Is Steemit a Scam? It’s Complicated – Test 3

Test 3 in my investigation of whether Steemit is a scam - what happens when the new money stops?

Having worked in the finance industry, (and designed a few investment schemes myself) I’m examining, in a series of post, whether Steemit is a financial scam or not.

To evaluate the true nature of Steemit as a financial scheme, I am using five tests which can be applied to any financial scheme:

1. Who is making money?
2. Who is losing money?
3. What happens when new investment ceases?
4. Identifying the risk factors
5. Evaluating the risks

In my previous posts Steemit passed tests 1 and 2. It passed test 1 with conditions: someone else has to be willing to convert Steem to real world currency and will charge for that transaction.

Test 2 was also passed. Although it is possible for those who invest real world money, but are not prepared to create or curate content, to lose money in Steemit, it is also possible, if I am prepared to ‘work,’ for me to earn money.

Test 3: What happens when new investment ceases?

This is a thought experiment. Examining how the scheme reacts when new investors stop contributing really shows up the true nature of the beast.

So would Steemit immediately collapse, unable to fulfil its promises, like a Ponzi scheme or a recruitment pyramid scheme?

No. Earnings will continue, money is still generated, Steem Power is still distributed.

Do the earnings of those at the top, those with most Steem Power, stop increasing, like in a Classic Pyramid scheme?

No, because the content and curation ‘work; of those below them continue to contribute to their wealth.

However, the wider the membership pool, the less effective every investment becomes: to climb to the top of the Steem Power tree will require greater and greater investment as the number of participants increase. This I consider to be no bad thing.

If we go back to the Commission Based Pyramid model we compared Steemit to in my second test, those who invest money into Steem Power are effectively buying their way higher up the pyramid - buying their way into earning greater commission slices from those below them. The current model of Steemit is not a pure meritocracy, but also an aristocracy.

However, and this is a BIG caveat, there are two different systems in play here:

• The investment scheme
• The content creation and curation scheme

Does it matter? Actually, yes, it does, and here’s why:

As the ability to buy influence decreases, the ability to gain Steem Power by ‘working’ (content creation & curation) gains momentum. Over time, assuming the number of adopters continues to grow, the ranks of the ‘Whales’ will become increasingly dominated by creators and curators – those doing ‘work’. The influence of the aristocracy dwindles and the power of the meritocracy gains momentum, exactly as originally envisioned (or at least as presented to the world at large).

If the design of the developers is true, there has to come a tipping point where the sheer number of participants pushes the platform over the edge into a content and curation meritocracy. In the long run, the investment model which ‘kick started’ the platform will cease to have much relevance – I did warn you it’s complicated.

Those currently in positions of power and influence, (whales/aristocracy) may choose to fight back against the rising meritocracy by only supporting ‘work’ which is seen to provide value to their own wealth. There is already some evidence of this in the current down-voting controversies on Steemit. Capitalism is getting in the way of meritocracy.

However, it is too early to write Steemit off as ‘just’ an investment scheme, because, as numbers grow, the importance of those who create and curate content will increase, and the ‘work’ based model will gain importance.

So Steemit passes test 3 with the following caveat: If new investment ceases, any already invested monies would still continue to earn, provided investors are prepared to ‘work’. Only inactivity results in devaluing investments. Not your classic passive investment scheme.

How will we know if Steenit is more than just an investment scheme? The pressure exerted by developers for members to invest will reveal the true nature and intent.

If, as numbers grow, the pressure to invest also increases: phone calls, emails, adverts, etc, Steemit will be show to be just an investment scheme (so far my in-tray in clear and my phone is quiet). If there is no pressure to invest, then the stated intent for Steemit to be a means to encourage new people to participate in crypto currencies can be believed. All will depend on how the developers decide to react when new investment falls away.

There is, however, another complicating caveat: it could be argued that if the developers are really savvy, they will cast their net as wide as possible on the assumption that a small percentage of new-comers will still invest in Steem Power despite the potential for loss. As we know from numerous spam-scam phishing emails, it only takes a small percentage of people willing to pay $20,000 dollars to transfer Great-Aunt Mabel’s lost millions into their own account, for the whole enterprise to become profitable.

Does anyone care? Possibly not at the moment, but one of two scenarios (or perhaps both together) could sound the death knell for Steemit as a creative community:

1. If a joining fee is ever imposed on new members.
2. If existing members are offered a commission/financial reward for recruiting new members

Be vigilant and in the meantime, ‘work’ hard and have fun.

In the next post, I will identify and evaluate the financial risk factors of Steemit – Is it worth the money?

Image by giphy.com

Other posts in this series:
Is Steemit a scame? Test 1
Is Steemit a scame? Test 2

Is Steemit a scame? Tests 4 & 5
Is Steemit a scame? What I'm really doing here