How anonymint and Bacchist both got it wrong the real story about steem interest
this is a response to these two threads:
https://steemit.com/steemit/@anonymint/it-s-so-easy-to-become-a-millionaire-with-steem
https://steemit.com/interest/@bacchist/steem-power-interest-is-not-compound-interest
@anonymint and @bacchist both take vastly different positions on what sort of interest Steem power pays. They actually both have a lot of people agreeing with them, although they both happen to be incorrect.
Why Bacchist is wrong (steem power does increase exponentially, and is like compound interest)
Steem power is based on vests. The "interest" offered by steem power is the an increase in the rate of conversions between vests and SP. That rate doubles every year. That is an exponential increase. Not a linear one.
Hence, if i have 1 million vests now, it might be worth 200 steem. A year from now, it would be worth 400 steem . A year after that, it would be worth 800 steem.
This is compound interest. Specifically, this is 100% APR, compounded annually. The fundamental, operational difference between compound and non compound interest is that compound interest is exponential, while non-compound is linear. In a non-compound interest situation, the increase in value would be (for example) 200 today, 400 after 1 year, 600 after 2 years. That is to say, our yearly increase would be the same every year.
Why anonymint is wrong (Its compunded annually, not monthly)
Anonymint overestimated the amount we would make on interest because, although he was right about the interest being compound, he calculated it as though it was 90% apy compounded monthly, when, in fact, it behaves as though it is 90% APR compounded annually. Monthly compounding is much more common in 401Ks (which is what the calculator hes using is based on)
How much could we expect our account to be worth if we invest as anonymous describes?
Lest start with the 100 steem... it doubles 5 times to 3200 steem.
the half steem we put in every day adds up to 182 per year. Lets call it 200 a year for easy math. This additional money were putting in will also double every year. Obviously money that we put in at the beginning will have a chance to double more.
the first 200 doubles 5 times=6400
the second 200 doubles 4 times=3200
the third 200 doubles 3 times=1600
and the fourth 200 doubles 2 tmes=800
and the 5th 200 doubles once.=400
so the total after 5 years is 15600 steem, worth around $62.4K. But most of that is blogging rewards, which is really principal, not interest. THe initial deposit by itself only just accumulating interest without extra money coming in is only worth around $12.8K
Also its important to remember that all of this interest goes away every 3.5 y ears when steem is reverse split 10:1.
This part is very confusing, because my understanding is that VESTS relate to your Steem Power (SP) balance, so comparing what it will be worth in USD is impossible. Can you please restate using SP instead of USD to help me understand?
damnit... yes that was a typing error. you are absolutely correct
it should have read Hence, if i have 1 million vests now, it might be worth 200 steem. A year from now, it would be worth 400 steem . A year after that, it would be worth 800 steem.
Nothing "goes away" due to the reverse split.
And of course they are both wrong cause there is no "interest' involved in the whole thing.
Well, the reverse split effectively rolls back the clock, iiuc. So if we start with 100 steem, it doubles to 200, then 400, then 800, then sometime in year 3 when it would hit 1000, it 10:1 reverse splits and were back with 100. Am i misunderstanding?
It is wrong to thing about the whole deal in terms of interest to begin with... maybe this will help you see why you have say 100 worth of X before and after the split.
The same way the company would be worth say 100 mil before, after or with no stock split.
Yeah, i realize its not really correct to think about it like interest. But if youre already making the analogy, and already calling it "interest" then you have to realize that all the so-called interest that youre gaining actually disappears.
https://steemit.com/interest/@sigmajin/understanding-the-steem-economic-system-vests-sbd-steem-dilution-interest-and-all-those-crazy-things everything you need to know about steem-conomics
In the end, what I feel is that if two smarts people who seemed to have taken some time to understand the economic principles of Steem cannot agree on what these principles mean, how can an average people can understand it?
From my perspective, an assumption is being made when the value of a share is fixed to some number in USD. The USD amount wouldn't change if you do, say, a stock split. If 100 shares of stock is worth $100 and you split the stock so you now have 200 shares of stock, it still equals $100. When someone say 200 shares is now worth $200, IMO, they made an assumption about the growth in demand for the share which would have had to happen to support the price.
Making predictions about a potential for compounding demand for a stock which is being spit every year tells us very little.
We can't accurately connect any of this to USD unless we also talk about how the change in supply of STEEM impacts the demand for STEEM in USD terms.
Also, IMO its absurd to speculate on crypto prices 5 years out. The fact is no one has any idea.
This we agree on. :)
Which is why I've been calling for a bit of humility all around along with less name calling and such. Some of the threads discussing this are quite sad, IMO.
ok i see from the post above what the disconnect was... i wasn't saying it was fixed to a dollar amount.... i just mistyped $ instead of steem because i was hosin.
