Digging Deeper: More Doubts About Steemit

I think I have a better understanding of Steemit now so I'd like to dig in a little more. If I'm mistaken on anything please let me know in the comments.

First off, I've seen many say that 80% of Steemit was pre-mined. According to Steemit, Inc:

Steemit, Inc mined about 60% of the available STEEM the first day and then continued to mine until it had mined over 80% of all available STEEM the first week. This representes over 320,000 STEEM mined by Steemit, Inc. Steemit then transferred 53,000 STEEM to 6 founders as VESTS. VESTS is STEEM that has been locked up for an average of 1 year, it can only be converted back to STEEM via 104 equal weekly payments. Steemit then converted its remaining STEEM into VESTS. One week after launch less than 20% of STEEM (80,000 STEEM) was liquid and almost all of it held by anonymous miners.

The white paper indicates that for the first month the blockchain created 40 steem/minute for miners and 40 steem/minute to seed the content and curation reward pools. The 80% figure represents one week of mining (with three to go until the switch to elected witnesses), which equates to 322,560 steem. All of that steem was allegedly converted into SP so that it could be "powered down" later to help grow their business.

For the first month then 1.7 million steem went to miners and 1.7 million was used to seed the content and curation pools. During the last three weeks 9 steem were created for every 1 steem awarded to a miner and converted into SP. That translated into a total of 10,886,400 SP.

Overall the blockchain creates 800 steem per minute, although currently the distribution is different than it was when mining first began. How that works is the block time is 3 seconds, so there's about 20 blocks per minute. 1 steem goes to the curation pool, 1 steem goes to the content creation pool, 1 steem goes to miners, and 1 steem goes to the liquidity pool to reward liquidity providers on the internal market.

That's a total of 4 steem per block, or 80 steem per minute. On top of that for each one of these steem created an additional 9 steem are created and distributed as SP according to SP ownership. So 4 steem for rewards + 36 steem converted to SP equals 40 steem per block, or 800 steem per minute.

Of that 4 steem, the 25% which goes to curation is rewarded in SP upon payout. The 25% which goes to content creators is divided evenly between steem dollars and SP. The 25% which goes to miners is paid out in SP. The 25% which goes to liquidity providers is awarded in steem.

In total then then 2.5 steem get automatically converted into SP, 0.5 steem gets converted into steem dollars, and 1 steem remains as steem. That means 38.5 steem out of 40 per block, or 96.25%, automatically convert into SP where it can only be withdrawn over two years in 104 payments. 1.25% goes to steem dollars and 2.5% remain as steem.

From what I can tell a July 26th hard fork disabled the liquidity reward because a few people found a way to game the system. So now 30 steem are created per block and 98.3% are automatically converted to SP.

One consequence of the high SP percentage is that the $167 million market cap displayed on coin market cap is not really accurate. According to steemd.com there are 122,683,652 SP and 4,587,145 steem. Tradeable steem represents 3.6% of the steem + SP supply. Calculating instead from the tradeable supply (and at the current steem price of $1.45) would put the market cap at $6.6 million, which would place Steemit at 25th in the overall crypto market cap rankings instead of 5th. That may not be an entirely accurate way to calculate the market cap either but it's a closer estimate than including the vast majority of units not on the market.

PAYOUT BEGINS

Up until the first payout on July 4th no steem dollars existed. According to Steemit, Inc:

 On July 4th approximately 5,000,000 STEEM will be distributed to the best content producers and curators. Half of this STEEM will be paid as VESTS and half will be paid as STEEM Dollars.

I'm not sure how either sentence is accurate however. Curators are only paid out in SP, meaning 75% would be paid out in SP and 25% in SMDs. Since mining started on March 27th, 40 steem/minute were placed into the content and curation reward pools. By July 4th that would total ~5.7 million steem distributed as ~4.3 million steem as SP and ~1.4 million steem converted into SMDs. As coinreport.net reported:

Steemit, a blockchain-powered decentralized social network, distributed Monday $1.3 million in cryptocurrency to users of the site, who are paid for posting and voting on content.

