Bitcoin has been the first blockchain-based network and blockchain-based peer-to-peer currency that gained a large following and popularity. Some people think that Bitcoin became what it is today because of the superior technology, which is true, but there’s much more to Bitcoin than just technology. Bitcoin is not just a cryptocurrency. It is also a philosophy. Bitcoin is based on the principles of decentralization, anonymity, transparency and personal responsibility.
Most of the other blockchain networks that have achieved significant market capitalization, such as Litecoin, Ethereum, Ripple and Dash, also have a philosophy behind them. Steemit is not an exception.
The most important principle of Steemit is that all contributors to the platform should receive value for their contributions. Steemit doesn’t limit contributions to posting, sharing or liking content.
Existing social media platforms often view contributions very narrowly. They operate on one-user, one-action principle, be it likes, shares, posts or comments to the posts by others. This approach creates an environment prone to platform abuse and manipulation.
For example, many of the Twitter and Facebook accounts have thousands and even tens of thousands of followers that they buy in countries such as India and Philippines, where people build entire “like farms,” rooms full of smartphones on which employees of the farms click like buttons. The platforms then need to figure out how to identify and block abusers. Taking action against users who interact with service abusers may also pose a challenge.
The idea behind Steemit is that a cryptocurrency can introduce economic incentives to a social media platform and allow the platform to grow in a way that is completely different from the growth path of traditional social media platforms such as Reddit, Twitter, and Facebook. It is the synergy between a cryptocurrency and actions of users on social media that gives Steemit a really powerful advantage.
The challenge of Steemit has been to solve the issue of assigning value to various user contributions on the platform. In a perfect world, users rate each other fairly and cooperate with each other, leading to a social media platform growing in an organic and healthy way (meaning no service abuses and no advertising). However, in the real world a platform needs algorithms to deal with intentional manipulation and service abuses.
Instead of relying on “one-user, one-action” principle, Steemit bases its algorithms on “one-Steem, one-vote” approach, where “one-Steem” is one unit of Steem cryptocurrency. In this framework, users get financial rewards in Steem cryptocurrency for contributions to the platform. Contributions include posting, voting, curating and capital contributions.
Capital contributions on the Steem platform
Steemit looks at capital contributions in a very broad way. It recognizes that capital contributions can exist in a form of ownership and in a form of debt and both forms offer their own unique sets of benefits. Owners profit when an asset grows and experience losses when the asset shrinks. Those who invest in debt get their investment back with interest but do not benefit from the growth of an asset associated with the debt.
In turn, owners can have liquid ownership and vested ownership. Vested ownership is a form of ownership that many companies in the business world use to keep employees for certain periods of time. Employees get vested stock options, meaning that an employee will get stocks after spending a certain fixed amount of time with the company. With many startup businesses, employees have to work and wait for years before they can convert their options into shares. Selling shares can also mean additional wait time. The goal of this process is to allow new companies raise additional capital from investors without having to compete with existing shareholders looking to sell their shares. Smart investors want capital so that they can grow the company. Steemit sees itself as such an investor and admits that without vesting, new capital is often exchanged for shares of those who are looking to exit and the company doesn’t benefit when such as exchange occurs at an early stage.
Steem Network offers all of the above forms of ownership to its capital contributors. On the network, these options are Steem currency (STEEM), Steem Power (SP) and Steem dollars (SBD) (Steem dollars (SBD) are a currency that is different from Steem currency (STEEM) ).
Steem (STEEM) is the main cryptocurrency of the Steemit network. It is a liquid currency, meaning that you can buy and sell it on cryptocurrency exchanges just like you would any other digital currency. For a list of exchanges that currently trade STEEM, see https://www.coingecko.com/en/coins/steem/trading_exchanges#panel. In January of 2018, the value of STEEM token was fluctuating between USD$4 and USD$8. All other tokens on the Steemit network derive their value from STEEM.
Steam Power (SP)
Steam Power (SP) is a vested version of STEEM. Steam Power is STEEM committed to a vesting schedule that lasts thirteen weeks.
