Learning Crypto: The Steem White Paper (part 1)
I read the Steem White Paper yesterday and I was amazed at the amount of thought and detail that went into creating this ecosystem. I know (as with most young things) that some of the information in it might be outdated. The Steem community has changed and rules have changed with it. I decided to walk through the 44 pages and pull highlights from my point of view in a short(ish) concise way. Time to get the thinking cap on! 🤔
The Three Starting Principles
Everyone Has Ownership
The most important principle is that everyone who contributes to a venture should receive pro-rata ownership, payment or debt from the venture.
Time/Energy as a Currency
The second principle is that all forms of capital are equally valuable. This means that those who contribute their scarce time and attention toward producing and curating content for others are just as valuable as those who contribute their scarce cash.
Self Sustaining Ecosystem
The third principle is that the community produces products to serve its members.
These first three principles mentioned show the depth of what Steem is compared to other social networks or platforms. It is really quite amazing.
Recognizing Contribution
Steem is designed around a relatively simple concept: everyone’s meaningful contribution to the community should be recognized for the value it adds. When people are recognized for their meaningful contributions, they continue contributing and the community grows. Any imbalance in the give and take within a community is unsustainable. Eventually the givers grow tired of supporting the takers and disengage from the community.
The White Paper discusses the need to recognize contributions and this is done by the community. The power of that recognition is relative to how much you have vested in the ecosystem in the form of Steem Power. We have all seen it. When a whale upvotes your post it has far more monetary (and community) impact than when a new user performs the same action.
The Free Market
A proven system for evaluating and rewarding contributions is the free market. The free market can be viewed as a single community where everyone trades with one another and rewards are allocated by profit and loss. The market system rewards those who provide value to others and punishes those who consume more value than they produce.
The paper goes on to talk about how great the free market is but there is a problem with paying for content. People are unwilling to pay for content when they can get it for free. It won't work and it violates one of the principles mentioned above. However, there is a solution.
Steem is designed to enable effective micropayments for all kinds of contribution by changing the economic equation. Readers no longer have to decide whether or not they want to pay someone from their own pocket, instead they can vote content up or down and Steem will use their votes to determine individual rewards. This means that people are given a familiar and widely used interface and no longer face the cognitive, financial, and opportunity costs associated with traditional micropayment and tipping platforms
This. Is. Awesome. 💯
We can still reward and promote quality contributions without the need for monetary expense and it actually creates a self sustaining economy. Voting on content allows us to support and reward each other.
Next listed are the ways that you can earn rewards in the Steem ecosystem:
Form of Contribution to Earn Rewards:
- Content Creation
- Content Curation
- Transaction Validation
- Proof of Work Mining
- Liquidity Rewards
- Reporting Misbehaving Block Producers
Ways To Contribute
There are two items a community can offer to attract capital: debt and ownership. Those who buy ownership profit when the community grows but lose if the community shrinks. Those who buy debt are guaranteed a certain amount of interest but do not get to participate in any profits realized by the growth of the community. Additionally there are two ways ownership can be held: liquid and vesting. Vesting ownership makes a long-term commitment and cannot be sold for a minimum period of time.
So we have three different types of investment in the Steem world. Each represented above and used for different purposes to help this organism thrive and grow.
Steem (STEEM)
The liquid ownership
Steem is the fundamental unit of account on the Steem blockchain. All other tokens derive their value from the value of STEEM. Generally speaking STEEM should be held for short periods of time when liquidity is needed. Someone looking to enter or exit the Steem platform will have to buy or sell STEEM.
STEEM is the easiest to get out of the system. It is the cryptocurrency used and could be compared to bitcoin or litecoin. By having STEEM your assets are more liquid but this does not always mean better.
STEEM is constantly increasing in supply by 100% per year...Someone who holds STEEM without converting it to SP is diluted by approximately 0.19% per day. While the rate may appear high, for transactions that take less than 10 days, it is still cheaper than credit card processing fees. Furthermore, the daily token creation is insignificant next to the daily volatility.
This means that holding on to STEEM is not the best long term strategy. The entire system is built to help create involvement and community. This structure helps facilitate that for the Steem ecosystem. STEEM was not created to be the ultimate value, instead it is a vehicle to help create community and reward productive involvement.
