In the past few days, @dantheman and @ned have proposed and begun implementing a major change to the way Steem works. It involves several things, but two of them are
- it decreases the Steem inflation rate to something like 9.5%
- it decreases the Steem Power liquidity lock from 2 years to 3 months.
Yes, you read that last one correctly: that is a factor of 8. These changes are tentatively slated to go into effect November 16th. I want to talk through some thoughts about what effect these changes will have on the price of Steem.
Right now, the Steem inflation rate is high - over 100% per year. One effect of such high inflation is that the price of Steem (the token) falls rather fast, and in expectation, will always be falling. You just can't run a printing press at that breakneck speed and not expect to see a plummeting price. In principle, this should be fine - the holders of Steem Power are ostensibly protected from most of that inflation because they're the beneficiaries of much of it; the holders of Steem Dollars are nominally completely protected from that inflation because SBD is pegged to the USD.
Here's the problem: continuously-falling prices send very nasty signals. When you bring up coinmarketcap and see Steem down another 5% in the past day, and you see this again and again and again, you don't stop to consider the inflation rate - you think "there goes another pump-and-dump scheme into the toilet."
These very nasty signals result in more selling. There's a vicious cycle in here, and ultimately the falling prices outpace the inflation itself, as depicted here.
It's natural to try to stem the tide by decreasing the inflation rate. That's part of the stated purpose of the upcoming change. However, I suspect that in the short-term, the change in the vesting period (from 2 years to 3 months) will counteract the change in inflation. Here's why:
Right now, if every Steem account powered-down all at once, 1.8 Million Steem would suddenly appear on the market; that's about $380,000 worth of Steem. No big deal. That's less than 1% of Steem's market cap. (note: I got this number with a price of about $0.21 per Steem)
After the hardfork, if every Steem account powered-down all at once, 8 times the amount of Steem would appear all at once. That is, we'd see about 14.2 Million Steem all at once, or just over $3,000,000 dollars. Million with an M. That's just over 7% of Steem's market cap; which I view as a large fraction.
So, being careful not to make any concrete predictions, let's just take a look at the facts:
- After the hardfork, a huge amount of Steem will be made available as liquid.
- Some of that Steem will be sold on the open market.
- Do you think that this will cause a decrease in the price of Steem?
I'm trying not to be FUDdy here; I'm just pointing out that it's possible that our recent news-related price change is in entirely the wrong direction. We don't know where things will equilibrate after the hardfork, but we need to think very hard about what effect it will have for massive amounts of Steem to suddenly be unlocked.
Also, if my facts are wrong (i.e., about the vesting period change or something), someone please tell me.