In my last post, I discussed how STEEM price fluctuations can cause high levels of SBD debt.

The last post was intended to be a brainstorming session. I tried to put everything on the table - from doing absolutely nothing, all the way to completely eliminating SBD.

Here are some take-aways that I got from the conversations:

• SBD has the potential to be a great benefit to the STEEM ecosystem.
• It costs the network more STEEM for users to convert when the price is low, than if they convert when the price is high.
• To maintain a constant debt ratio you have to retire half the debt each time the STEEM price drops by 50%. ( @smooth )
• The general rules from the whitepaper for how the witnesses should use their parameters to affect the debt are defined here. ( @clayop )

After a lot of back-and-fourth, I feel that @clayop, @smooth, @bacchist, and myself are actually close to being on same page regarding the major principals. There are still some disagreements on specifics - including the appropriate magnitude and conditions for when to do certain things - but I think it is healthy for there to be differing views on this.

In @bacchist's latest witness update he coined a perfect term for what I believe is our best solution to the problem: Smallest Effective Discount (SED). As @clayop pointed out: We should not discount price feeds any more than is necessary. The amount neccesary is whatever is needed to keep SBD pegged close to $1, and the debt level under control. SED is exactly what we should be aiming for.

The whitepaper gives general principals for when to use price discounts and interest, but it is very unclear how the terms and limits apply to the new economics now that the system is enforcing a limit on SBD conversions once the debt level reaches 10%.

Based on my conversation with @smooth, I think it is important for the witnesses to define what is considered an 'acceptable' debt level and conversion rate. Based on this, each witness should be able to determine what they believe the 'Smallest Effective Discount' is.

Debt Levels

Optimal Debt Level

A safe debt level is 1%. From an equilibrium point of 1%, the system can handle a 50% price drop before SBD payouts are affected, and a 90% price drop before the 10% debt level is reached. From here, witnesses should have time to react to changing market conditions and take corrective actions if things start to head in the wrong direction.

High Debt Level

Once the debt level has reached 2%, the system will start imposing it's own rules to reduce the debt. It is not a dangerous level at this point, but it has started to affect the system behavior. At this point, the debt level should be considered high.

Dangerous Debt Level

If the system has reached a 5% debt level, it should be considered dangerous. One more 50% price drop, and the system would be at the critical level of 10% - where the SBD 'agreement' would be broken.

Extremely Dangerous Debt Level

If the system has reached 8% debt level, the price stability of the system is at severe risk.

Critical Debt Level

At 10% debt level, the system would no longer honor the "1 SBD = approximately 1 USD worth of STEEM" agreement. (If this were to be happen, it would be really bad for SBD.) The system should not be allowed to reach this point.

Conversion Ratios

Safe Debt Scenario

In a 'safe' debt scenario, the SBD conversion rate should be approximately equal to the rate of new SBD being produced. This will fluctuate with short-term changes in price and conversion rates, but an equal amount of conversions and new SBD production over time should be the goal.

High Debt Scenario

In a high debt scenario, the SBD conversion rate should be greater than the amount of new SBD being produced. Whatever STEEM is being produced instead of SBD (due to the high level of debt), should also be counted as part of the "SBD production rate".

Low Debt Scenario

If the debt level is below 1%, the SBD conversion rate can be less than the amount of new SBD being produced.

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These are intended to be general guidelines. It is up to each witness to determine what they believe are the appropriate actions based on the current market conditions.

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