrounding SBD due to confusion from "dumb money" external to the platform, who failed to do their research before investing. It's effectively taking that dumb money and redistributing it to smart Steemians, who understand that their extremely-overvalued SBD should immediately be either offloaded for STEEM or cashed out at market value.

At first glance, as contributors, this is wonderful! We all love more money. However, there are a few problems with allowing SBD to continue trading above $1 for the foreseeable future:

It hurts our potential for an internal economy.

A peg to the U.S. dollar is valuable to us because it allows us to hold and exchange a stabilised asset on the blockchain within the community. Say I want to purchase a piece of artwork from a fellow Steemian. I can do one of two things:

• I can buy that artwork with STEEM or another, external cryptocurrency.
  • In this case, the artist assumes the risk that the value of STEEM or other currency will go down before they can cash it out.
• I can buy that artwork with SBD.
  • With a functioning SBD=USD peg, the artist can rest assured that the asset will retain its value relative to the dollar in perpetuity.

Without a functioning SBD=USD peg, this use case for SBD fails. Currently, anyone offering 1 SBD for 1 USD's worth of anything is, sadly, being quite foolish with their purchasing power.

It encourages stakeless behaviour.

Steem works as a content platform partially because the authors who create content are incentivised to make good decisions for the platform as a whole. The way we do this is by mandating that authors must accept, at most, 50% of their post's value as a liquid asset (SBD). The other 50% must be powered up to vesting shares.

Unfortunately, right now, due to the irrational price of SBD, the percentage of a post's value which is automatically powered up is only 12%. That is not a lot at all. It's so low, in fact, that several bad actors are, as we speak, hurting the platform for personal gain in various ways, and writing off that 12% stake as a lost cause. Some aren't even powering it down. They just leave it there and ignore it. 50% is much, much harder to ignore. We would see many of these bad actors disappear should the SBD price return to rationality.

It hurts Steem's credibility as a platform.

Steem purports to offer two blockchain-issued asset classes, STEEM and SBD. SBD is meant to represent exactly one U.S. dollar in value; no more, no less. To people who are not familiar with the social networking aspect of Steem and only care about its worth as a means of transfer and/or storage of wealth, this is a huge red flag.

The dangerous proposal

A majority of the top 20 witnesses appear to be in favour of introducing a reverse conversion operation. This means that instead of only being able to convert SBD to STEEM, we will also be able to convert STEEM to SBD. This would theoretically solve the problem with the peg, but it would also introduce a dangerous and imbalanced opportunity for bad actors to manipulate the market.

As I understand it, the lack of bidirectional conversion was originally conceived to protect small holders from a sort of unfair market manipulation. Take the following scenario:

1. The price is currently 5 USD/STEEM.
2. Mallory has 200,000 liquid STEEM. She wishes to manipulate the market.
3. Mallory uses the new reverse conversion feature on half of her STEEM to (effectively) short 500,000 SBD into existence.
4. Mallory sells the remainder of her liquid STEEM through large, market orders on various exchanges, most likely causing a dip or outright crash as buy orders evaporate from underneath the massive selloff.
5. The price falls to 2.50 USD/STEEM over the next week.
6. Mallory uses the conversion feature to convert her 500,000 SBD into 200,000 liquid STEEM.
7. Lather, rinse, and repeat.

As you can see, a bidirectional conversion implemented outright would result in a huge wealth redistribution from the honest users to the dishonest users of the platform. Now, the high SBD is indeed also currently functioning very effectively as a wealth redistribution mechanism, but it is at least doing so in a way that benefits contributors to this platform, at the expense of those external to it.

I have devised a two-phase approach to the irrational SBD problem. Please do take the time to read my suggestion from a technical standpoint as I am still a new user of Steem and only recently began to understand the economics of the platform. If you believe it is impossible, irresponsible, or impractical, I would like to understand why.

My proposal on how to fix the the SBD peg

(a two-phase approach)

Phase One: fix the broken 50%/50% algorithm

Rationale

The high SBD price currently incentivises "eat, shit and leave" behaviour. People who do not believe in the platform or community come here to post simply to make money. Steem works because authors acquire sizeable stake in the platform which takes vesting time to power down. There is a reason we did not allow 100% SBD payout from the beginning, and yet the 50%/50% algorithm has become a lie. Instead, the percentage received as liquid SBD can currently be computed as:

sbd_price / (sbd_price + 1)

...which is a whopping ~88% as I write this post! This means that an extra, unintended 38% of each payout's value is being robbed from our economy. The above approach will solve this first problem, and many secondary problems will go with it, including the rampant abuse of voting bots-- who can currently provide reliable, per-post liquid returns, vested stake excluded, for little to no contribution to the platform. These abusers can effectively ignore their stake in our community as it is such a small percentage of what they make.

By rebalancing the 50%/50% algorithm, we can solve this half of the problem in short order.

Steps

1. Have the witnesses create and maintain a feed of SBD price in U.S. dollars, distinct from and unrelated to the current exchange rate calculation.
2. When awarding post rewards, compute the 3.5 day moving average of this price and factor this into the calculation of the 50%/50% rewards mode.
3. Allow Phase One to continue for at least two full payout periods before moving on to Phase Two.

Phase Two: fix the broken SBD/USD peg

Rationale

At this point the impact of the high SBD price on stake has been mitigated, however, SBD is still useless as a shelter from volatile market conditions. This is disadvantageous, as SBD could provide real tangible value in the form of a means of exchange for risk-averse providers of goods and services.

Steps

1. Compute an "SBD Irrationality Quotient", or "SIQ": (sbd_price - 1)/10

2. Choose a block height at least two payout periods in the future.

3. At the chosen block height, enable a rate-limited reverse conversion (STEEM->SBD) using the SIQ to adjust the coefficient as follows:

                   steem_price * steem_converted * (1 + SIQ)
   sbd_received =  -----------------------------------------
                                   sbd_price
   

For example, if I have 10 STEEM, the SBD price is $10, and the STEEM price is $10, I should be able to gradually convert my liquid STEEM to 10.9 SBD.

This should create a distributed market force which forces the value of SBD in a controlled manner toward $1.

Conclusion

It's definitely scary to think about our payouts going down by a factor of 7. The concept makes me sad, too, especially as a new user. On a normal post of mine I can expect maybe $2-$3 of rewards. However, money is not everything. We are building a decentralised society here on Steemit. I hope that we can all put our short-term monetary goals aside and do what is right for that platform.

It's also important to note that the mitigation plan outlined above will most likely result in a higher STEEM price for several reasons. Firstly, as the new reverse conversion removes liquid STEEM from the market, decreased supply should result in a rise in STEEM's price. Speculative interests from "dumb money" will also cease to be split between our two asset classes and all that speculation will shift back to STEEM, bringing further volatility (for better or for worse) to STEEM. Finally, Steem can go back to showing off a fully-functional, stable, blockchain-issued dollar peg with faster transactions and higher capacity than all top coins combined.

That last one is going to bring a lot of attention our way. Especially with the way Bitcoin has been failing spectacularly under load. Our window to capitalise on this is coming to a close as Lightning gets closer to reality. Come on, folks. Let's do this. 🍋

---

---

How to get an upvote from me today: Do you agree with my conclusions about the state of SBD? Have your own ideas? Share my goals? Think I'm a dangerous lunatic? All comments are welcome-- especially those pointing out errors in this post that I've been staring at for four hours now!