Steem Power Interest Is Not Compound Interest!
I want to clear up a common misunderstanding.
Some people believe that the interest gained on SP balances is compound interest. That leads to over-the-top claims, such as the one we see here:
https://steemit.com/steemit/@anonymint/it-s-so-easy-to-become-a-millionaire-with-steem
Starting with just a $400 initial investment and generating only a meager $2 (½ STEEM) in daily blogging rewards, the total value of your STEEM POWER could be worth more than $1 million within 5 years!
This is the power of compound interest, as exemplified by the following chart.
But that's simply FALSE.
The fact is, SP growth is NOT compound interest. The principal never changes, unless you add to it through participation in the site. I've said this in various comments, so I'm just going to copy a few of those to save time...
There is no such thing as Steem Power (SP) in the back end. When you power up, your STEEM is converted to VESTs. When you power down, your VESTs are converted back into STEEM. The conversion rate changes over time, though... so that balance appears to be growing. It's showing you how much STEEM your VESTs are worth.
The Steem Power in your wallet is called VESTs behind the scenes. That number doesn't change unless you receive rewards from posting, commenting, voting, or powering up/down. The change in number that you see is a reflection of the change in the conversion rate between VESTs and STEEM.
Steem Power doesn't really exist. It's just an abstraction. The amount of VESTs that are represented by the Steem Power figure stays constant aside from increases due to participation and interaction with the community. The difference is subtle, but it basically means that the growth doesn't resemble compound interest so much as inflation.
There is a big difference between what is happening to your Steem Power balance and what would happen to your credit card balance if you missed a few payments. There will not be exponential growth of the money supply and the attendant hyper-inflation that would bring. It's not going to happen!
To clarify a bit for those that are new to STEEM I will add this detail.
When STEEM pays out 1$ worth of rewards (whether from posting, commenting or upvoting) it simply creates the new units "out of thin air". This has the effect of diluting everyone's STEEM holdings since the supply has increased but your personal wallet's balance has not.
The way to protect yourself from this dilution is to Power Up.
What does this do you might be axkin'?
Well, for every 1$ worth of STEEM created to pay for content & curation there are 9$ worth of STEEM created to send to those that have powered up.
So you should only hold STEEM if you are planning on selling it, or sending it to someone. Don't hold it for a long time since it is being diluted little by little by everyday's payouts.
Power it up and you will lock in your value.
Hope this helps complement the main post!
But this means that SP also gets diluted. So at constant price, if you're inactive, you'll be down after a year. (correct?)
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... of course 1 Steem stays 1 Steem, but it gets devalued against any stable currency. That's what I meant in my original comment.
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STEEM is just a short-term, highly liquid part of the puzzle. I hope people realise it's not designed to be held. In the short term, we may see the exchange market value STEEM highly against the Dollar. But long term, once the 100% inflation kicks in, I expect STEEM to start devaluing.
Steem Power is the best long term investment - but of course not everyone will be OK with waiting 2 years for powering down. It only works if you are invested and believe in the long term success of Steemit. If that comes to pass, powering up now will pay off massively later - no crazy compound interest required.
SP itself does not create a compound interes, but dont you get more curating rewards if you have more SP? That alone creates a compounding effect doesnt it?
Basically anything that earns more money as time goes on and then that increased amount is what makes the money, compounds.
I believe SP has other compounding properties, but all that is needed for a counterexample to disprove an assertion is one instance, which I believe I have done.
tl:dr SP compounds over time
Incorrect.
I mean in the literal sense of you get SP due to simply having SP. the SP is stored as vests which (ignoring any external inputs) stays the same, but the conversion rate from vests to SP keeps going up due to the 9:1 effect. So the fact that SP is actually the current conversion rate of vests using an ever increasing factor could be interpreted as vests dont compound, ie. are static. However, the issue here is that it is discussing SP and not the internal vests and the SP caculated from an ever increasing conversion rate sure looks like compounding, acts like compounding, because it is compounding.
Add to this the effect of SP*log(SP) being your allocation for curating and by any sense of the word SP is compounding, even if the underlying vests would remain static if you never did anything at all.
