Steemit child

Steemit is great! It is the cross-breed of the social network giants, like Facebook, Twitter, Google+ or reddit and alike and the blockchain technology that underlies Bitcoin, Ethereum and other cryptocurrencies. Both the social network and the blockchain made some people very rich. Very very rich!

So it seems, Steemit, the child of the two, has a very successful genetics! I imagine that the social network is the mum and the blockchain is the dad. The gender of the child is not yet apparent, but currently the leading post has 30000 USD reward, which is a make-up artist video, so it shows female tendencies! But of course it does not matter if a boy or a girl, just that it's a healthy one, right?:)

We don't pay :)

What, however I couldn't get my head around, is that who is actually paying now the bill for the 30000 USD make-up artist video blog? Personally I would not give a penny for it, but I can vote for it because it is not my money, is it?

So today I spent some time to read the STEEM whitepaper to get a clue. For the first sight it was confusing. It looked like the money comes from nowhere. You make a nice introductory video, and you make a few hundred bucks and that’s it! But where does that few hundred comes from? Can this whole thing be maintained in the long run?

I understand that if many people get together and share their thoughts in an organized manner, that itself is very valuable. So the value of what is here is not questioned. But the value and the money is not always connected. Wikipedia is actually extremely valuable, yet the content creators do not receive money (maybe they should…) and they still do a lot of hard work! But we talk about monetization!

The social media/Mother

The social media has proven that it worth billions of dollars, but initially it was not clear how it would generate revenue! However by now we all know that when we sign up to Facebook or other giant (centralized) social media site, we give up a piece of ourself and our connections, in exchange to be connected to others. We do not get anything else in return, but the social media sites make a huge profit by targeted advertising. Based on your friends, comments, likes they guess what you want, even if yourself are not aware of it and show you some ads to get your attention. They not only match demand and supply, they actually create demand by this! A third party pays them and they sell them your attention. And their profit is made in real money!

The blockchain/Father

The blockchain is another success story which has proven itself to be a multi billion dollar invention. In one sentence, the blockchain is a worldwide unmutable whiteboard. Everybody can write on it, nobody can delete anything from it, and it is accessible from everywhere! And of course, nobody owns it (well, you can own it, but then nobody cares about your blockchain)! It is NOT a large database somewhere in a bank, because then the bank could delete from it. It is a different thing. It is secured by distributed redundancy. Conceptually the blockchain is copied very redundantly across the world so to delete a record from it you need to gather 51% of all copies, delete the record on those copies and then argue that the other 49% is fake and yours is the real copy. This is practically impossible and this makes it remarkable. I think in historical perspective we can compare it to the invention of units carved on clay tablets, which then enabled more efficient trade and economics. But at that time there were many small clay tablets, with different notations etc., which was good only as a personal accounting book. Fastforward 10000 years, we got Bitcoin, a single wordwide “clay tablet” with agreed notary rules. It is a world accounting book containing who owned or transferred what and when and it is uncheatable even by the FED or the Bank of England! Now this notion made many people excited, who started to invest money to buy and run computers which can write into the blockchain according to the rules. With these investments and by following the rules, they were able to write into the accounting book (i.e. the blockchain) that they own some units of value, called bitcoins. The rules were constructed such that they could do this only slowly and with computational effort (called as mining). From here on Bitcoin became recognized as something very valuable, as it is free of national regulations and free of currency transfer barriers. People paid real money to the miners (who run the computers) in exchange for to be written into the blockchain that they own some bitcoins. In other words they bought bitcoins. So bitcoin market was created! Bitcoin (the network) is of course not just the blockchain, but also the notary rules. One of the most important rule, is that the number of bitcoins that the miners can write into the blockchain can be altogether 21million, no more! It is even more scarce then gold, as in the entire universe we can have maximum 21million bitcoins. This is a rule, that have to be accepted to write something into the Bitcoin blockchain. If a miner would defy it, it wouldn't write into the Bitcoin blockchain, but to something else, which wouldn't have the Bitcoin's value. This rule attracted many more speculative investors, who realized that the more people want to own some bitcoin the more valuable it becomes so the price has to go up eventually. As of today 1 bitcoin worths 668 USD. With this price, the maximum value the Bitcoin can represent ever is 21million*668USD = 14Billion USD. It sounds a lot, but it is not if we compare it to alternatives, like Paypal which has a markecap 48Billion USD. So people believe the price will go up, which can be a self-fulfilling prophecy. However at some point the price will not go further. What happens then? Will it be still valuable? I think the answer is yes, as it is still a worldwide currency, which is useful. But it depends on the alternatives yet to come.

