This might sound a little weird, but they're paid out of the value of the overall system. Overall, the Steem system is worth something; this value comes from all the content that is generated and propagated on Steem. Right now, the market is valuing this at about $250 million US, but this number is changing rapidly. The developers of Steem figured out a clever way to pay a small fraction of this total value to content creators and upvoters. This is done by creating new STEEM (which is basically a currency) and putting it into a pool that's distributed to content creators. When you create new STEEM, you dilute the old STEEM, and it's like you took a very tiny slice of that $250 million and shifted it around so that the creators have more of it than before.

The big question is whether this can possibly continue. I suspect there will be a robust discussion emerging about why STEEM should have any value at all.