How can witnesses on steemit be prevented from price manipulation?
The Steem blockchain has 21 witness positions: 20 top witnesses and one "rotating" position which is split between all other witnesses in line with their voted Steem Power (SP) support. Under the delegated proof of stake system (DPoS) these witnesses are elected by all SP holders.
Each witness provides a price feed for the price of Steem to be used in blockchain operations.
The first protection against price manipulation is to use a median average of the witness price feeds. A single outlying price feed would not affect the median price to any significant degree.
The second protection against price manipulation (or market manipulation outside of witness control) is to use a 3.5 day median average of the price feeds as the exchange rate.
If market manipulation or error were to result in significantly distorted price feeds then the 3.5 day period provides a window of time (around half the length of the 3.5 days) for the situation to be corrected by the affected witnesses or for those witnesses to be dropped by a call to the blockchain to change DPoS voting.
Given the competitiveness of the witness voting it is likely that any manipulative witness would be quickly replaced.
This gives the third protection against price manipulation. The top witnesses are very well paid and it is unlikely that an attempt of price manipulation could compensate for the loss of a top witness position.