So…?

Now going back to Steemit, or more general, to steem. Let see what it inherited from the mother. It is a social network, you can register for free, normally can have one account, you can post publicly, like(vote), reply, follow and do these sort of things. From the father side it inherited that it is backed up by a blockchain. The posts, the votes are on a blockchain. This is good, there is no central authority, and everything is written on a worldwide whiteboard. And there is a unit of value, which in this case is not bitcoin, but it is called STEEM. However the constitutional rules are much more complicated compared to the Bitcoin network, and the rules are the key for understanding where the money comes from! On the blockchain we are not restricted to only a single unit of value. We can bookkeep other assets as well if we find them useful. For example, for Steemit two other assets are introduced besides STEEM: STEEM POWER (SP) and STEEM DOLLAR (SD). Since you are reading this, you probably know what these are, but just to reiterate:

STEEM DOLLAR (SD) is the representation of 1 USD on the blockchain. Hypothetically Steemit people could have a contract with a big bank, like Barclays who gives an account to everybody on Steemit and show their balance on the Steemit website. But in practice of course they could not do this, it would be extremely complicated to pull such a deal off. But in essence it is your 'bank' account. You have some dollar there and it pays a little interest to be there. If you want, you can cash it out from the 'bank'. What purpose it serves? Since it is on the blockchain you can easily and safely buy other assets with it (within seconds) without worrying about real banks, security etc., and since it represent 1 USD, you can forget that it is a cryptocurrency and forget its instability. It is 1 USD.

STEEM POWER (SP) is an asset represents your voting power. The idea is that there are some valuable rewards we want to distribute among the people who did some good for the Steemit community. How should we do it? For example everybody (every account) could have one vote. But it turns out it would not be fair as there would be cheaters who made multiple accounts to control the reward distribution. The Steem inventors designed an economically secured voting system. You can buy some amount of SP which weights your voting power. The more you have the larger your weight in deciding who gets reward for their useful activity (being that activity posting, voting etc..). It is designed so that if you split your SP to two accounts you do not gain more total voting power, so it does not worth to create multiple fake accounts. This asset has other important properties, but let discuss that later.

The total value of the reward we want to distribute (let's say in a fix period of time) is measured in the unit of value, that is in STEEM. For example we have X STEEM to distribute. According to the voting it is decided in what weight this X amount should be distributed among the community members. Then the members receive their rewards, but not in STEEM. When e.g. you are rewarded with Y STEEM, the reward distributor first exchanges the 50% of the Y STEEM to dollar, that is to SD and exchanges the other 50% of it to SP and you will receive the SD and the SP. So if you did good to the community your voting power increases and you got some dollars as well. Sounds reasonable, right? The precise voting system is more complicated and elaborate than I described here. The creators had to do a pretty good job to find an uncheatable system. Time will tell it works as intended. One more thing to add here, if that is not obvious: the system is running on the blockchain, there is no reward distributor 'person' that exchanges STEEM to SD or SP. It is done by… dare to say.. a DAO, a decentralized autonomous organization, or a “Steem engine”:)

Now this is all good, but where the money comes from!!

The interesting event in our simplistic view is when the Y STEEM is exchanged to SD and SP prior the reward is given out. By the rule, the exchange rate from STEEM to SP is 1, so it is not that exciting. Y/2 STEEM becomes Y/2 SP. However how to decide the rate between Y STEEM and SD, that is 'what is the price of STEEM in USD?' This is the same question that 'what is the price of bitcoin?' The price of STEEM is decided by the market. If people consider STEEM valuable then they pay real money to those who own some already for exchange. This is the only entry point for the USD into the whole Steemit ecosystem. If someone takes out 100USD then someone needs to pay in 100USD, no other way. (Technically you use bitcoin or ether to buy in and not USD, but in the logic the represented value matters and not the vehicle so to keep it simple let us imagine we buy and sell everything for USD)

So let us sharpen the parallel between Steem and Bitcoin. Both have a blockchain. There are accounting rules on them with a unit of value that you can buy and sell on the market for USD. We can consider both an engine or a DAO (supported by its community) with a total value that the community members own with their shares. In case of Bitcoin the shares are simply represented by the bitcoins, whereas in case of Steem the shares are represented by either STEEM, SD or SP. If a member wants to cash out his or her shares, the DAO sells some shares and gives the cash to the member. It is of course a simplistic view, but that makes it easy:

There is the member who cashes out.
There are his or her shares in whatever form.
There is the DAO/Engine governed by the rules outlined on the blockchain.
And there is the buyer who brings the cash.

