Where does the money come from ... part 2 of my steem economic model

This post is sort of a part two to this post, where i examined the interworkings of the steem economic system.

Since then, ive done a little more research, and figured out how a lot of the cogs and sprockets intermesh, or at least how they appear to intermesh. The system they set up is very elegant, and somewhat difficult to see as more than the sum of its parts until you sit around with a model and move things around and give it some thought.

I should mention that so far as computer programming goes, i never got much beyond line number basic. So i have no way of knowing if the code will actually back up anything i say. What I'm describing is a model -- an explanation of what money is going where, with a side order of speculation about why. Models, however, can be valuable even if they are incorrect. Most of what we know about the behavior of electrical current, we learned using the (incorrect) "conventional flow" model. I think information like this is neat, and worthwhile regardless of the situation. But i also think its timely... a big part of the accusation that steemit is a "ponzi scheme" comes from a failure to comprehend where the money comes from.

My other model, like every model i write, had Moe and Joe as its main characters. This one will too. But first we need Dan. I don't really need dan to explain how the money moves, but I do need to start with non-zero numbers so im not trying to devide by zero in my first transaction. Dan has 200 million vests, and 720 steem. In addition to dan, there is also a vault. The vault has 48000 steem in it. The steem in this vault doesn't belong to anyone... its locked away in the vault. There are only two ways it can leave, through power down or through redemption of SBD. For now, its just those two. Also, don't worry about where this came from. Its like the genesis block. Its just there. The reason I'm starting with relatively large numbers is that none of this will make intuitive sense if the blogging rewards and such are like 30% of the total money in the vault. This is what the steemiverse looks like right now.

What is a vest? Its a certificate that can be exchanged, with certain conditions, for a certain amount of steem in the vault. If you have X vests, and there are Y vests in the steemiverse, you are entitled to the total amount of steem in the vault times x/y. So there are three types of things so far in the universe. There is steem in the vault, free steem that exists outside of the vault, and vests that exist outside of the vault and represent ownership in steem inside the vault.

Vests and steem in the vault are not the same thing. Think of it this way. You go to a casino. You have the valet park your car. The valet gives you a ticket that represents your car. The ticket is not the same thing as the car, it is merely something which, in certain circumstances, you can go and exchange for the car.

In addition to being exchangeable for steem, vests have another value. Ones share of total vests determines the weight of his or her vote in things like blogging rewards and witness election. This is important. Vests have 2 kinds of value in them, voting value based on the total number of vests in circulation and steem value, based on both the number of vests in circulation and the amount of steem in the vault.

Dan's 200M vests represent a percentage ownership of the steem in the vault, and also a percentage voting power. Since there are no other vests, that percentage is 100%. Since there are no other voters, his voting power is 100%. Note that right now, with just one person in the Steemiverse, the value of those 200M vests will not grow (as it currently does for SP holders). That comes later. As things stand, the model is static. in this case, dans vests are worth (200Mv/200Mv)*4800steem=4800 steem

Now Dan goes public. He sells 240 steem to Moe, and 480 steem to Joe. So moe has 240 steem, Joe has 480 steem Dan has 200M vests and there are 48000 Steem in the vault.

As in our previous example, Moe decides to power up. As you might recall, i put forward the notion in my pervious post that when Moe powered up, he purchased his vests from the universe. But, in fact, he buys them by putting money in the vault. Moe puts 240 steem in the vault to buy vests. The rate of conversion between vests and steem is set by the ratio of steem in the vault to the number of outstanding vests. As youll recall, there were 200M outstanding vests, and 48000 steem in the vault, which sets the rate at 1M vests=240 Steem.

Although this changes the actual equation for dan, it does not change the value of his vests as they convert to steem. As youll recall, before it was (200mv/200mv)48000 steem=48000 steem. Now, it is (200mv/201mv)48240steem=4800 steem

It is important to note though that although the steem value of Dan's vests do not change, Moe's exchange of steem for vests does diminish Dan's voting power a little bit. Whereas Dan used to have 100% of the voting power, he now only has 99.5% of the voting power.

He will be compensated for this loss later on. Just keep in mind for now that at this point in the model, Dan loses out when Moe buys vests.

In our previous example, we fast forwarded a year, and Joe had to buy in at a reduced rate. If, using just the parts of the model that we have thus far introduced, we fast forwarded a year right now, Joe could also buy the full 1M vests for 240 steem that Moe did a year earlier. The model would still be static. IN this incomplete steemiverse, joe could exchange 240 steem for 1M vests any time he wished, and it would not effect either the conversion rate or the value of Moe or Dan's vests

So now lest introduce a third actor into the system. A miner, well call him Bro. ANd a fourth, a blogger. We'll call her Flo. Now our miner is mining two things, steem and vests. Lets talk first about the vests he mines, because the whole point of him mining steem is to offset the negative effect of him mining vests.