Steem Power (SP)
The vested ownership
Start up companies require long-term capital commitment. Those who invest their money in a startup expect to wait years before they can sell their shares and realize their profits.
Steem Power or SP is investment in the Steem world. You are helping provide a form of capital to keep this economy going. The capital that you earned by contributing and being a member of this economy. This is an incredible idea for this platform to work and the next statement helps us understand why.
There is significant value to having long-term commitment because it enables communities to make long-term plans. Long term commitment of stakeholders also causes them to vote for long-term growth rather than short-term pumps.
The cryptocurrency is overrun with people looking to pump and dumb. It is looked at as a vehicle to get rich quick or speculate with. Although there is volatility in any cryptocurrency, by creating SP that is held for a minimum amount of required time it allows for vested ownership. It is stable from the perspective of the Steem community and in turn is rewarded more favorably.
Because Steem wants to encourage long-term growth, it is hardwired to allocate 9 STEEM to Steem Power (SP) stakeholders for every 1 STEEM it creates to fund growth through contribution incentives.
If you have SP then you are invested in the ecosystem and because STEEM grows at a rate of 100% per year and the value of SP needs to be sustained, Steem rewards those who have SP on a 9:1 ratio. This is a little confusing but from what I understand it simply means that SP is protected from the amount of STEEM created devaluing it in order to keep worth in the Steem community.
SP can only be converted back to STEEM over 2 years via 104 equal weekly payments. ‘1 SP’ can be viewed as a share in a pool of STEEM.
I believe that this 2 year time frame has been shortened but the concept is still the same. It protects the Steem community and helps show a commitment on your part to be involved. By taking on SP you are saying that you are sticking with this and you believe in the community. You are becoming a stakeholder.
SP is a requirement for voting for or against content. This means that SP is an access token that grants its holders exclusive powers within the Steem platform.
SP is not only vested ownership in this "company" but is also what fuels your ability to support what is important and valuable. This is great! The more you commit to the ecosystem then the more reward and involvement you get in return.
Transferring from STEEM to SP is referred to as powering up while transferring from SP to Steem is referred to as “powering down.”
After reading through how Steem works this makes a lot of sense. "Powering Up" is vesting in the community and allowing you to get a larger stake and add more value giving you more of a voice. "Powering Down" is getting more liquidity. You are moving your position a little bit out of the Steem community. Both have there place and the rewards are different.
Steem Dollars (SMD)
The purchased debt
[The White Paper lists it as SMD but it is currently known as SBD.]
I must be honest. The SMD is a little bit to wrap your head around but it seems to me the basic concept is to have a consistent measure of value backed on the US dollar. The goal is to keep it as close to $1 in value as possible.
Stability is an important feature of successful global economies. Without stability, individuals across the world could not have low cognitive costs while engaging in commerce and savings. Because stability is an important feature of successful economies, Steem Dollars were designed as an attempt to bring stability to the world of cryptocurrency and to the individuals who use the Steem network.
Cryptocurrency is volatile and the pricing changes quickly. The SMD is a way to keep some balance and allow for consistency and stability that we need.
Creating SMD requires a combination of a reliable price feed, rules to prevent abuse, and liquidity. Providing a reliable price feed involves three factors: minimizing the impact of an incorrect feed, maximizing the cost of producing an incorrect feed, and minimizing the importance of timing.
In order to keep the price of SMD at the $1 rate then rules must be in place. In the Steem community these are controlled by a appointed group of stakeholders that can lose their position at any time (but we will get to that in a later post). This same group also determines the price feed. They are attempting to course correct SMD to stick as close to $1 as possible.
(SMD) - Minimizing Fraudulent Feeds
SP holders elect individuals to publish price feeds. These elected individuals are presumably trusted by those who have a vested interest in the quality of the feed. By paying those who are elected, Steem creates market competition to earn the right to produce feeds. The more the feed producers are paid the more they have to lose by publishing false information.
The stakeholders we mentioned are well vested in the platform and are even paid for their work. Since they are voted in and can lose that position it greatly reduces their desire to cheat. It just isn't worth it.
