Understanding Silent Risks and Uncertainty (A Non-Technical Essay For Speculators)

I was actually disappointed when it was announced two months ago that Steem was going to change its power down period from 24 months to 3 months. The initial inflation and power down model was quite attractive to me as a long-term investor. If you review my activities, you will see that it's reflective of that.

Anyway, clearly something was wrong with the initial economic model as the price kept plummeting. The conditions weren't keeping up with the community's expectations. So to top my disappointment, the proposal to reduce the liquidation period will most likely cause a further (of what I thought back then, unnecessary) price dump. Whales that don't want in anymore and those that are not in to hold would cash out.

Personally, I don't mind a low price. I powered up with the expectation of testing it for 2 full years.

However, I have accepted the change about a week or two after the hardfork proposal was announced. The community decision seemed unanimous that the change will be the better course of action. Accepting the hardfork was all thanks to some degree of comfort from Nassim Nicholas Taleb's (NNT) works.

If you're unaware of NNT, he released a book collection a few months ago called Incerto (containing Antifragile, The Black Swan, Fooled by Randomness, and The Bed of Procrustes). They're all philosophical essays about uncertainty. He has also released a 400+ pages mathematical companion for the entire Incerto series. It's free and you can snag it here: http://www.fooledbyrandomness.com/SilentRisk.pdf

Okay, so why was I interested in the 2-year power down period in the first place? Back then, I rationalized that the long power down period would allow the community to come together to mitigate critical platform issues. An ample time before any potentially severe market price reduction for Steem.

But the price dumping happened way sooner than expected. Unexpected side effects of a long liquidation period: short-term speculators weren't willing to invest in Steem Power. Trading volume wasn't enough to support the bleeding. All the while I've also had thoughts about highly-paid, but solely content-creator types powering down and cashing out without really adding much value to the network, especially after. So the reduction to a 3-month power down period will no doubt drive the price down, at least for the time being. But that's just an evaluation based on market price action, and there's certainly nothing wrong only cashing out - it's just the way it is in a voluntary society.

Steem's current market situation is quite the opposite of Bitcoin's where people are actually holding for its long-term valuation.

This is where it gets rather interesting. After walking back and forth in my living room for weeks reading and pondering about the scenario, I came to the following conclusions.

The extreme reduction in Steem Power liquidation may actually be better in terms of lessening artificial risk suppression.

A few months ago, I wrote this sentence in one of my articles (here):-

The absence of heavy-handed censorship also means that risks are not artificially suppressed like what most traditional, centralized organizations do. This keeps the community on edge to continuously learn and fix problems along the way, instead of dealing with a massive blowout from years of risk suppression. Even Steem's failsafe is designed to avoid total market meltdown: 2 years of slow death from Steem Power liquidation. An ample time for the community to work together to regain market confidence.

I would like to recant the last two sentences in that paragraph. The 2-year failsafe is actually an artificial risk suppression from total market action and exposure. That said, I'm not sure how it will work out but I think Steem will move on without any need for Steem Power at one point. Or maybe an extremely short window for liquidation.

Steem is now in better position to withstand NNT's turkey problem.

A thanksgiving turkey is in no way vigilant. It gets fed everyday, thinking that tomorrow will be the same. Until the butcher's knife pays a visit, of course.

A turkey is fed for 1000 days by a butcher, and every day confirms to the turkey and the turkey's economics department and the turkey's risk management department and the turkey's analytical department that the butcher loves turkeys, and every day brings more confidence to the statement. But on day 1001, there will be a surprise for the turkey.
_{by Nassim Nicholas Taleb}

This is applicable to all kinds of markets, and it's easy to be intimidated by Steem's current price when comparing to the likes of Bitcoin. I'm not trying to FUD or jinx anything here. Any markets that are large enough with its fairshare of salesmen and attention of those in positions of power are well worth considering, however. What I would like to inform here for market speculators and social platform enthusiasts are these:-

• Steemit is proving to be a congregation and breeding grounds for a diverse crowd, and better equipped as a plenum for cryptocurrency understanding and debates. This also extends to all forms of collective knowledge and sharing. Plus, Steemit's high exposure all sorts of people even includes those who are just here for the money and will sell at any price. I thought that would be bad at first if so many will be doing it. But here's a saying: bleed or blowout.
• Bitcoin is considered a Goliath in the cryptomarket with its fair share of believers in the technology, despite its obvious network deficiencies when it comes to instantaneous transactions, support incentives, and network scalability. Have a go at @dantheman's articles and its comments here and here. Steem is still considered small and agile like David. Learning along the way and designing better systems for scalability, and to defend against overpowering entities (like the government) are essential for the network as a whole to avoid being the turkey.
• It seems that Steem developers have plans to scale up and make consensus way more liquid and antifragile. With high transactional activities inherent in a social platform that isn't limited to just fund transfers should prove to be relatively more agile even with highly decentralized stakes in the Steem network. Remember that a growing network that's powered by low-barrier currency-backed social interactions is a great way for token distribution, effectively decentralizing stakes far and wide in a relatively short period of time.
• I believe that a currency-backed social network made to be as antifragile as humanity itself is a good thing. Sure there are scammers, plagiarists, and disputes. It costs money, but the lessons learned for the community is invaluable and is not entirely a cost sink with no future returns.
• Blind maximalists defending a network based purely on philosophical grounds may do more harm than good in the long run.
• Studying a game (like the design mechanisms of a cryptocurrency) reveals their possible consequences, and that's more in the realm of knowing compared to figuring out probabilities.

For the more mathematically inclined..

I'm not a great mathematician / statistician / economist myself and would rather point you to an already complete text on it. Remember the free mathematical companion to NNT's Incerto? Here it is again: http://www.fooledbyrandomness.com/SilentRisk.pdf

I can suggest the following chapters:-

• Black Swan, Part II: "Real World" Rigor @ page 65
• Some Misuses of Statistics in Social Science @ page 211
• Mathematical Formulation of (Anti)fragility @ page 297
• The Convexity of Wealth to Inequality @ page 373
• Brownian Motion in the Real World @ page 417

Conclusion

Of course I'm rather biased and hoping for Steem's eventual success over the long run, or else I won't be spending so much time on it. However, I hope not to be a fool and the turkey walking on the thin thread of silent risks. Debates are healthy, and I hope to continue learning and interacting with the community.

There's a reason why many institutions are failing and facing a crisis on the legitimacy of authority. Too many decades of artificial risk suppression. I'll end the piece here with another quote by NNT. Thanks for reading!

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_{If forward-thinking stuff with a dash of everyday slice-of-life is your cup of tea, follow me @kevinwong}