Steemit Is Like Reddit, But Where Upvotes Equal a Cryptocurrency Payout

A homeless man can afford to buy an RV thanks to a popular blog post. A woman earns a year’s salary from a YouTube makeup tutorial. An African writer starts with three hours of electricity per day and ends with over $40,000 dollars.

These are some of the striking and somewhat implausible-sounding stories to have emerged during the first fully operational month of Steemit, a forum-style platform that rewards community content and curation with cryptocurrency payouts, and where—for the moment at least—users who hit the goldmine of a viral post can see up to five-figure payouts. (Here I should include a journalistic disclosure: a post on the site in which I appealed for sources for this story earned a total value of over $800, of which I have currently withdrawn $100.)

But as with any new cryptocurrency, there are key questions over stability, sustainability, and underlying motivation. As it stands, the bulk of the site is made up of quickly-written, poorly-researched content, some of which is remunerated into the thousands of dollars. At the same time, critics have raised concerns over both the distribution of the currency and the business model of the platform, questioning the huge sums accrued by early adopters and in some cases alleging a scam dependent on new investment to remain afloat.

The principle of the Steemit platform and its three value tokens—Steem, Steem Power, and Steem Dollars—is outlined in the Steem Whitepaper, written by the founders and lead developers, which describes it as “the first cryptocurrency that attempts to accurately and transparently reward an unbounded number of individuals who make subjective contributions to its community.” In the simplest explanation, every year, approximately 10 percent of the total value of the currency is allocated to content finders and creators by votes cast by the community; it’s essentially something like Reddit meets Bitcoin.

Steemit Is Like Reddit, But Where Upvotes Equal a Cryptocurrency Payout
Screenshot of the Steemit site showing trending articles earlier this month

When users want to cash out, they can trade Steem or Steem Dollars for Bitcoin on a cryptocurrency exchange, then convert Bitcoin to fiat currency through the service of their choice; but half of the payout received for any post on the platform is assigned through another token called Steem Power, which the Steemit website is programmed to only release back to users gradually in a series of 104 weekly increments spanning two years, in order to promote long-term investment in the project.

At present, Steem has enjoyed an explosive growth in value in only a few months of operation, but with payouts for contributors coming from the creation of new currency, there have been accusations within the cryptocurrency community of the project being a pyramid scheme, with continued new investors required to keep the system afloat. Among other things, the nature of the three-token system has been criticised for creating an artificially high valuation of the currency: Almost all of the tokens in the system are locked up as Steem Power, but figures for the overall value are calculated by taking the market value of Steem—which has much more liquidity, but only represents 4 percent of the total supply—and applying it to all of the vested funds. In turn, the high value could then encourage people to buy into the currency as a whole at a price dictated by the subset; it’s difficult to know how the system of payouts would fair in the face of a slowdown in this new trade.

Over phone and email, CEO and co-founder Ned Scott, a former financial analyst, talked about his vision for the platform, and the criticisms that have been levelled at it.

“It’s a new and groundbreaking way of rewarding people for sharing information with other people,” Scott said. “And over time we start to see this as a more stable way for journalists to participate in the content economy. I can also see new types of content being incentivised: Wikileaks for example, or investigative journalists ... But there’s other economic layers to add in, like the idea of a peer-to-peer marketplace like Craigslist or eBay; with those layers it becomes less like a social network, and more like a social economy.”

At the time of writing, Steemit had a market capitalisation of $167 million according to Coinmarketcap.com, ranking it the fifth largest cryptocurrency
Scott and his team believe that their model of directly paying users for content could one day displace social media giants like Twitter and Facebook, but not everyone is convinced. One outspoken critic of Steem, cryptocurrency analyst Tone Vays, vowed to tweet out an exposé of each page of the whitepaper. So far he’s made it up to page 18 of 44.

“Here is the problem: The whole system depends on newcomers buying Steem Power and buying Steem Dollars,” he said in a call. “As long as there are people willing to buy into the system they can keep this jig going, but I don’t think people are going to keep buying into this system for long … it’s big news now, but once the hype dies down, it will be over.”

(In a follow-up email, Scott said that, “This is a decentralized ecosystem based on token seignorage with set and specific rules ... Claims that [payout] money is coming from new investment in Steemit are categorically false.”)

As Vays frames it, the problem is that early adopters of the platform are already being largely overcompensated. With most cryptocurrencies, such as Bitcoin, new tokens must be mined by solving computationally expensive hashing problems, a concept known as proof of work. While Steem uses proof of work mining, it also includes a proof of stake system whereby for every one new unit of Steem created, nine units are divided proportionally among all holders of Steem Power—which is to say that anyone with a large stake in the network is rewarded just for owning that stake.

At the time of writing, Steemit had a market capitalisation of $167 million according to Coinmarketcap.com, ranking it the fifth largest cryptocurrency, but also drastically down from a high of over $400 million in mid July. Stats provided by Steemd.com/distribution, a third party site that pulls data from the Steem API, show that the top 219 accounts collectively hold 87.8 percent of all Steem, mostly because they were involved in the initial mining process; comparatively, the lowest 50,000 accounts hold 0.5 percent between them. At present value, Scott’s personal account is worth approximately $7 million, with co-founder Dan Larimer’s at $5.5 million.