The vests mined by the miner go to pay for his POW, blogging rewards, curation rewards, liquidity rewards (though i understand theyre now gone). For simplicity's sake, lets say that the miner is giving vests only to himself and to flo, for blogging and curation rewards. We'll say that he gives Flo 100K vests and himself 100K vests. Now keep in mind that right now, were not talking about him mining or giving away or creating steem, just vests.
Since the miner is creating vests -- new shares in the ownership of the steem in the vault, he is devaluing the existing shares of all the current shareholders. For example, in this case the value of Moe's vests went down by .24 steem

He is also diluting the voting power of all vest holders. For example Moe's 1M vests was worth about .4975 percent of the total voting power before the new vests were created. Now, its worth about .4970 percent.

In order to compensate for that dilution, the miner also mines steem. This is rather interesting, as its something ive never before seen specifically mentioned, but all the steem mined by the miner starts out in the vault. At least as far as I can tell, all newly created steem begins in the vault.

Now, lets talk for a moment about how much steem the miner could put in the vault. He could put 48 steem in. That would be the exact number necessary to compensate for Dan and Moe's losses (about .24 steem for Moe and about 47.76 steem for Dan). But there would be a problem with this. Because the newly created vests would also reduce Dan and Moe's voting power. Moe, who used to have .5 percent of the voting power, would now have very slightly less than .5%. Remember how dan kind of got screwed when moe bought that 1M vests, becaue he lost some of his voting power? This steem is also going to help him (and all other steem holders) make up for the voting power they lost there.

So rather than merely compensate Moe and Dan for the financial loss, we must also compensate them for the loss of voting power occasioned by the creation of new vests. Obviously, we can not do that by distributing more voting power, because 100% is a fixed number. So we do it by increasing the amount of money in the vault. for every vest created through mining in this fashion, 10 vests worth of steem are created and placed in the vault at the current exchange rate. This is where the 9-1 number comes in

So in this case, Bro mined 200K vests to give to flo and bro. Now, as a concurrent part of the mining proccess, an amount of steem worth 2M vests is created as well. This steem goes directly into the vault.

Two things happen in this case to Moe and Dan.

1. They lose a certain percentage of their voting power, because the creation of new vests for bro and flo dilute the value of their voting shares.
2. In compensation for 1, more steem than is necessary to keep the exchange rate between steem and vests is added to the vault. This effect is a monetary (in the form of steem) compensation for the voting power lost when new vests are created.

So in this case, Bro sends 2M vests worth of steem, or 480 steem to the vault. This, btw, is where the 9-1 ratio used in the white paper comes in. The miner would have to send 48 steem to the vault in order to hold the financial system in stasis and keep everyones money value the same while degrading the voting value of SP holders. But instead he sends that 48 to hold the system in check, plus 372 additional steem to increase the steem value of SP holder vests.

Now this is a key concept, and its fucking brilliant. It hit me in the middle of doing the below graphic.

Moe and Dan are selling their voting power to Flo and bro in exchange for a share of the mined steem. Flo and bro are buying that voting power, but not with steem, with their contributions.

Go back up and reread that... think it.

Newly mined steem is being used to incentivize the transfer of voting power from those who have it to those who make valuable contributions to the system (or have nice boobs)

Now our universe looks like this.

There are several more things to add to the model, which I'm going to do tomorrow in part 3 of this.. but this is already getting super long.

Let me leave you with this though. Imagine that instead of Flo blogging, we actually have 10 Flo's, and over some period of time, they earn 201M vests. Imagine what happens to Moe and Dan.

Dan started with 99.5% of the vote with his 200M vests Moe had .5% of the vote.
After all the Flos get their vest rewards, there will be 402 total vests. Dan and Moe will have 49.75% and .25% of the voting power respectively
However, in exchange for their vests losing half of their voting power, Dan and Moe will actually have the steem value of their vests increase 10 fold... in the real steemiverse, this would take about 3.3 years.

When we talk about bitcoin, its easy to see where the money comes from.... it gets mined, then the miners sell it. In steemit, mined money goes into the vault to mediate the transfer of voting power to the bloggers and other community contributors from investors. The investors get a share of the mined steem in exchange for dilution of their voting power.