Simple Examples of Steem's Money Flows

In this post, simplified examples are given to help understand the basic money flows of Steem.

Assumptions

1. The market cap of STEEM is fixed to $1 million
2. No moves(power up/down) between STEEM and Steem Power
3. Annual inflation rate is 100% (approximate to the real number)

Basic Scenario

I will first explain a basic scenario in which 90% of STEEM exist as Steem Power and only 10% is liquid STEEM. The total supply is 100k STEEM, so a unit price of STEEM is $10. Let's assume that a Steem Power supply measured in VESTS is 1,000 M(illion). Since 90% of STEEM is in the VESTS fund pool, the exchange rate is 90 STEEM/VESTS, and hence the VESTS price will be $900.

• Total STEEM supply: 100,000 STEEM
• STEEM: 10,000 STEEM
• Steem Power: 1,000 M_VESTS (Fund pool: 90,000 STEEM, so the exchange rate is 90 STEEM/VESTS)
• STEEM Price: $10
• Steem Power(M_VESTS) Price: $900

After a year, with a creation of 100,000 more STEEM, we can find 90% of newly created STEEM went to Steem Power fund pool and 10% went to Rewards fund. With the doubled supply, the STEEM price will be halved to $5 ($1 million / 200,000 STEEM). However, since Steem Power fund pool increased to 180,000 STEEM, the unit value of VESTS does not change ($5 * 180 = $900). Additionally, we can see that $50k (or 10k STEEM) rewards are created. So where does $50k come from? The answer is STEEM holders. Their wealth decreased by $50k, while contents providers and curators got $50k.

• Total STEEM supply: 200,000 STEEM
• STEEM: 10,000 STEEM
• Steem Power: 1,000 M_VESTS (Fund pool: 180,000 STEEM, so the exchange rate is 180 STEEM/VESTS)
• Rewards: 10,000 STEEM equivalent
• STEEM Price: $5
• Steem Power(M_VESTS) Price: $900

What If All STEEM Is in Steem Power?

In this extreme case, 100% of STEEM exists as Steem Power. The exchange rate is 100 STEEM/VESTS, so the VESTS price will be $1,000.

• Total STEEM supply: 100,000 STEEM
• STEEM: 0 STEEM
• Steem Power: 1,000 M_VESTS (Fund pool: 100,000 STEEM)
• STEEM Price: $10
• Steem Power(M_VESTS) Price: $1,000

After a year, we can find that the value of Steem Power decreased by 5%. That is, under higher Steem Power ratio than 90%, Steem Power holders pay for rewards (Surely STEEM holders too).

• Total STEEM supply: 200,000 STEEM
• STEEM: 0 STEEM
• Steem Power: 1,000 M_VESTS (Fund pool: 190,000 STEEM)
• Rewards: 10,000 STEEM equivalent
• STEEM Price: $5
• Steem Power(M_VESTS) Price: $950

Too Many Liquid STEEM

What happens if exceed amount of STEEM is floating around? I assume that 50% of STEEM is liquid and the others are in Steem Power.

• Total STEEM supply: 100,000 STEEM
• STEEM: 50,000 STEEM
• Steem Power: 1,000 M_VESTS (Fund pool: 50,000 STEEM)
• STEEM Price: $10
• Steem Power(M_VESTS) Price: $500

After a year, interestingly, Steem Power holders obtained more wealth (in total $200k) and contents providers got $50k. This money comes from STEEM holders pocket. Their wealth a year ago was $500k but now its only $250k.

• Total STEEM supply: 200,000 STEEM
• STEEM: 50,000 STEEM
• Steem Power: 1,000 M_VESTS (Fund pool: 140,000 STEEM)
• Rewards: 10,000 STEEM equivalent
• STEEM Price: $5
• Steem Power(M_VESTS) Price: $700

Conclusions

In these simple examples, we discovered that rewards mainly come from STEEM holders by depreciating a unit STEEM value. But if Steem Power has exceeding weights (more than 90%), Steem Power holders also pay for rewards. It should be noted that if the ratio between STEEM and Steem Power (in terms of STEEM) is under 90%, there is a incentive to convert STEEM into Steem Power until the ratio gets to 10:90. Currently, the ratio is about 96.4%, so I expect there will be more Power downs until it's balanced.

Hopefully this post helps!