However the crucial difference between the Bitcoin and the Steem lies within the constitutional rules. And the rules make up the value. The one crucial rule that made Bitcoin very desirable is missing from Steem. The number of STEEM is not limited 21Million, but quite the opposite. Every year the supply of the STEEM+SP is increased by 100%, that is the number of STEEMs and SPs together are approximately doubled every year. Currently there is about 100Millon SP and 3Million STEEM. Since the ratio between them is 1 the total STEEM supply can be considered 103Million. So next year this date we will have 206Million STEEM+SP. So how this extra 103Million STEEM+SP will be distributed? The rule is that the 90% of the 103Million newly created STEEM value go back to SP owners. That is the 100% inflation does not effect them dramatically. In fact if you have x SP now then you own x/103M fraction of the total supply. Next year you will have 1.9 x SP (without doing any useful activity) and you will own 1.9x/106M fraction of the total supply. The math says this is equivalent of ~5% effective inflation on your SP. The remaining 10% of the 103Million will become pure STEEM which provides the funding for rewards. That is the value of your STEEM will lose its 50% by next year and the other half of it will be redistributed to those who earned it. It seems nobrainer to convert your STEEM to SP, but note that SP has a time restriction. If you have SP, you have voting power and low inflation rate, but your investment is locked away. You can take it out during a 104week period, weekly receiving 1/104 of it. This secures the long-term investment for Steemit.

So why is a good deal to by STEEM then? Bitcoin will increase because it has limited supply. STEEM and even SP will lose its value. If noone buys STEEM the “Steem Engine” cannot pay for the make-up artist the 30000 USD! For now the price of STEEM is driven up by speculators, believing that the price will go higher and higher. But if the STEEM price is likely to go down or not going up, what will be the value of STEEM? It is an entrepreneurial investment! For example if you believe in yourself that you can find a niche subtopic where you can contribute then you would buy some STEEM. Why? Because you convert it to SP and start posting/voting(and self voting) etc., to earn SD and SP to overcome the 5% effective inflation and go over the profit side. You will compete for the redistributed new STEEM supply. Which has the value that is take from the lazy or unsuccessful investors through inflation. Year on year the inflation redistributes the value to the good ones. See? Nothing is free, you need to work again :-) So these are the players in the game:

There is the member who cashes out.
There are his or her shares in whatever form, but probably in SP.
There is the DAO/Engine governed by the rules outlined on the blockchain.
There is the new entrepreneur who brings the cash.
There is the loser entrepreneur who loses value.

Steemit is a democratized social media, where you are both the content creator and the attention buyer. It is a miniature capitalist system in which people bet their money on themselves and win or lose. This is however a distant or maybe a never coming future. But it shows Steem has a basic pillar that will be always valuable. While Bitcoin has fundamental value because it has limited supply (and some other stuff making it a store of value), Steem is built on the proven success of democratic systems combined with capitalist economy. Initially however there are other factors. The more people will join in, the redistribution becomes more fair (possibly:) as the large crowd can decide what is valuable and what is not. The system will produce more and more quality content (or demanded content, which is not the same) and attract an even larger crowd. Soon we will arrive to a stage where institutions cannot afford to be not part of it and they will join in, buying huge amount of SP to channel your attention to their external profits. The real world capitalism will crepe in and buy you out. You will work for them when you vote and give yourself to them when you read. But... you can start your own business and try to make yourself rich! Good luck:)

Let me know your thoughts below... and what can I say now: start buying or writing :)

For more understanding probably can take a look at these posts as well or add below yours if I missed it:

https://steemit.com/steem/@liondani/steem-whitepaper-download

https://steemit.com/steem/@biophil/what-does-game-theory-say-about-steem-part-1

https://steemit.com/steemit/@donkeypong/still-confused-by-steem-steem-dollars-and-steem-power-the-power-plant-analogy

https://steemit.com/steemhelp/@aem/steem-for-noobs

https://steemit.com/mining/@bitlord/testing-gtx-1070-in-games-and-mining#@bitlord/re-bitlord-testing-gtx-1070-in-games-and-mining-20160714t124655105z