Steemit introduced SP because it recognizes the value of vested capital and wanted to provide investors who commit to supporting the platform in the long-term with additional benefits. Another reason behind introducing SP was awareness on the behalf of Steemit about the fact that many cryptocurrency speculators jump from currency to currency depending on which currency they expect to go up in the next day or two. Steemit wanted to avoid this kind of behavior and instead build a community of people passionate about the project.
The main benefit of owning SP is having influence over the value of post and comments on the Steemit network. SP holders also receive interest payments based on the vested balance. The interest is equal to 15% of annual inflation.
Committing to SP is known on the network as “powering up.” To “power up,” all you have to do is transfer your STEEM into SP. When you have an SP balance, you can’t transfer it, divide it or trade it. If you want to exchange an SP balance into STEEM, you “power down.” After you inform the network about your decision to power down, you receive your balance in thirteen equal installments that will be paid to you weekly, starting 7 days after you initiate the power down process.
The problem with existing social media
Steemit is a blockchain-based social media platform. The company is based in New York City and Virginia. The creators of Steemit are Ned Scott and Dan Larimer. Larimer is a software developer who has also created cryptocurrency financial platform Bitshares and co-founded block.one, the company behind the smart contract platform and cryptocurrency token EOS.
Steemit has several tokens, including STEEM and Steem Dollars. As of January of 2018, STEEM token had a capitalization of over USD$1 billion. Steem dollars had capitalization of over USD$40 million. The goal of the company is to take the lessons from existing social media companies and combine them with benefits of blockchain technology.
The issues with non-blockchain based social-media
Collectively, user-generated content brought billions of dollars of profits to creators of platforms such as Facebook. However, it is important to understand that Facebook is not “social media.” The definition of the term “social media” includes connecting people and letting them interact with each other. If that’s what Facebook was doing, it would not be making any money.
In reality, Facebook is an advertising platform. This is not something Facebook executives mention often in their speeches about connecting the world. Facebook doesn’t make money when users like each other’s posts or send each other messages. Facebook makes money by showing users advertisements and by figuring out how to make users engage with the ads that the platform shows. The longer someone stays on Facebook, the more ads the platform is going to show to the person, the more money it is going to make. This is the essence of Facebook. Facebook has become a very successful company because it is very good at analyzing behavior and showing people content that they will react to.
Facebook analyzes everything about its users, including their tastes, content they consume, things they buy and people that interact with. Then, it uses this data to find and highlight content that will make people stay on the site and interact with more ads. One of the problems with the business model of Facebook is that the model doesn’t care about the quality of content. It only cares about how often people visit Facebook and for how long they stay on the website. The business model is the same whether advertisers are selling shoes, are spreading fake news propaganda or are promoting fake diet pills. The algorithms behind the platform do not know the difference. This is the reason why Russia used the platform during a US Presidential Election to spread fake news and why in 2017 a hate group was able to use Facebook to advertise to those who publicly claim that they hate people of a certain nationality.
This is also the reason why Facebook relies heavily on the reports and feedback from its users. However, the user-policing system is far from perfect because users do not get incentives for doing the censorship work for the platform. Because of this, Facebook enforces policies very unevenly. For example, Facebook has a policy according to which people on the platform should only use their real names. However, Facebook doesn’t know whether someone’s name is real and it doesn’t have enough resources (or chooses not to spend money) to verify the real names of all its users. Whether users who don’t use their real names see their accounts suspended depends largely on whether other users report them for not using a real name. This means that if a person in a country with an oppressive government uses a pseudonym to disclose human rights violations by the government on Facebook, the employees of the government can flag the account and Facebook will take it down while other accounts using pseudonyms will go unnoticed.
Developing an algorithm and then running it is much cheaper than hiring people to do manual labor, which is why Facebook has elaborate algorithms, yet only 1 employee per 100,000 users on the platform. (The total number of Facebook users is 2.07 billion. Facebook employs 21,000 people). With so many users and so few employees, issues and crises are absolutely inevitable.
Likes and preferences of users may also contradict the interests of advertisers, which could potentially hurt Facebook revenues.
