What Pegs Up Must Peg Down - Is SBD Really A Tether and Is It Doomed?

The Steem Backed Dollar (SBD) was created at the same time as the Steem blockchain. It was made because @dantheman Larimer, the inventor of the Steem blockchain, believed in the value of a tether coin when it came to attracting long-term investment.

The idea was to peg the SBD to the United States Dollar (USD), thus making sure that the Steem Dollar would always be worth roughly the same as a US Dollar.

At first things seemed to be working nicely, however of late we have seen a failure of the SBD to keep the peg, and currently as of writing 1 SBD will get you roughly $0.82 worth of Bitcoin. In other words, the SBD is worth almost 20% less than it is meant to be worth.

What's In A Peg

Before we go on, for those of you who have little to no idea as to what a pegged coin, sometimes known as a tether or stable coin is, let us just briefly go over it here.

A pegged cryptocurrency coin, is one whose price is pegged to a fiat currency like the dollar or the euro. So for instance the True United States Dollar crypto (TUSD) is pegged to the price of a dollar, in other words, for every TUSD you own, you can cash it in for $1, or at least one dollar's worth of Bitcoin.

As it stands the price of TUSD is currently at $1.01 pretty much where you'd expect it to be.

Peg Mechanics

The next question you may quite reasonably ask is; how the hell do you peg a cryptocurrency to the price of a dollar or anything else for that matter?

Good question.

As far as TUSD is concerned, the whole network is covered by third party escrow agreements.

There are some very specific, and potentially confusing details regarding the exact function of tether coins which we won't go into here. I will simplify the whole process like so:

Joe buys a TUSD coin from an exchange like Bittrex. A third party company (escrow), takes the dollar amount that Joe paid for that coin and puts it into an account.

If Joe or anyone else later wants to sell that coin, the dollar amount is released from the escrow account and given to him.

Like I say, it is perhaps a little more complicated than that, however the premise is simple. The amount of True USD coins in existence, is directly correlated to the amount of dollars held in the TUSD escrow account(s).

As such, each TUSD can be said to be a promissory note, with the promise attached:

I promise to pay the bearer of this token $1

SBD Peg Mechanics

Now the difference with SBD is that there are no escrow accounts being held in its name. Steem Dollars are pegged using its sister cryptocurrency, STEEM.

Herein lies the problem.

Each SBD is backed with $1 worth of STEEM, there is at any one time, at least 20 times more STEEM than there is SBD.

This means that, STEEM can drop to $0.05 and still fulfil its promise to peg SBD.

That is because $0.05 x 20 = $1.

So in a way the SBD can be thought of as a container, whereupon each one, contains $1 worth of Steem. So if Steem is sitting at $0.50, then each SBD will have 2 Steem in it. If Steem is at $2 (I wish!) then each SBD will have half a Steem inside it.

The Problem In Dealing With Abstracts

Every financial system that uses 'promises' is essentially an illusion, it is a functioning one, nonetheless, it is still an illusion.

For instance on a five pound note in the United Kingdom, it says the words I promise to pay the bearer of this note a sum of five pounds.

This rather arcane message, hawks back to the days when they only printed as much money as could be covered by gold. Therefore if you wanted to swap your paper for gold, you would trot off to the Bank of England and do just that.

Nowadays, money is given power through shared agreement and its utility, we all agree it's worth something, and crucially the government only accepts tax payments using fiat currency.

So back to crypto, and in particular the Steem Dollar.

The problem is that whilst we say the SBD is a container, it isn't really. It is merely a reference code on the blockchain. The only way to empty an SBD is to sell it on either the internal or an external exchange.

As mentioned above, a pegged currency acts as a promissory note. SBD however does not, because there is nobody around to make good on that promise.

With TUSD and the Great British Pound, there are external bodies, the escrow company and the Bank of England, who exist independently of the market, to make good on the promise.

That way you can be assured that if you want to get one dollar for your one TUSD, there is an external third-party company ready to make good on this promise, and you don't necessarily have to rely on another individual. In much the same way the Bank of England would have given you five pounds worth of gold in the days before we dropped the gold standard.

But with SBD who do you go to? The internal market is made up of individuals on the Steem blockchain. If it was owned by Steemit inc. then presumably we could go to them, regardless of what Bittrex said the price was, and get them to make good on their promise and give us a one-to-one conversion rate.

What Pegs Down, Must Peg Up

Without getting into the complex financial details of how peg coins like TUSD keep their peg should the price go above or drop below their one dollar peg. We can rest assured that something is being done if the price goes too high, and also if it drops too far below the one dollar peg.

The something that they do, is to do with how much TUSD is in circulation and the size of the escrow pot of United States Dollars. Suffice to say if the price of TUSD drops to $0.85, then within 24 hours it will be back at $1.00.

