How SBD are actually created?

Are they a completely different currency, or are they just a derivative from another currency?

In the initial STEEM plan, as far as I understand, the value of one SBD should have been always $1. And by reading the white paper, I understand that for one SBD, $19 worth of STEEM will be printed. For instance, if SBD is to be pegged to $1 and if STEEM trades at $1, then for each SBD there will be 19 STEEM printed.

When I say "printed", I mean the STEEM inflation, which at the moment is 9.5% per year. This inflation is allocated towards the rewards pool, witness pay and SP interest. Since witnesses and SP interest is getting paid only in STEEM, the printed SBD will be allocated only to the rewards pool.

Let's get back to the 1 to 19 thing. In financial lingo, I think we can also define this rapport like "there is a 5% debt-to-ownership ratio". Well, this ratio is not set in stone, it can be modified by witnesses, via their price feed bias.

If they increase their bias, it means they shift the reward allocations towards SBD. There will be literally more SBD "printed". Your rewards may see more SBD than STEEM, even if you choose 50/50 in the payment type. Also, by doing that, they will increase the debt-to-ownership ratio.

If they decrease their bias, they shift the rewards pool towards STEEM. There will be literally less SBD "printed". You may see more STEEM than SBD, even if you choose 50/50 in the payment type. Also, by doing that, they will decrease the debt-to-ownership ratio.

How exactly SBD can be traded?

Here is where it gets interesting.

if one SBD is "pegged" to the dollar, it means the holder of 1 SBD is somehow guaranteed to get "1 dollar worth of STEEM" whenever he decides to sell

So, in other words, there is a future guarantee that at some point, the SBD holder will get at least "the pegged amount" worth of STEEM tokens. SBD is basically an oversimplified futures contract.

Ok, let's try to build on that.

Suppose we have not a $1 peg, but a $10 peg.

Suppose a SBD holder hopes, or, I don't know, he's sure he will get back $10 worth of STEEM in the future, for just one SBD token. And for that, he's willing to pay $10. In fiat, or in whatever crypto currency he is comfortable with (we'll see below why this is important).

Suppose also the price of STEEM is $1.

So for 1 SBD to be bought with $10, we will have 1 SBD = 10 STEEM.

Now let's see what happens if the price of STEEM changes drastically.

Case 1: STEEM goes down 50%. 1 STEEM = 50 cents. In this situation, if the peg holds, 1 SBD will be exchanged for 20 STEEM.

The SBD holder gets back the same value, but more STEEM tokens.

Case 2: STEEM goes up 50%. 1 STEEM = $2. In this situation, if the peg holds, 1 SBD will be exchanged for 5 STEEM.

The SBD holder gets back again the same value, but less STEEM tokens.

The above is always true if the transactions are made internally, via the price feed set up by witnesses.

But what happens if SBD trades in other ecosystems, outside the internal market? In this case we will face normal supply and demand.

A person may simply want to buy this futures contract, called SBD, because he believes it will appreciate in the medium term. It's a free market, right? As a result, the price of the futures contract may go up simply because it's in high demand.

But what will happen then on the internal market?

At least 3 things:

• witnesses may want to counteract this external price increase, by adjusting their price feed bias, creating more SBD, to increase the supply.
• as a result, the debt-to-ownership ratio in the STEEM ecosystem will increase.
• if the price of SBD increases, then people who are getting rewards in SBD (and they will get more SBD than STEEM, as a result of the price feed bias increase above) they will be inclined to sell at a higher price, outside the internal market, for fiat.

Right now, the current debt-to-ownership ratio is already at 10%, not 5% as it was designed in the original white paper.

The "suction" effect of a high SBD

So if somebody hopes or expects the price of STEEM to go up, he will normally wants to get a hold of more STEEM, right?

He has 2 options: buying STEEM directly, or buying SBD, the futures contract. Now, if he decides, for whatever reason, to buy the futures contract, instead of the collateral (STEEM, in our case), then something very interesting will happen.

We will basically see a reversed situation of the Case 1 described above. It's reversed, because instead of decreasing the value of STEEM, you increase the value of SBD. As a result, you get more STEEM tokens. Problem solved.

But if witnesses are reacting and start to update their price feed, then we will have a higher debt-to-ownership ratio. So, if the rewards are paid entirely in SBD, for instance, as a result of the price feed bias, then less STEEM will be printed. You will receive just the futures contract, not the actual token.

But, and here's where it gets really interesting, as a result of a small supply of STEEM, its price may go up.

Got it?

And this game may play for a while...

At this moment, I confess I have limited knowledge of where this game could end up.

I just did my best to translate my understanding of the current inner workings of the STEEM ecosystem, to the best of my abilities.

Thoughts?

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I'm a serial entrepreneur, blogger and ultrarunner. You can find me mainly on my blog at Dragos Roua where I write about productivity, business, relationships and running. Here on Steemit you may stay updated by following me @dragosroua.

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You can also vote for me as witness here:
https://steemit.com/~witnesses

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If you're new to Steemit, you may find these articles relevant (that's also part of my witness activity to support new members of the platform):

• Rewards: Were Does The Money Come From?
• Netiquette: How To Avoid Being A Steem Douche?
• Witnesses: What Are They And Why Should You Care?
• How Can I Mine Steem And What CPU / GPU Power Do I Need For That?
• The Beginner Guide To Not Getting Hacked On Steemit