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In this comprehensive guide, we'll unravel the intricacies of Steemit, shedding light on its three key currencies: Steem, Steem Power, and Steem Dollars.
As discussed in this exploration, the advent of Bitcoin ushered in a transformative era, empowering entrepreneurs to devise bespoke monetary systems. Steemit, a social network underpinned by the digital currency Steem, stands as an exemplary illustration. We'll delve into how Steemit leverages Steem to foster a financially rewarding ecosystem for its user base. To set the stage, we'll explore insights from two influential investors:
Naval Ravikant remarked, "Embedded in the Steemit white paper are courses in monetary policy, game theory, venture finance & currency design." (source)
Fred Wilson expressed, "This is the Decentralized Autonomous Organization model that many blockchain entrepreneurs are following today. I think Steem is a really interesting experiment that may turn into a really nice business..." (source)
Unveiling Steemit's Mission:
Steemit, positioned as a hybrid of Reddit and Medium, aims to reward users for posting and engaging with content. This innovative model directly challenges mainstream social networks where user interactions typically yield no financial returns.
The core mechanism is simple: users post content, receive upvotes, and the more upvotes, the more earnings. Early identification of successful posts through upvoting also translates to monetary gains.
Encouraging Quality Content: The system encourages users to contribute high-quality content, distinguishing itself from platforms like Reddit where trolling is prevalent but financially unrewarding.
The Architectural Landscape of Steemit:
In traditional cryptocurrency frameworks, the blockchain is coupled with an interface known as a wallet, facilitating transactions. For Steem, Steemit serves as the interface to the blockchain, processing not only buying, selling, and transferring cryptocurrencies but also publishing articles, comments, and upvotes. This sends transaction orders to blockchain miners.
Revolutionizing Content Storage: Textual content is directly stored in the blockchain using markdown, while images, due to their size, find storage on steemimg.com. The platform aims to achieve complete content distribution without relying on traditional servers in the near future.
Decoding Steemit's Three Currencies:
To navigate the Steemit social network, users engage with three currencies:
Steem (STEEM)
Steem Power (SP) or Vesting Steem (VESTS)
Steem Dollars (SBD)
Let's explore the distinctive features of these currencies and their interplay.
Steem (STEEM):
Mining Dynamics: Steem operates on principles akin to Bitcoin, with a public and decentralized blockchain. Miners, termed 'witnesses,' construct transaction blocks, with a 3-second block time. While utilizing the proof-of-work algorithm, block construction differs from Bitcoin.
Distribution Nuances: Unlike other cryptocurrencies, newly mined Steem isn't entirely allocated to miners—an aspect we'll delve into further.
Acquiring Steem: Users can acquire Steem through mining, purchasing from dedicated exchange platforms [1], or by actively participating on the Steemit platform.
Approximately 100% Annual Inflation: While the initial impression might suggest increased volatility compared to Bitcoin or other currencies, understanding the 'monetary policy' and platform operation reveals a nuanced picture.
Navigating the Reverse Split: Steem's circulating quantity undergoes multiplication by approximately 10 every 3 years, facilitated by a 'reverse split' with a 10:1 ratio. This strategic move involves dividing account balances by 10 and multiplying their value by 10.
Unlocking Value: Steem, in essence, serves as a gateway into and out of the Steemit 'economic space.' After acquiring Steem, users can exchange it for Steem Dollars or Steem Power.
Steem Dollar (SD):
Also known as Steem Backed Dollars (SBD), users can obtain Steem Dollars exclusively by exchanging Steem on the dedicated exchange platform within Steemit.
Dollar Pegged Equivalence: A unique feature of Steem Dollars is their value pegged to the dollar, with 1 Steem Dollar roughly equivalent to 1 dollar. This design ensures that even if the value of STEEM fluctuates, converting SBDs back to STEEM provides an equivalent amount in dollars.
10% Annual Interest Advantage: Steem Backed Dollars offer an additional perk—a 10% annual interest, with the rate subject to variation based on platform economic activity. Over the long term, converting dollars into Steem Dollars might prove more lucrative than keeping them in a traditional bank account.
Ensuring Monetary Stability: Unlike STEEM, which experiences volatility, Steem Dollars maintain a stable value, paving the way for potential service development. This stability addresses a common criticism of Bitcoin and other cryptocurrencies.
Steem Power (SP) or Vesting Steem (VESTS):
Empowering Transformations: Users can 'transform' their Steem into Steem Power exclusively on the Steemit platform, a process termed Power Up. Unlike currency exchange, this transformation represents a change of state, with 1 Steem Power equivalent to 1 Steem.