So, the OP should really correct the misinformation at the risk of getting downvoted should it not be corrected
The internal accounting of VESTS is irrelevant, because it is STEEM that we base the external exchange and market capitalization on. I explained this in my comment.
The point about VESTS is also irrelevant because the value of VESTS are effectively taken from STEEM holders and given to STEEM POWER holders. That is the compounded interest payment.
It is absolutely compounding. The value VESTS represent are taken from one party and given to another. An interest payment is taken from someone and given to another.
WTF ??? Is wrong with people who upvoted this blog!
I downvoted it because not only did he spread lies about me, he also downvoted my blog post.
You are welcome to provide cogent rebuttal. I haven't seen one from you yet.
I'm sorry dude, but you either do not have any idea what VESTs are and what Steem Power is... or you are blatantly lying to people trying to mislead them...
I'm am trying to be as nice as I can here, but what you're doing is just wrong.
Im kind of confused here about the "taken from one party and given to another" thing. Thats not what makes interest compound. Bacchist could have stated it better, but tbh im not sure we're working on the same definition of compounding either
I know when I read "You are welcome to provide cogent rebuttal. I haven't seen one from you yet." I know I need a TLDR
But the conversion rate is increasing linearly, no? That is to say, if i have X amount in steem power, and I don't add any more, the increase in the conversion rate will yield a fixed increase in SP every month, not a linear one. Am i missing something.
Yes, the conversion rate increases quasi-linearly as a function of time, very unlike compounding which is a geometric series that grows super-linearly. The principal, denominated in VESTS, is static. It doesn't move at all unless you are earning additional VESTS by curating or blogging, but that has nothing to do with interests.
recursive... see my other reply... the conversion rate doubles every year.... thats is compounding and thats not a linear increase... ie, the 1m vests is worth 200 now, 400 after one year, 800 after 2 years, etc... thats 100% APR compounded yearly
That is not linear. Anonymint is off on how much were going to make (i think because hes trying to calculate it compounding monthly)
Sounds logical
I'll make this super simple for the standard person that wasn't amazing at math.
Creating the numbers and gains out of air.
You start with 10 sp, at 10% interest a month you have 11 sp.
You start with 11 sp, at 10% interest a month you have 12.1 sp.
You start with 12.1 sp, at 10% interest a month you have 13.31 sp.
Now over time steem may go up in value or may crash and burn and become the value of rdd, diem etc.
That being said today's price does not represent a price seen 104 weeks from now. So while 10 steem may be worth .05 btc currently, your 50 steem in 2 years might be worth .05 or .000005 btc.
https://steemit.com/steemit/@rogue91/steem-power-and-proper-calculations-of-gains
Thank you! That was really helpful.
Thank you for pointing this out :)
I feel like many people have the wrong idea about what this is all about!
I feel like people need to focus more on writing quality content, Rather than the financial factor. If we focus too heavily on the money end of it, We may bring in more spammers.
https://steemit.com/life/@kaylinart/why-do-people-choose-to-fail
This blog is incorrect.
And it is highly insulting for such erroneous misinformation to be highly upvoted while ridiculing me.
I wrote the blog post which bacchist is quoting and criticizing with this post.
Let's begin with the Investopedia defintion:
The Steem white paper says that for every 1 STEEM created for a block, 9 additional STEEM POWER are created and distributed proportionally to STEEM POWER holders. In other words, for every 10 new units of money supply created, 9 of them are STEEM POWER and earned as interest for STEEM POWER holders, regardless how you account for them as a ratio to VESTS.
The interest paid to STEEM POWER holders is taken from STEEM holders, as a percentage of the market capitalization.
The reason you guys are fooled is you are not accounting for the fact that the interest payments are taken from STEEM holders and given to STEEM POWER holders.
I am sorry for those who lack math skills and upvoted this incorrect blog post. Please note your names are listed on the list of upvoters.
There is exponential growth of the Steem money supply. Even if you keep the VESTS constant and account for tokens divisibility as separate parameter, the external unit of exchange are STEEM and the supply of STEEM is growing exponentially with a compounding on newly minted STEEM on every block.
