Steem Dilution - Why? - Explained

Many users on Steemit do not understand WHY the inflation rate of Steem is so high? This is the exact topic I will be tackling in this post, and I hope for some, I will be able to make sense of the situation.

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First, a Little Background…(it is not imperative you understand these numbers…)

Steem is inflationary just like the $USD and all currencies around the world. Steem is currently in distribution mode, so the % rate at which new Steem is being produced is much higher than it will be 12 months from now. We are currently at 800 Steem produced per minute;

• New Steem Created Per Minute: 800 Steem
• New Steem Created Per Day: 1,152,000 Steem [1]
• Current Steem Supply: 148,354,955 Steem [2]
• The Gross Steem Dilution Rate Today: ([1]/[2]): 0.77%

Of the new Steem Created, Steem Power Holders get 90%, the other 10% get paid out in Contribution Rewards.

The Daily Dilution rate will fall day in day out until we hit 0.19% sometime towards the end of next year (It will continue to fall because the daily amount of Steem created remains static, but the Total Steem in Circulation increases each day). When we hit 0.19%, the number of Steem created per minute will begin to increase in Gross terms to keep the daily Dilution rate at 0.19%.

WHY??

As I usually do, I will consult the White Paper - Page 38-39 to begin with in order to get a good sense of what the founders were thinking when they set up the Steem Economic System. This section is headed up Accounting in Steem;

The increase in the supply of STEEM is mostly an accounting artifact created by the desire to avoid charging negative interest rates on liquid STEEM. Negative interest rates would complicate the lives of exchanges which would have to adjust user balances to account for the negative rate of return of STEEM held on deposit.

Mirroring the blockchain logic exactly would be error prone and complicate integration and adoption. Therefore, STEEM has chosen to never charge someone’s account, but instead to increase supply. This achieves a similar economic result without forcing everyone accepting STEEM deposits to implement negative interest rates on their internal ledger.

From this extract, we can see that, the purpose of dilution in the Steem System is to target Liquid Steem holders. Liquid Steem holders have the ability to cash in their holding at a moments notice, and don’t need to commit, or contribute to the Steemit platform to do so.

Looking at Page 8 of the White Paper Steem is Described as follows;

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. Once STEEM has been purchased it should be converted into SP or SMD to mitigate the impact of dilution over the long-term.

Now, when answering the question Why? It all comes down to incentives and fairness.

The Steemit system incentivises users to Power Up in order to avoid dilution. This actions is a commitment to the Steemit Platform. In exchange for a long term commitment, users avoid high dilution rates attached to Liquid Steem. They do however forgo liquidity in exchange.

What this means is, committed long term user/investors stand to gain far more (or be diluted far less) than passive users who are not prepared to commit.

This contributes to the Steem Economic System being a Fair Meritocracy, incentivising and rewarding long term commitments, and Penalising short term Money Grabbing mentality.

While I am here, thought I would mention…

The 10:1 Reverse Split

Every 32,000,000 Blocks (approx 3 years) the Steem Network performs a 10:1 reverse split. This means that everyone’s holding of Steem will be divided by 10, however price of Steem at Exchanges will be multiplied by 10 to counteract this change.

The reason for this is as follows;

A side effect of increasing the supply is that the network will require ever increasing levels of precision in its accounting. On average the number of bits required to represent a typical account will grow by 1.3 per year. It will only take 10 years before numbers involved no longer fit within the 53 bit precision supported by JavaScript or the 64 bit precision supported by CPUs.

Over time the magnitude of the numbers involved grows beyond human scale and comprehension; furthermore, the least significant bits have so little economic value as to render them meaningless.

This construct allows the numbers of Steem in Circulation to remain at a reasonable level moving forward into the future. If the Reverse Split wasn’t in place every ~3yrs, the Steem in circulation would balloon to unreasonable numbers quickly.

Always interested to hear you thoughts... Also, if anyone has any requests for future posts from myself, let me know in the comments section..

Post Promotion:

One of my Steemit friends @acidyo is working on helping new users get welcomed into the community. Check his post out here