The problem

Currently, the price of Steem dollars is down to around $0.76, which is significantly off the $1 they're supposed to be pegged to. I think the reason for this is that it takes 7 days to convert Steem dollars to Steem and you get the average price. If Steem is dropping, then that means the conversion process will charge you too much for Steem, resulting in getting significantly less than $1 worth of Steem per Steem dollar.

This is a problem because it makes the system dangerously unstable. If the price of Steem is dropping for any reason, it will pull the price of Steem dollars down with it. If Steem dollars are significantly off $1, confidence in the ability of the entire system to maintain stability and keep its promises is undermined. A low value for Steem dollars could be seen as a market signal that Steem as a whole is failing.

The peg is not reliable because a downward trend in the price of Steem causes the value of Steem dollars to drop -- exactly what the peg is supposed to prevent.

The solution

I propose a change to fix this: Instead of the redemption rate for Steem dollars being the average over the 7 day conversion period, it would be changed to the better of either the 7 day average or the price at the time the Steem is delivered.

This would help Steem dollars hold their pegged value better even if the price of Steem is dropping. In fact, the more Steem dropped, the more Steem dollars would see some upward pressure, helping to maintain confidence in the system, even if the price of Steem is falling. It would also permit Steem dollars to be a bit of a hedge against a reduction in the price of Steem.

I haven't completely thought this through, but it seems like an improvement to the reliability of the dollar peg and a way to maintain confidence in the system as a whole.

I'm not sure my exact proposed change is the best solution, but I'm convinced that some change to the way the rate is calculated is needed to make the peg work even if the price of Steem is dropping.