Did you happen to notice that a certain @dan is among that list? You know, the guy who invented this system in the first place? Are you claiming his math skills are lacking, and he doesn't understand what he created? A little humility might be in order here.
Just to be fair, Dan also upvotes plagiarist. So I'm not sure he is actually reading what he upvotes. It's more like he glances at it and calculates, "will normal people upvote this?" and then clicks accordingly. It's like on Twitter when they say, "Retweets are not endorsements". Upvotes are not endorsements, but more a game of whether or not you think other people will blindly upvote a post without thoroughly assessing it's content. ;)
https://steemit.com/steem/@jl777/truth-and-fairness-vs-popularity-what-to-do-when-a-post-that-says-another-post-is-wrong-and-gets-more-reward-than-the-original
As a community do we care more about accuracy or popularity?
from the "voting is popularity contest" by smooth: "Downvotes are widely discouraged except for reporting abuse, which means every non-abuse post with at least one upvote should have an upvote percentage of 100%"
@tuck-fheman would you consider what bacchist did to anonymint's post as non-abusive?
https://steemit.com/steem/@smooth/voting-is-a-popularity-contest
I don't agree with a lot of the upvoting and downvoting on Steemit. People are downvoting for others using what they consider to be a wrong tag on their post or because they posted in a different language and didn't tag it with that language.
Any sort of consensus has been lost in recent weeks due to the influx of new users happy to make up their own set of rules. I'm sure over time it will work itself out just like it did when the 2nd wave of new users hit the beaches of Steemit island.
After people have been here for a month or two they realize what the whales approve and don't approve of, and if they want to make money they will "pander to the whale" or perhaps persuade a few whales to change their minds.
When people's rewards begin to dwindle, they realize they need to change their ways. It's generally only those who have been given a free whale ride for a while that feel like they can do whatever they want without retribution. But once their post start earning $1.28 each, they'll come around usually. ;)
I'm not speaking for Dan, but I think he's said in the past that he upvotes anything that will bring about an open discussion. He many not agree with the post, but thinks it's a topic that should be discussed and in this case it appears he is correct, assuming that is his reasoning behind his upvote.
Yes, that's a good point, but this (I'd imagine) is a slightly different type of article. It only takes a quick scan to see what the content is about.
As far as I understand, VESTS don't change over time unless you curate or post. Steem Power is just a reflection of your VEST holdings given the current ratio of 1MV to Steem Power (234 right now) . To me, it seems like share dilution, not compounding interest. That said, I understand how easy it is to get this confused because I wrote two posts myself on the Steem Power "interest" before better understanding things.
If the money supply of the dollar remains constant, yet we use an accounting ledger which moves dollars from one person to another when an interest payment is made, is that not an interest payment because the total supply of dollars didn't change.
Just because you invent some orthogonal ratio token that remains constant doesn't mean value wasn't transferred. Duh!
Come on guys, I don't have time for middle school math tards.
@lukestokes:
If you call analysis trolling, then yes I am doing analysis at Bitcointalk.org. Some of it is postive for Steem and some of it is critical. Otherwise it wouldn't be analysis.
@bacchist wants me to be 100% loyal. He doesn't want the fact that Steem is an exponential compounding system to be exposed. Which may explain why @dan upvoted his (or may not if @dan didn't even read it).
Yes I am claiming @dantheman can come here and debate me if he feels he is correct. I already explained the math. Let's wait to read a cogent rebuttal.
See also my explanation that this is not simple interest.
Edit: tie-warutho you are wrong. Please stop downvoting my posts!
So if I understand this correctly, interest is generated on the Steem power, just not compound interest?
This is actually quite dated. That was the case at the time, but now interest on Steem Power balances is quite limited. Participation and engagement are the main ways to accumulate SP and SBD. Posting, commenting, and voting.
Thank you so much for your reply. So does that mean that interest is no longer generated on Steem power? I'm trying to steer clear of interest or at least know how interest is being added on (religious reasons).
Edit: misread. So it is generated, but just at a lower rate.
It is generated, but it is less than 2% a year.