Strategic Lock-in: After converting Steem into Steem Power, users must retain this state for 104 weeks (2 years) before potential transformation back into Steem, known as Power Down. This strategic lock-in prevents users from hastily responding to STEEM value fluctuations by converting Steem Power into STEEM for market sale.
Long-Term Investment Philosophy: The 104-week lock-in principle aims to instill discipline in long-term investments. While speculators may retain STEEM, believers in the Steemit mission can transform their holdings into Steem Power, unlocking various benefits.
Annual Interest at 90%: Unlike Steem Dollars offering a 10% yield in Steem Dollars, Steem Power provides a substantial 90% annual interest, calculated in Steem Power. This allocation emphasizes the importance of Steem Power holders, protecting them from inflation compared to those holding STEEM.
Voting Influence and Content Governance: Steem Power operates as shares within the Steemit enterprise, where ownership translates to influence on content quality decisions. Users can exercise their voting rights and influence based on the amount of Steem Power they hold.
Seamless Transactions: Whether it's Power Up, Power Down, acquiring Steem, or exchanging for Steem Dollars, users can effortlessly navigate these transactions within the wallet section of their Steemit accounts.
Content Voting and Steem Power:
Transparent Dynamics: On Steemit, one Steem Power equals one vote, and everyone can participate in upvoting posts or comments. The author's earnings are determined not solely by the number of upvotes but by the cumulative Steem Power of all voters.
Transparency in Action: Steemit users have visibility into key metrics, including past and pending payouts to authors and curators, the identity of voters, and the Steem Power holdings of each user.
Reward Calculation Mechanics: The reward amount is expressed in US Dollars, automatically refreshing based on the Steem/US Dollar exchange rate. It primarily hinges on two factors—the sum of Steem Power from voters and the Steem-to-Dollar exchange rate.
Influence of Voting on Content Quality: This system empowers those who invest significantly in the Steemit project by transforming their Steem into Steem Power. It aligns with the notion that financial investment in a social network should correlate with a genuine interest in the content produced.
Payment/Payout Processes:
Timing of Payments: Payments are initiated only 24 hours after a post receives its first upvote, marking a distinctive feature of Steemit's payment system. This delay ensures that only posts appreciated by the community and supported by users with sufficient Steem Power for rewarding are eligible for payment.
Distribution Mechanics: Following the 24-hour period, the payment is divided into two components—75% goes to the author, and 25% is distributed among the voters. This distribution model aims to acknowledge and incentivize both content creators and curators in the face of the platform's content abundance.
Payment Composition: While the payment amount is denominated in US dollars, the actual payout is executed in a 50-50 split between Steem Dollars (SD) and Steem Power (SP). This arrangement provides users with Steem Power, offering enhanced voting privileges on platform content, and Steem Dollars, affording the flexibility to either cash out directly or reinvest for increased participation in the platform.
User-Friendly Withdrawal: Steemit users can easily navigate the withdrawal process through the wallet section of their Steemit accounts, ensuring a seamless experience for converting their earned rewards.
Funding Source: Notably, readers don't directly pay authors out of their pockets. Instead, through their votes, readers inform the Steem protocol which authors should be rewarded. The Steem Power and Steem Dollars distributed as rewards originate directly from the mining process conducted by blockchain witnesses, constituting freshly created funds to compensate authors and curators.
Mining Dynamics of Steem:
Distinctive Proof of Work: Unlike conventional cryptocurrencies where mining primarily rewards machines validating transactions, Steem introduces a novel concept known as 'subjective proof of work.' Here, the work rewarded is that of authors and curators, marking a departure from the objective proof of work in Bitcoin. The reward is subjective, contingent on the willingness of voters and their possession of Steem Power.
Complex Reward Allocation: The distribution of mined Steem involves a multifaceted approach, defining the monetary policy of the Steem protocol. Various rewards include:
Posting Reward: For authors
Curation Reward: For voters
Savings Rewards: Interest for Steem Dollars holders (currently set at 10%)
Commitment Reward: Interest for Steem Power holders
Mining Reward: Awarded to blockchain miners, equivalent to 1% of the Steem market cap
Market Maker Reward: For those providing liquidity in the internal market of Steem/Steem Dollars
In essence, Steemit's distribution model goes beyond decentralizing currency issuance; it extends to incentivizing content creation and curation, shaping a dynamic economic ecosystem.
In conclusion, while Bitcoin paved the way for decentralized currency issuance, Steemit pushes the boundaries by implementing a monetary policy that fosters the creation of quality content within its community. This unique approach positions Steemit as a pioneering experiment in the blockchain space, as acknowledged by prominent investors.
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