Once we make any connection to USD outside of STEEM we're including a lot of assumptions about the market demand for STEEM in USD terms. If we're doing that, then we're completely confusing the internal mechanisms built into the code regarding share dilution which directly impacts share holder value. That, to me, confuses everything.
It's quite possible the net result of all this does end up appearing like exponential growth. If that does happen it will be because the demand for STEEM was growing at a rate to support that result.
Yeah, i agree. Especially trying to predict valuation 5 years out... theres literally no precedent for that in crypto. this article from early 2014 is what i like to show people who try to make long term predictions about crypto prices.
Good to see we both make typos within our threads lol :(
If you want to do the stock market analogy, think of it like this.
A vest is like a stock. A share of steem as a whole. The Conversion rate between vests and steem is like the value of the stock.
The problem is that unlike a company, which has a fixed amount of shares that represent a fixed fraction of company ownership, steem has an ever increasing number of vests. So my 1M vests will represent a smaller fraction of ownership tomorrow than it did today. Thats what they mean when they talk about dilution.
Steem power "interest" is like a stock dividend, a payment made by a company to its shareholders. (which, btw is exactly how any company that issues new shares makes up for dilution)... To compensate shareholders for the decreased percentage of ownership due to the creation of new vests, steem pays a dividend on existing vests in the form of increasing the steem power value of those vests.
The reason its never explicitly described this way in the white paper is because there would be hell and blood to pay with the sec if they did that.
This, I think, is the problem I see being made. That is not the value of the stock if someone is trying to make a comparison to USD value.
Steem Power as a stock dividend doesn't mean anything in terms of the value I see being discussed here unless it can also be exchanged for that value. Whether we call it a dividend or not, if the number of shares of stock is increasing then the USD value of their holdings should be proportionally decreasing, all things being equal. This is stock dilution, which I think is a much better way to think about this than "interest" (even though I've incorrectly used that term myself many times).
OK, minor correction. The conversion rate between steem power and vests is like the share buyback value of the stock. How much money the company is willing to give you for the stock.
Its kind of confusing, because theyre denominated in the same unit (steem) but steem isnt the same as steem power. Steem power can't be sold, it can only be powered down, which is when you convert those vests in your SP balance to actual steem at a rate of 1% of your SP balance per week, but thats really all they are is the ability to create steem, not steem itself.
Ah, but you just did it again. You mentioned "money" which exists outside of this ecosystem and can only be brought into it via an exchange which then determines the value of the cryptocurrency.
Just because Steem Power can't be sold doesn't automatically mean the monetary value (in USD) will remain unchanged as more Steem Power is created. Does having it vested impact the discussion and the assigned value? For sure, but I don't think definitive statements can be made on either side like we're seeing now.
Whenever the topic "[hyper]inflation" comes up, the reverse split 10:1 is supposed to answer the question. But that is lazy, IMO. The interest does not "go away".
Let us take your math (and the numbers resulting from it). You start with 100 Steem and 200 Steem p/a and arrive at 15600 Steem after 5 years, and after the Split, you have 1560 Steem - from what have initially been 1100.
Interest: 42%.
I start with 1000 Steem and have 32000 Steem after 5 years. Being ten times as powerful, but only half as efficient, I get to earn 1000 Steem p/a, which become 62000 Steem in 5 years. So I get 94000 Steem, and after the Split, I have 9400 - from what have initially been 6000.
Interest: 57%.
Doing half your work, I grew relatively richer than you. Where's the error in my math?
I am a tool with the typing today. the reverse split is every 3.5 years.. it happens on the dime when the "interest" has multiplied the exchange rate by 10. So you start (for instance) at 1m vests=100 steem. it doubles to 200. then to 400, then to 800 after 3 years... sometime in the third year, when it would hit 1000, it reverse splits back to 100 and starts the cycle over again. The steem value of X vests will always be between X and 10X, where X is the starting point and 10X triggers the reverse split back to X. IDK where we are in the doubling thing now, but if 1M vests=250 right now, the most 1M could ever be worth is 2500 (but probably less than that, because were not at the very beginning of the cycle)
The point here is that there is a fixed, cyclic range for vest conversion.
Also, part of your problem is youre thinking of steem power as being steem. Its not. That number in your wallet is made up. Your steem power is denominated in vests. The number in your wallett is how much Steem, inc is willing to pay you to buy back shares of its system, if that makes sense.
It is not, I know. I just wanted to keep it simple, for argument's sake, and used your numbers and verbiage. Ideological Turing Test and all. There is no art in trying to complicate and obfuscate.
My point still stands. The conversion is not the answer to the question. Says the whitepaper:
My mistake was to take the "3.5 years" as gospel; it has nothing to do with rotations around the sun, it has to do with "blockchain time".
Thank you for the discussion!
This still doesnt provide undeniable proof that your steem essentially doubles over the year.
that much is in the white paper. im pretty sure thats basically common knowledge... thats why i didnt document it... basically it happens because the vest to sp conversion rate doubles every year... i think