Another thought experiment: A decentralized and utilitarian approach to SBD interest rate discovery

Still speculating on the topic of SBD interest rates for the Steem blockchain. For background, see here and here.

Is there ever a time when SBD interest rates should be non-zero, and if so, when?

This time, I'm going to consider the possibility for a rate discovery mechanism that's based entirely on the changing value of STEEM. Once again, I'm assuming that this should be dynamically adjusted, instead of a "set and forget" value.

Like before, I'm not advocating that anyone take any actions. I'm just thinking about possibilities, and hoping to advance the community's understanding of the topic (ever so slightly).

Question: What is the purpose of the Steem Dollar?

Answer: If I go to the Steem whitepaper, I find this sentence: Creating token-convertible-dollars enables blockchains to grow their network effect while maximizing the return for token holders. So it seems that SBDs were intended to benefit STEEM and SP holders. And the interest payment is intended to facilitate the realization of that benefit.

For me, the most difficult part of imagining a dynamic interest setting for SBDs is that it's hard to anticipate how people will react to changing interest rates? Will they sell and crash prices, or will they buy and cause prices to increase?

If SBD prices fall below a dollar, that is manageable through the blockchain's internal conversion function. If SBD prices rise, no one really seems to mind. So, we can basically forget about the impact of interest on SBD prices. STEEM prices, however are another matter.

As we see above, "maximizing the return for token holders" is the fundamental purpose of the SBD. And the "token" in question is STEEM, not SBD. So, we care - a lot - if SBD interest payments increase or decrease the price of the STEEM token. However... it's difficult or impossible to anticipate how SBD interest payments might affect STEEM prices.

Instead of anticipating price changes, then, what if we create an algorithm that is guided by history, and discovers the best setting as time moves forward? To know what we mean by, "best", we go back to the whitepaper. The best rate is the one that maximizes value for STEEM and SP holders.

So, let's trim all the fat and focus just on that for today's thought experiment. Imagine, this time, an algorithm that responds to STEEM market price movement. If the STEEM price goes up, the algorithm repeats what it did before. If the STEEM price goes down, the algorithm reverses direction. Fortunately, the witnesses already provide a price feed, so the price changes aren't hard to track at all. For example, the last day of STEEM prices can be easily obtained from the blockchain, like this:

curl -s --data '{"jsonrpc":"2.0", "method":"condenser_api.get_feed_history", "params":[], "id":1}' https://api.steemitdev.com | jq -S .result.price_history[].base | tail -25

So, our algorithm can actually be relatively straightforward, something like this.

1. Choose:

   • Starting value: 0% in this example
   • Amount to adjust the interest rate during each iteration: 1% in this example
   • Length of time between adjustments: 1 day in this example

2. Set interest rate to 0%.

3. One day later, move the interest rate up by 1% and remember the value and the direction.

4. Every day thereafter, repeat the following:

   • Check what happened with STEEM prices during the last day.
   • If STEEM prices went up, move the rate in the same direction as the previous day by another 1% (or set to 0 if that would be negative).
   • If STEEM prices went down, move the rate in the opposite direction by 1% (or set to 0 if that would be negative).
   • Remember the value and direction.

Obviously, individual witnesses could tailor their own settings for starting value; the amount to change during each iteration; and the length of time between changes.

If the interest rate has no bearing on STEEM prices, then we would expect rates to float near the starting rate from random price fluctuations. On the other hand, if the interest rate does influence STEEM prices, then we would hope that the rate would gradually converge on some sort of near-optimal rate.

Thoughts?

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Thank you for your time and attention.

As a general rule, I up-vote comments that demonstrate "proof of reading".

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Steve Palmer is an IT professional with three decades of professional experience in data communications and information systems. He holds a bachelor's degree in mathematics, a master's degree in computer science, and a master's degree in information systems and technology management. He has been awarded 3 US patents.

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^{Pixabay license, source}

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