This is the second in a series of posts pertaining to some of the things I see changing after the next hard fork.
Here is the first part:
https://steempeak.com/busy/@taskmaster4450/marketing-shift-bringing-steem-to-them
Hard Fork 23 is going to be a major game changer. It is one that is going to include a couple features that will change a lot about the Steem ecosystem. At the center of all this is the SMT protocol. In yesterday's article, I wrote how it will alter the approach how Steem acquires users. Presently, we are trying to bring people to Steem. After the SMTs are introduced, I can see it being a situation where Steem is brought to the people.
Relating to this is the internal exchange. This is a very important aspect to the future of the Steem platform. Unfortunately, it is something that is being overlooked in importance. Basically, this is going to provide an enormous sink for STEEM.
Last week, many became aware of how the New York Fed pumped $75B into the Repo market. This is the short term loans that banks make. They put up collateral for the loans such as bonds and are very short term, lasting only a day.
While the focus was upon the fact the Fed created the money out of thin air, there was a bigger lesson. Why did they do it? The reason was because the markets froze up. There was a lack of liquidity which necessitated the Fed taking the action it did.
Liquidity in markets cannot be overstated. It is paramount for a market to operate efficiently. When markets lack liquidity, they crash. This can happen for a variety of reasons and manifest in many different ways. No matter what the cause, bad things happen.
One advantage the central banks do have is the ability to go in and add liquidity. Unfortunately for the present system, the financial is now addicted to the easy money. Instead of being an action taking when markets dry up, the central banks turned it into the new norm.
Blockchain does not allow for this. The inflation rate is pre-determined and operates according to the rate set in the code. This means that more tokens are appearing, but they are at a steady pace.
In the past I wrote that there is not enough STEEM out there. Some took exception to this since they are only looking at the present moment. With somewhere around 120M STEEM floating around in liquid form, people seem to think that is an abundance.
It is not.
STEEM will be paid for any SMT created. We already see a preview of this with Steem-Engine. That exchange has all tokens paired with the STEEM peg which is created each time someone transfers STEEM over. The internal exchange will not use a peg but, rather, STEEM itself.
We all know what is it like to want to sell a token. We go to the exchange and look at the buy/sell wall. Often we find that the spread between the bid and ask is wide. Many times, there are a lot more sell than buy orders. Thus, we might have a token that looks okay compared to the last sale price yet when we figure it out based upon what we could truly sell it for, it is worth a lot less.
This is the result of a non-liquid market. Obviously, there are a lot of tokens that have little activity since few people are involved with them so lacking liquidity makes sense. With so many tokens being created, not all are going to be active. Anyone who bought penny stocks in the past can identify with what I am referring to.
The problem arises when one finds the same thing with every token. If all Steem-Engine tokens had this, it would be a major problem. The "market makers" basically would be non-existent at that point.
Hence, when SMTs are introduced, there will be a lot of STEEM required if they are successful. It would be catastrophic to have a successful protocol yet the tokens that were created using it could not be traded due to a lack of liquidity.
For the market to operate efficiently, there requires enough liquid STEEM on the internal exchange to keep things moving.
So where will this STEEM come from?
It could be a number of different areas. Perhaps someone gets the idea that being a market maker is a worthwhile venture. In this instance, a bunch of STEEM is acquired along with the setting up of a bot. The bot would place buy and sell orders to support the market. Market makers help to keep spreads tighter while also providing the liquidity required to keep them moving.
Another other way liquidity could be provided is by the community, itself, operating as a market maker. If enough people are constantly entering the internal market to buy tokens, thus providing STEEM, then there will be liquidity. Traders offer a valuable services here. However, as we have seen with markets over the decades, when confidence dries up, that money "heads for the hills".
Liquidity is paramount and, since STEEM is the pair for all SMTs, having enough in the system is crucial. Again, at the present moment this seems like it is not a problem. However, just consider for a moment, the situation we could be faced with.
Steem-Engine was able to create somewhere around 500 tokens in the 3-4 months it offered this feature. At the same time, based upon the last number I saw, somewhere around 500K STEEM on the exchange backing the peg. This is what is providing the liquidity to the markets.
Obviously, we know there are a lot of tokens that are not traded often and have little activity. Most of them have wide spreads. Nevertheless, for tokens like PAL, LEO, Marlians, and SPORTS, there is no problem buying or selling. The markets for those tokens is working well.
Now, let us pull this idea out to 5,000 tokens. More importantly, let us focus upon the active ones. Instead of having a handful, imagine 100 tokens that are active. How would this look as compared to the 5-8 that are most active on there now?
Perhaps this might seem like a stretch to some on Steem-Engine. While I disagree with that, let us presume that is the case. For SE it might be, but I find it highly unlikely that SMTs are going to find any difficulty.
There is another major piece to this puzzle which can be summed up by this comment in Steemitblog's post yesterday.
Steem-Engine tokens are focused upon the existing Steem userbase. While the different tribes might have brought in a few people here and there, we know from the overall numbers it is the same group of people transacting on here each day.
SMTs are going to focus upon those who are outside the ecosystem. The fact that there are already people asking about the testnet shows the potential demand we could see. While the answer does not clarify who was asking, I am going to surmise that Steemit Inc has been contacted by some decent sized projects. I recall 
I take this to mean there were a few good sized players. Are they still around with all the delays? Who knows. Yet, as I always try to point out, Steem does not need a top 10 site to adopt SMTs to be very successful.
This means that SMTs have the potential to bring in some larger numbers. By appealing to websites with an existing userbase, this can tap into an immediate pond. Knowing that a percentage of those people will start to transact with the tokens means that the internal exchange will get a lot more active.
By the way, as an aside, watch the volume on blocktivity.info go through the roof when SMTs go live. All those transactions are at the base layer meaning we could see millions happening in a short period of time.
It is important to remember at the core of all this activity is STEEM. It is the pair for every single token developed using the SMT protocol. That means millions of transactions are going to have to pass through STEEM.
Essentially, we are looking at millions of buy orders all placed in STEEM. The only question is how much STEEM is going to be required to keep the overall market liquid?
Liquidity on the internal exchange is going to be a huge sink for STEEM. By being the base paid, great demand is created for STEEM. I believe this will help to soak up the liquid STEEM in short order. While much of the liquidity will come from individuals who are interested in buying different SMTs, there will be a number of market makers that are developed.
And guess what these projects will require.
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