Similarly if the price goes to $1.05, again within 24 hours it will be back to $1.00.

This does two things, firstly it allows you as a long-term investor to chill. You know that your TUSD is going to be worth a dollar whenever you decide to sell, therefore acting as a good place to keep your funds while you're deciding where to invest next.

Secondly it allows room for the day-trading speculator, who tries to take advantages of the dips and rises below and above the dollar peg. If you had been trading TUSD last night for instance, you could have bought some for $0.85, and then this morning sold it for a 15% profit as it went back to $1.00

This might sound like stating the absolute obvious, however I will do so anyway. The above example highlights how if you are to have a proper peg coin, then you must be able to control the price when it goes down as well as up.

Because anyone can hyper-inflate a coin to drive the value down, but it takes a bit of a smarter cookie to get that value back up.

Peg To Stability Not Price

Unfortunately in all the noise, we have lost sight of the fact that just because something is pegged, does not make it stable, and vice versa.

For example, diamonds and gold are considered stable commodities; why? Because they are finite resources of which there is long established perception of value - we like shiny and sparkly things - and there is a utility - gold is used within computing, and diamonds in industrial drilling.

Therefore whilst there may be slight upwards or downward fluctuations of gold and diamonds. Unless an alien visits and triples the amount of these commodities on planet earth, then diamonds and gold are not going to suddenly crash in price.

The same of course can't be said of the US Dollar. The dollar is constantly fluctuating in value in respect to the other currencies in the world. So whilst the dollar can be said to be more stable than the Polish Zloty for instance. It cannot be classed as a stable asset.

Plus of course, lest us not forget that the dollar is fractionally reserved. Meaning that more dollars are printed based on how much debt is in the system. So the dollar, like every other fractionally reserved currency on earth, is losing value each and every day.

Don't Forget The Humans!

So in August(ish) of this year (2018), the Steem Dollar pumped first to around $2, then $5, then $8 and topped out at a rather impressive $13.

There were various reasons given for this pump, my favourite being that the USDT, not to be confused with the TUSD mentioned above, was going through some difficulties and lots of investors lost confidence in it.

Ergo they switched to SBD, by all accounts they were mainly Korean, as due to Korean laws surrounding crypto, tether coins are very popular over there.

Now I remember having debates with @smooth and others directly or indirectly connected to Steemit, and I suggested we leave the peg the hell alone. Or we peg it to $8.00, seeing as it seemed to sit around that price for some time.

I was told that having a stable SBD far outweighed any individual financial gains.

However what about financial losses?

You and I, and anyone else who uses the Steem platform, were completely aware that the 'true' value of SBD was $1.00. Therefore when we cashed in our SBD rewards, the first thing we did was sell that SBD, either for more STEEM, or Bitcoin.

What about the poor souls who did not know that? What about all those people who bought SBD at $10.00 and above, and who mistakenly thought that they should hold onto their coins for even greater future profits?

Those people have been screwed over, not because of an unknowable variable that crashes the price - like with Bitcoin - but because (some of) the Steem witnesses, deliberately crashed the price for the greater good.

What makes this stick in the throat more, is that there seems there is absolutely nothing they can do to get the price back up to the dollar range should it fall short.

What's To Be Done?

I think moving forwards we should do what we should have done in the summer. Which is leave SBD to find its natural price, this for me represents stability.

Because then investors come in with their eyes wide open, they know that they'll get at least a dollar for each SBD, however it might just average up and be worth more.

I truly believe that it would have stabilised at somewhere between $5 and $8.00, and maybe even survived this latest crypto crash; who knows?

One thing I do know though, is pegging a coin cannot just be backed by thin air promises, it needs real world action.

The other thing I know is, just because something is called a peg coin, does not make it stable.

Let's make the Steem Dollar great again (whatever that means!)

Note: I am not a financial expert, therefore some of the information above may not be 100% accurate. If you believe I have left out some vital piece of info, or that I have unwittingly misread my readers, then by all means feel free to correct me. Where appropriate, I will make changes to the article.

Instead I have thrown the above points into my critical thinking engine (my brain), and drawn the resultant conclusions. The point of this article is not to attack the decisions made surrounding SBD, rather to examine them and to spark debate fuelled by experts and users alike.

WHAT DO YOU THINK ABOUT SBD AND TETHER (PEGGED) COINS IN GENERAL? DO YOU THINK IT IS POSSIBLE TO CREATE A PEGGED COIN USING SBD OR ARE WE FIGHTING A LOSING BATTLE? OR PERHAPS YOU BELIEVE THERE IS SOME FUNDAMENTAL FLAW IN TETHER COINS?

AS EVER, LET ME KNOW BELOW!

Title image Leio McLaren (@leiomclaren) on Unsplash

Cryptogee