Due to inflation Blockchain Conversion converts for 0.97$ with a stable marketcap.

Introduction

You can convert Steem Dollar to STEEM in two ways: Trading on Exchanges or BlockChain Conversion:

Trading on Exchanges

Trading your Steem Dollars on an exchange is quick and easy. You can do a trade within a few minutes and you know exactly at which price you will convert.

Yet, the only reason that a Steem Dollar holds any value is due to Blockchain Conversion. Blockchain Conversion backs the Steem Dollar price: If the price of Steem Dollar falls below a certain threshold than traders can take advantage of this by converting at a more favorable price on the blockchain.

Blockchain Conversion

Steem uses a list of trusted witnesses to publish a price feed of the STEEM / USD exchange rate. This price is based upon exchanges like poloniex or bittrex. When Blockchain Conversion is used than your Steem Dollars will be converted to Steem after 7 days based upon the median of the price feed.

Blockchain Conversion is a smart contract and in some regards similar to the Federal funds rate but I won't make this comparison here ;) There are risks and rewards when doing blockchain conversion depending on whether the price of Steem goes up or down.

Incentive to hold Steem Dollars

There is an incentive to hold Steem Dollars as otherwise the possible risks of holding Steem Dollars as compared to real Dollars may drive the price down. The interest rate is 10% at present. It is specified on steemd in the field sbd_interest_rate.

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Price of Steem Dollar: 0.97$

Whitepaper of STEEM p.15:

It is our belief that these rules will give market participants confidence that they are unlikely
lose money by holding SMD purchased at a price of $1.00. We fully expect there to be a
narrow trading range between $0.99 and $1.01 for SMD under most market conditions.

The price of a Steem Dollar is determined by the market (exchange). Yet, the market is basing its price on the Blockchain Conversion smart contract which is converting at 0.97$ all things being equal.

Inflation of 5.7% Per Week

Steem is Proof-of-Stake and has a constant inflation. Below is a table of Steem's inflation over the last month from coinmarketcap.com

Date	Supply	Inflation Per Week
21 August	120025 STEEM	5.61%
14 August	113289 STEEM	5.59%
7 August	106949 STEEM	5.91%
31 July	100625 STEEM	-

We can see that Steem inflates on average by 5.7% per week. As a side note, if you are vested in Steem Power and actively curate than you are mostly protected from this inflation.

Blockchain Conversion Uses 7-Day Median (2.85% Inflation)

The price at which Steem Dollars are converted into Steem is based upon the 7 day median of the price feed. If we assume that all things stay equal then the market cap of Steem should stay the same. This means that the price of Steem falls by 5.7% per week given equal market cap.

-5.7% in Steem Value accounts for -2.85% on a 7 day median.

1$ - 2.85% = 0.97$

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Conclusion

We must assume that the market cap of Steem stays the same. Anything else would actually be the definition of a ponzi scheme. Given this the value of a Steem Dollar is backed by Blockchain Conversion which as calculated equals a price of 0.97$ with all things staying the same.

The whitepaper is making an error by saying that the price is between 0.99$ and 1.01$. In my opinion this should be corrected by taking the above into account.

Another technical solution could be that the Blockchain Conversion increases the price feed median by the given inflation. In my opinion this would make the system more transparent and if adopted should be added to the whitepaper.