Note: This describes the mechanics of Steem prior to its 2017 fork. When it is updated, this note will be removed.
How STEEM Works
Steem is one of the most complex currencies that has hit the market. We wrote an initial overview here, but we did not address some of the technical mechanics behind the platform. The white paper is dense and at at times almost seems to obfuscate the inner workings. This has led to some confusion about the bigger picture. This article is an overview of some of the least understood concepts, in our estimation while researching the topic.
Calculating the Market Capitalization of Steem as $250+ Million is Misleading
Coinmarketcap and many other data sites report that Steem’s market capitalization is behind only Bitcoin and Ethereum. They are calculating market cap as the total supply of STEEM by the market price of an individual STEEM.
But all of the STEEM supply is not liquid – in fact, a very small portion (currently 2.5%) of the total STEEM supply is held as actual, tradeable STEEM. The rest are held as (1) Steem Power, which can only be converted to STEEM in equal weekly installments over 2 years and (2) as Steem Dollars, which can be converted to STEEM in one week (or traded on the STEEM blockchain for STEEM). Steem Dollars are the second-most liquid token, but they constitute a very small supply of the total value.
Over 97% of the total supply is wrapped up as Steem Power, which won’t fully become liquid STEEM for a year and not at all for at least 1 week. The supply of STEEM that the market is currently tussling over is quite small: only 2.78 million STEEM tokens.
There are multiple ways to calculate market capitalization, just as there are multiple ways to estimate the supply of fiat money. Usually they involve forms of money that are liquid (dollars, bank accounts) or near liquid. A promise to be paid over two years that also isn’t transferrable is not near liquid.
If Steem’s marketcap were calculated as the price of a liquid STEEM x available liquid STEEM, it would be $9.7 million.
Contribution Rewards are not given as STEEM–in fact, the blockchain doesn’t create new liquid STEEM tokens
The whitepaper does the reader a disservice by denominating everything in STEEM. They explain that STEEM is the ‘unit of account’ of the system, in that everything can be valued in it, but STEEM is also its own token that is different from Steem Power and Steem Dollars.
The whitepaper states numerous times that the STEEM supply grows constantly, as if more STEEM are being added.
- “STEEM grows at a rate of approximately 800 STEEM per minute” (pg 35)
- “STEEM is constantly increasing in supply by 100% per year” (pg 8)
But the “STEEM supply” is only growing by adding more Steem Power and more Steem Dollars, not by adding actual liquid tradeable STEEM tokens. The constant inflation is attributable to rewards for creators/curators, which is given 50% in Steem Power and 50% in Steem Dollars. Rewards for creating market liquidity on the blockchain are also given as Steem Power. Rewards for witnesses and miners are given as Steem Power. Interest on Steem Dollars is given as Steem Dollars.
The new Steem Power and Steem Dollars that are created seem like they are worth a lot in USD – about $4 million per day, at current market numbers. For reference, this is almost 4x the amount created in one day through Bitcoin. Due to the delay in converting to STEEM, it seems unlikely these Steem Power and Steem Dollars would all be redeemed at current market prices, unless demand for acquiring STEEM and powering up exactly matches the rate of powering down. The rate at which the network is actively powering down is unknown.
The Distribution of Steem Power Matters
Steem Power determines one relative influence on the Steem.it platform. More specifically, it entitles the user to the following.
- Weight of votes on who becomes a witness
- Weight of votes on good payout-worthy content
- A portion of Steem Power that is generated every block as generation inflation (as it doubles every year)
90% of all tokens generated as part of general inflation go to existing Steem Power holders, in proportion to how much of all Steem Power they control. Those with a lot of Steem Power get a lot of new Steem Power. This results in no redistribution of Steem Power – it generally follows the initial distribution. This is by design: according to the whitepaper, people invested in the platform shouldn’t get diluted.
The remaining 10% of new tokens are distributed according to voting on content and curation. The theory is that those who make the platform worth reading should share in the bounties; the challenge is that these reward tokens are largely drowned out by the 90% of new tokens that follow general inflation and honor the existing distribution of Steem Power. This effect is accentuated by the fact that half of these rewards are given as Steem Dollars, which don’t confer on the holder any additional Steem Power inflation.
If someone started on the platform with just .1% of all SP and created every single piece of valuable content i.e. responsible for all voted posts and comments on the platform for an entire year, they would have accumulated just 2% of the network, even though they supplied almost all of its value as a content platform.
Moreover, votes are weighted according to Steem Power. One person with 1000 SP can outweigh the votes of 999 people with one SP. This means the voting weight of “whales” vastly exceeds the voting weight of non-whales. This has given rise to a number of posts about how to attract whales to steem.it content, including a script for identifying whales (post valued at almost $2000).
Currently, the top 45 accounts hold 65% of voting power.
Due to how new SP and SMD are created, this is unlikely to change anytime soon.
If all of those 45 accounts chose to power down 100% of their SP, they would still own approximately 50% after two months, 40% after a one year, and 27% after two years. As they power down, they still earn rewards for their remaining SP as the STEEM network grows. This assumes they don’t produce content or earn rewards for curation, even though they retain influence over rewards in proportion to their SP holdings.
Redistribution from starting conditions can happen, just very slowly. Over a ten-year time horizon, such dynamics may get rebalanced in favor of content producers if whales continually cash out at greater rates than content producers/curators.
This article will be updated if other elements warrant deeper explanation. We did not create steem nor have reviewed its code. If you spot an error in this article, let us know.