(SMD) - Mitigating Timing Attacks.
Market participants have access to information faster than the blockchain’s one week moving median conversion price can react. This information could be used to benefit of traders at the expense of the community.
Since the actual price adjustments are delayed you can basically see the future. By delaying the ability to convert by one week it helps protect the SMD and the community.
(SMD) - Minimizing Abuse of Conversions
If people could freely convert in both directions then traders could take advantage of the blockchains conversion rates by trading large volumes without changing the price. Traders who see a massive run up in price would convert to SMD at the high price (when it is most risky) and then convert back after the correction.
You can only convert from SMD to STEEM and not the other way. It is a protection mechanism for helping keep the SMD pegged to the US dollar.
(SMD) - Liquidity
Most users will prefer to use the internal market to perform instantaneous trades between STEEM and SBD. The internal market will track the real-time price of STEEM much more reliably because professional traders can take advantage of arbitrage opportunities. To further enhance the quality of the market, the STEEM network rewards individuals who provide liquidity by leaving orders on the book.
This quote above is from steem.io which is more concise. The white paper does go into more detail on liquidity but the idea seems to be that you are rewarded for holding SMD.
(SMD) - Sustainable Debt to Ownership Ratios
If a token is viewed as ownership in the whole supply of tokens, then a token-convertible-dollar can be viewed as debt. If the debt to ownership ratio gets too high the entire currency can become unstable.
For every SMD Steem creates, $19.00 of STEEM is also created and converted to SP. This means that the highest possible debt-to-ownership in a stable market is 1:19 or about 5%. If Steem falls in value by 50% then the ratio could increase to 10%. An 88% fall in value of STEEM could cause the debt-to-ownership ratio to reach 40%. Assuming the value of STEEM eventually stabilizes, the debt-to-ownership ratio will naturally move back toward 5%. The idea behind having a conservative 5% debt to ownership ratio is that even if all debt were converted and sold there should be ample buyers and the effective dilution of the token holders remains relatively small.
Does this confuse you? It does me. My best guess is that by having a 1:19 ratio of SMD to STEEM there is a protection on it losing value or desire of ownership from the market.
(SMD) - Interest
SMD pays holders interest. The interest rate is set by the same people who publish the price feed so that it can adapt to changing market conditions. All debt carries risk to the lender. Someone who holds SMD without redeeming it is effectively lending the community the value of a dollar.
When you have a large about of SMD you are loaning value at a set point ($1) to the Steem community. Although the stakeholders elected to control the price feed attempt to secure this, it can go below that point. By paying interest in those cases it makes it worth it to still maintain your position.
(SMD) - Setting Price Feeds
Astute readers will recognize that an interest bearing asset of limited supply may trade higher or lower than the underlying asset depending upon other opportunities to earn interest on the same asset...The primary concern of Steem feed producers is to maintain a stable one-to-one conversion between SMD and the U.S. Dollar (USD). Any time SMD is consistently trading above $1.00 USD interest payments must be stopped. In a market where 0% interest on debt still demands a premium, it is safe to say the market is willing to extend more credit than the debt the community is willing to take on.
The stakeholders adjusting the feed have a big job. They are doing all that they can to keep the SMD pegged to the US dollar. This is actually in their best interest to do so to bring stability (the main goal of the SMD) to the community and help keep all vested stakeholders happy. And because the SMD is tied to STEEM it helps impact the stability of it as well.
In effect, feed producers are entrusted with the responsibility of setting monetary policy for the purpose of maintaining a stable peg to the USD. Abuse of this power can harm the value of STEEM so SP holders are wise to vote for witnesses that can be counted on to adjust the price feed and interest rates according to the rules outlined above.
We have not really covered witnesses, but that is the term for the voted stakeholders that perform these tasks for the community.
Thanks for going through this with me. If you have any insights or corrections let me know. I am enjoying the learning journey and documenting it for the Steemit community!
You deserve more votes. Can't wait for your second part.
Thanks! Feel free to Resteem! :)
I hope to go over more in the next few days.
Just did!
Thank You.
No problem! 👍