At the time the steem price was around $0.23, so 5.7 million steem would have been "worth" $1.3 million USD although only 25% of that would have been in SMDs able to be cashed out.

In Steemit there are feed producers who determine the SMD/steem conversion price. When steem in the pool is converted into SMDs upon payout this price is used to determine the number of SMDs created. The price is also used when anyone holding SMDs wishes to convert them into steem via the built in "convert to steem" option. 

I don't know what the median feed price was on July 4th, but assuming it was something close to 0.23 SMD/steem (in order to target SMD/USD parity), that means about 328,000 SMDs should have been created on July 4th. As data from the blockchain shows 328,625.822 SMDs were created at block #2889600. Therefore the new amount available to the market after the first payout on July 4th was about $329,000 USD worth of crypto.

Many have wondered where the money came from to pay out all the rewards. I don't know what the liquid steem supply available on the market was at the time or how many people actually tried to cash out their SMDs but there was no sudden price decline. In fact, the steem price steadily climbed from $0.23 on July 4th to $0.58 on July 10th, at which point it increased dramatically to $3.85 on July 13th. I imagine that the large payout generated a frenzy of interest which provided the support necessary to absorb the new SMDs and send the steem price to new heights.

STEEM DOLLARS, STEEM, AND INFLATION

Currently there are ~1.99 million SMDs. As far as I know the only way to destroy SMDs is for people to use the "convert to steem" option. SMDs traded on the internal market or external exchanges of course remain in tact. It seems as though most people have opted not to use the convert option since the SMD supply has consistently increased.

The current feed price set by feed producers (2.027 SMD/steem) means 1 SMD will convert into about $0.72 worth of steem. On Poloniex SMDs are priced at $0.92. Going directly to market with your SMDs means not only can you trade immediately but you'll get a much better price. Unless the SMD/steem feed price is lowered SMD inflation will likely continue.

Steem is also being diluted and so people are encouraged to move into SMDs if they want short term liquidity plus interest or into SP if they want voting power. Assuming the hard fork change went through to disable liquidity rewards, 98.3% of new steem from the blockchain gets automatically locked up in SP where it can only be withdrawn slowly over two years. The remaining 1.7% of steem gets converted into SMDs to pay out rewards. 

I'm not sure whether you're better off holding SMDs or steem. For the time being SMDs are being diluted and so who knows if the 10% annual interest, also paid in SMDs, will translate into a profit. Those interest payments can be stopped at any time by feed producers as well, and there's no guarantee that SMD/USD parity will be achieved (it doesn't seem to have worked thus far). Although SMDs are called "debt" there are no individual debtors and no one is obligated to redeem SMDs for any other asset.

Steem on the other hand suffers from people "powering down." Since peaking around July 20th at $4.63 the price has declined to where it is now at around $1.45. The effects of steem inflation are becoming apparent.

STEEM WHALES POWER DOWN

According to steemdown.com the "steem whales" will be powering down $1.2 million worth of steem this week. Excluding the official Steemit account it will be ~$288,000 worth of steem. Some view this as a positive because it means SP is being distributed away from the whales and more evenly across the network.

While a more even distribution might be a good thing the steem has to be bought up by new investors. As I stated in a previous article there's no real product being purchased on the Steemit network. Contributors are being paid by people who invested expecting future earnings. Even if new investors enter into the network to provide support it will only prolong the inevitable. If everyone putting money into the Steemit network is expecting more in return then everyone cannot get paid.

ADVERTISING ON STEEM

One way to get sustainable cashflow into the Steemit network would be through advertising. I don't think this can be done through ads on steemit.com however because all the revenues would go to Steemit, Inc. rather than the network. Advertisers have to be incentivized to purchase SP. 

As I understand it though there are mechanisms in place against voter collusion. Would there be any way for advertisers to promote their own content through voting power? Would they get down voted? Even if they could leverage SP to promote themselves their SP purchase would be a one time deal since voting doesn't cost anything.

That all being said perhaps Steemit can come up with a way to facilitate advertising in order to create a sustainable business model.