In the Latest [Steem Release 0.14.0](https://steemit.com/steem/@steemitblog/announcing-steem-0-14-0-release-candidate) there was an interesting update concerning **Steem Dollar Stability**. A few questions later from users like @elyaque (who also posted [here](https://steemit.com/steemit/@elyaque/steem-report-september-4th), I have decided to post on this topic, and provide my thoughts on how this could impact the Steem Economic System moving forward…

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As I have done in many of my previous posts, I am going to begin by consulting the [Steem Whitepaper - Page 12/13](https://steem.io/SteemWhitePaper.pdf). Where there is **Change**, it is always worth considering the **Origins** of where we have come from, and where we are **Suppose** to be going. The Whitepaper allows us to do both.

## Sustainable Debt to Ownership Ratio
> If a token is viewed as ownership in the whole supply of tokens, then a token-convertible-dollar can be viewed as debt. If the debt to ownership ratio gets too high the entire currency can become unstable. 

> Debt conversions can dramatically increase the token supply, which in turn is sold on the market suppressing the price. Subsequent conversions require the issuance of even more tokens. Left unchecked the system can collapse leaving worthless ownership backing a mountain of debt. The higher the debt to ownership ratio becomes the less willing new investors are to bring capital to the table. 

> For every SMD Steem creates, $19.00 of STEEM is also created and converted to SP. This means that the highest possible debt-to-ownership in a stable market is 1:19 or about 5%. If Steem falls in value by 50% then the ratio could increase to 10%. An 88% fall in value of STEEM could cause the debt-to-ownership ratio to reach 40%. Assuming the value of STEEM eventually stabilizes, the debt-to-ownership ratio will naturally move back toward 5%. 

> The idea behind having a conservative 5% debt to ownership ratio is that even if all debt were converted and sold there should be ample buyers and the effective dilution of the token holders remains relatively small. 

> A rapid change in the value of STEEM can dramatically change the debt-to-ownership ratio. The percentage floors used to compute STEEM creation are based on the supply including the STEEM value of all outstanding SMD and SP (as determined by the current rate / feed). 

What is apparent from reading this extract of the White Paper is that the founders already had this mechanism of their radar. The key sentence for me is; **Left unchecked the system can collapse leaving worthless ownership backing a mountain of debt.** 

## Why the change?
Something the founders couldn’t necessarily have planned for was the almighty demand for Steem at such an early point in the project. 

**The price rally in the week after the 4th July was around 1,000%**

This was great for Steem investors who profited handsomely from this rally. It was also great for Content Curators and Creators…

**Why?**

Curation and Creation rewards are paid out as a percentage of Steem Market Cap (~10% per annum). So, if the price of Steem is High, the Market Cap is High, and so are the Curation and Creation rewards. 

**Here is the Key Point** 

These rewards are split as follows;
* Curator: 25% of the Rewards: Paid in Steem Power
* Creators: 75% of the Rewards: Paid 50:50 in Steem Power and Steem Dollars 

This means that, currently 37.5% of these Rewards are paid out in  Steem Dollar, which is **Essential Debt** in the Steem Economy. This debt is priced in $Dollars, and thus does not change in value with the Price of Steem. 

* **If the Price of Steem goes up, the Market Cap rises, and the % of Debt in the system Falls.**
* **If the Price of Steem goes down, the Market cap falls, and the % of debt in the system Increases.**  

At any given point in time, the amount of new debt created (Steem Dollar rewards) is a small fraction of the overall value of the Steem Economy. So, during normal trading conditions, there is nothing to concern ourselves over. We could however encounter problems **If/When** the price of Steem Falls, **Just** like it has done over the past month.

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When the price of Steem started to fall, the Steem Dollar to Steem Market Cap ratio was well below <1%. In the space of 1 month, we are now hitting ~2%. Without having a mechanism in place to cap Steem Dollar Production, every price fall in the future would result in a increase in Steem Dollars to Steem Market Cap (Essential Debt to Ownership Ratio would balloon). Imagine we had started out around 5% a month ago, we could have been pushing towards 20% Debt to Ownership Ratio. This could have been enough to put the Steem system under severe pressure, considering all this debt is convertible to Steem over a one week lead time.

## The Update
Under the 0.14.0 update there will be a 2% cap in Steem Dollars to Market Cap. This means that, if this threshold is ever reached, Author Rewards will paid in Steem and Steem Power, instead of Steem Dollars and Steem Power. This will naturally keep control of the Debt to Ownership Ratio, rather than letting it runaway by itself.

This is a slight more aggressive control than the original 5% ratio referred to in the White Paper, and shows how serious the founders consider this metric.  


## Is this **Good** or Bad?

**Overall, It think this is a good idea.** 

This protects the Steem Economy from large falls in the price of Steem which could send Debt to Ownership ratio to breaking point. Steem would need to become pretty much worthless for this to happen under the 2% Cap implemented in the latest update. If this point was ever reached, it at least won’t be the Debt to Ownership level (which we can control..) which would cause Steem’s demised.

I have considered the fact that, if we go beyond the 2% cap, more Steem would be created which could create extra sell side pressure on the system. On balance, I feel this is much better than increasing Steem Dollar Circulation. Steem Dollars essential represent Steem anyway. This update, to me, seems like the only reasonable way to control this moving forward…   

**Yesterday the Debt to Ownership Ratio was at 1.92%...**

**Interested to hear your thoughts…**