One of the obvious solutions to this issue would be to make users stakeholders in the company.
In 2014, Reddit was considering launching its own cryptocurrency because realized that the platform would improve significantly if users posting stories and content that other users appreciate were to get shares in Reddit, Incorporated. The launch of such a cryptocurrency, which is something that Steemit has done, would mean that people would have a clear incentive to create content that others would find valuable. The value of content as measured in likes, shares and comments would take over the financial value of what advertisers are willing to pay to show their ads on the platform.
Steemit guiding principles
Steemit may seem to be an outlier in the cryptocurrency space. Bitcoin is a blockchain platform that focuses exclusively on finances. The focus of the Ethereum platform is decentralized apps and smart contracts. Other popular cryptocurrency platforms, such as Dash, Ripple and Monero, also aim to bring improvements to the world of financial transactions.
Steem operates in a different space, yet just like other successful blockchain platforms it solves existing problems and has its own philosophy.
Just like Bitcoin is based on three main principles, which are decentralization, transparency and personal responsibility, Steem also has three main principles.
The first principle is that every contribution to the platform matters and should be incentivized. The second principle of the platform is that all forms of contribution are equally valuable.
While Steem is a social media platform, it views the term “contribution” very broadly. Contribution to the Steem platform can have many forms and is not limited to posts, likes and shares. Different forms of contribution are the reason why Steem platform has two currencies, Steem Token (symbol: STEEM) and Steem Dollar (symbol: SBD). STEEM currency functions just like any other cryptocurrency. You can buy this cryptocurrency at many popular exchanges. Steem Dollar works similarly to conventional convertible notes. Steem Dollar is pegged to the US Dollar. SBD is a way for the Steem platform to accept and reward contributions in the form of debt, as opposed to people buying the STEEM token, which is a contribution in the form of financial ownership.
Vested Steem Currency
In addition to these forms, the platform has Steem Power, which is a vested version of STEEM. The term “vesting” comes from the world of stocks and shares. To motivate employees to stay with a company, many businesses, especially startups, award them “vesting options,” meaning that if an employee stays with a company for a certain period of time, he or she will be able to buy company stock at a certain price. If the company is doing well, the price is usually much lower than the stock price, which means that the employee can get significant income in addition to the regular salary. For example, if the employee can buy 100,000 shares at a price of USD$1 per share after working for the company for four years and the price per share at the moment of vesting is USD$4, it means an additional income of $300,000, which is the difference between the market price of 100,000 shares ($4*100,000 shares = $400,000) and vested buying price ($1*100,000 shares = $100,000. Sometimes, shares are vested on an annual basis to motivate employees to stay with a company longer. For example, an employee may get an option to buy 10,000 shares at the price of $1 per share after working for a company for one year, additional 20,000 for the same $1 per share at the end of year two after working for the company for two years and so on. The way vesting works on the Steem network is much simpler than that: After a user on the platform converts STEEM into SP, the platform will only convert the funds back over the duration of 13 weeks, paying the amount in equal installments on a weekly basis.
Serving the members
The third principle of the Steemit philosophy is that the main goal of the Steem platform and Steem network is to serve the members of the network. This is the same principle that lies in the foundation of local member-only credit unions, food co-ops and health sharing organizations. The principle is very different from the guiding principle of social media platforms such as Facebook and Twitter.
Both Facebook and Twitter are businesses. The main goal of a business is to increase the value of the business. Facebook and Twitter do so by selling advertising to advertisers. To increase revenues from advertising, they need users on their platforms and they need users to stay on the platforms as long as possible. This is why social media networks work so hard on creating algorithms that will keep users on the platforms. This is not how Steem network operates.
The network provides value to its members in six ways. First, it is a source of curated content. Second, it is a curated community. Third, it allows users to get quality answers to their questions. Fourth, it offers a currency. The fifth way of delivering value is offering free payments. Finally, the Steem platform creates jobs by providing value to its members.
Because the goals of the platform are aligned with economic interests of its members, the platform produces content and services in a fairer way compared to regular social media platforms.