It is considered "dilution protection" more than what we typically refer to as interest. Since the STEEM supply is increasing, a bit less than 20% of the new STEEM created goes to existing Steem Power balances, to protect them against inflation.
I am upvoting this because people need to understand. The less 'get rich quick' dreamers there are in the network the better. Lol. I am in this for the long haul and plan to slowly accumulate steem through blogging and commenting and generally being a positive Steemerian. Oh, and also buying as much Steem under 5$ as i can! Anyway great explination @bacchist thank you for your service. 😉
If that was your intent, you should have not been upvoting this blog post.
If you don't want people to invest in exponential compounding systems, then why do you upvote some claim that Steem is not an exponential compounding system, when in fact Steem is an exponential compounding system.
Nice!
You know a lot about the charts. ;)
Looks like a 5 year old scribbling which is about level of his illogical analysis.
Let me explain this another way, which will hopefully end all the confusion.
The debasement of STEEM units is 9/10ths to pre-existing STEEM POWER holders. The other 1/10th goes to new STEEM holders, not the pre-existing STEEM holders.
So if the ratio of STEEM POWER to STEEM is 9 (i.e. SP is 9/10ths of the money supply), then STEEM POWER holders have no gain in terms of the percentage of the money supply due to aforementioned debasement. If that ratio is less than 9, then STEEM POWER holders do have a gain; and if that ratio is greater than 9, then STEEM POWER holders do have a loss in terms of the percentage of the money supply due to aforementioned debasement.
It is a variable interest rate, which can even be 0% or negative, depending on the market conditions.
And that does not factor in the change in market price (and thus market capitalization) due to the debasement.
None of that changes the fact that when the interest rate is not 0%, there is a positive or negative interest rate compounding.
What is a fair criticism of my blog post, is that the effective gains in terms of percentage of the money supply, is much less than 90% APR because the ratio is probably normally closer to 9 than to 1 (or an infinitesimal).
The ~90% APR is always the case comparing the effect of the debasement on pre-existing STEEM POWER versus pre-existing STEEM holders w.r.t. to percentage of the money. However, that is rather meaningless effect, since new STEEM holders are created with 1/10th of the said debasement. Thus the constant 90% assumption of my blog post was an error. Yet also the claim of the OP of this blog that there is no compounding due to VESTS is also in error.
There is a compound interest rate, it is just variable and can even be 0% or negative at times.
Edit: and note afaics that 50% of 1/4th of the STEEM created is converted automatically to STEEM POWER as 50% of the blogging rewards. Thus this will tend to force the ratio to greater than 9 (a negative interest rate), which would mean that much of the debasement is being paid by the STEEM POWER holders.
@anonymint im pretty sure that the dilution caused by steem power rewards to bloggers is supposed to be offset somehow by part of it being paid in SBD, though im not really sure of the mechinism for that yet.
that said, im not trying to be a dick, but you really suck at making your case here, which is easy as hell to explain without bringing in the creation of steem and steem power. I have an MBA and your explanation was so bad you confused me into thinking you were wrong, when you were actually mostly correct. You could have won this argument 20 hours ago if you weren't making it needlessly complex. (see my post above for why its compound, and not simple interest)
Great post ! That's the one I was looking for to clear my mind about the nature of Steem Power Interest's rate
Great post, @bacchist! I feel I'm partly to blame for this misconception because I understood it as "interest" as well, and wrote a couple posts about what I was trying to understand. I know see it more accurately as share dilution over time which holding VESTS protects you from. You and I have had a number of conversations about this and I really appreciate you working it through with me. I'm glad to see you're getting a nice reward for those efforts! $1k+, baby! :)
We're kind of conditioned to think of interest as compound interest, because our financial system relies so heavily on it. I thought of it in those terms until I spent quite a lot of time with it. The economics of Steem are not what any of us are used to!
For the 9 STEEM POWER paid as interest (for each 1 STEEM created) to not be compounding, then it would require that all STEEM balances were forward stock split by the same proportion. But the STEEM balances are not given any new STEEM.
You should apologize to me and remove your downvote from my blog post!