Steem platform creators had to solve the challenge of ranking of individual contributions. The algorithm had to be transparent and deemed fair by the members of the community, even though rankings of posts and content can be highly subjective.
To solve the issue, the platform created a system of micropayments modeled after the free market because the free market is the best currently known system for evaluating and rewarding all kinds of actions, services, and goods. Content creation is not just similar to a job. Many businesses, such as newspapers, TV channels and radio stations, offer jobs to content creators and create content to earn revenues. Content itself can also be a product. Movies, music, TV shows, books are all examples of content turned into products. In a free market, laws of supply and demand apply. The more valuable the content, the more it costs. In a free market, the marketplace rewards those who provide value to others and punishes those who consume more value than they create. In a free market, money is a commodity that is easy to use.
The founders of the Steem network considered simply applying the free market system to content creation, meaning that consumers of content would be paying directly to content creators. However, they’ve later decided that doing so would not be efficient because most content consumers have a hard time assigning monetary value to content. They are likely to compare this value to physical goods that surround them such as computers, furniture, and consumable goods such as food. It is hard to estimate how much an article is worth compared, say, to a pound of apples that costs USD$1.50. This is the reason why so few content consumers have been choosing to tip directly on the existing social media and content sharing platforms.
Another option was to create a “pay wall” that would force content consumers to pay, yet the founders of the network decided that existence of such a pay wall would simply drive content consumers to platforms that offer content for free, even if this content comes with advertising.
For all these reasons, the Steem platform has enabled micropayment at the time changing the economic equation. On the platform, content consumers do not send funds to content creators directly. Consumers do not have to decide whether they want to pay and how much they should pay if they do. Instead, they can cast up and down votes for content they like and don’t like. The platform then uses the votes to establish how much to pay the creators. In practical terms, this means that content consumers use a familiar interface to vote on the content, and do not have to make confusing financial micro decisions.
Just like other blockchains, such as Bitcoin, Ethereum and others, Steem blockchain creates new tokens every time it creates a block of the blockchain. The difference is that Steem creates blocks of the blockchain in a different way and then allocates most of the new coins to the producers of the content on the platform.
The Steem network creates blocks not one-by-one, but in rounds. Each round consists of 21 blocks and the target is to create one block every three seconds, which means that a round approximately lasts 63 seconds (21 blocks times three seconds per block). Each round the Steem network delegates 19 Steem witness accounts to create a block per witness. This means that there are two blocks left. Out of these two blocks, a backup witness produces 1 block and a miner produces 1 block.
Any member of the Steem platform that is willing to participate in the creation of the Steem Blockchain can become a witness. To do so, the member will need members of the community vote for the member.
Every user on the platform gets 30 votes that he or she can use to vote for witnesses.
A witness needs to run a node of the Steem blockchain and help keep maintain an accurate price feed of Steem currency STEEM to the Steem Dollar SBD. As a reward for doing the work, a witness gets 1 STEEM for every block of the Steem blockchain that he or she creates.
Token distribution on the Steem platform
75% of the tokens that Steem Platform creates go to the Steem reward pool and then get distributed between authors and curators of content. 15% of the tokens become rewards for Steem Power holders. The remaining 10% to go witness members who create Steem Dollar rate feeds and sign the blocks of the Steem blockchain. The distribution of the author/curator reward is the following: authors get 75% of the reward and curators get 25%. If curators vote for a post during the first thirty minutes of the post’s appearance on the platform, a part of curator reward becomes author reward. This part is determined by the time of the vote. For example, if a curator likes a post that is fifteen minutes old, 50% of the curator reward will go to the author of the post.
Posts and comments remain active on the platform for a week. When this period expires, it becomes possible for the network members to claim their rewards in their Steem Wallets.
The Steem network started creating new tokens with an inflation rate of 9.5% starting with a hard fork that occurred in December of 2016. The inflation rate decreases by 0.01% every 250,000 blocks and will continue to do so until it reaches the rate of 0.95%, which is estimated to happen in about 20 years from 2016.