Understanding the Steem Economic System Vests, SBD, Steem, Dilution interest and all those crazy things.

in interest •  2 years ago

There has been a lot of confusion recently about steem, steem power, interest, dilution and other economic issues. I decided to write a post to help clear it up.

IMO, a big part of the problem is that frequently, the white paper can't describe things with their proper and useful names, because to do so would invite problems with the SEC.

There are Three Types of Assets in the Steem-iverse

And no, @lukestokes one of them isn't relationships.

For this post, i am going to call steem in general: the site steemit, the blockchain the company everything, The Steem-iverse. A big problem with coming to an understanding all the parts of Steem is that there are like 43 different things that are all called Steem, which frequently makes any explanation sound like a econ class taught by Pappa Smurf.

There are Equities
There are Cash Equivalents
There are Bonds

Steem (and only steem) is a cash equivalent

A cash equivalent means exactly what you probably think it means. Its a quasi currency that you can spend, invest, cash out, buy sell or transfer.

check this out:

See the part highlighted in red. Thats my steem. 270.709. I know im a total baller right.

Its very important to keep in mind here that, the part highlighted in red is the only steem in my account, even though the word appears like 4 other times on the page. When you're looking at a wallet, the only real steem is listed under steem balance. Nothing else is Steem. This is important.

Equities (see my vest, see my vest, made of real gorilla chest)

An equity is a stock in a company. In the Steem-iverse, equities are vests. Vests determine your steem power. Just like real world stocks, a vest represents a percentage ownership of the steem-iverse.

steem power is not smurfing steem

Unfortunately, rather than show you your vests the UI lists your steem power as Steem. But, its not real steem. In fact, the number shown there is nowhere on your account in the blockchain. Thats why i have mine covered in noes. What that number is really telling you is the amount of steem it would take to purchase the amount of vests you have right now.

This is very important, because until you understand this, youre going to be spinning your wheels. Steem power looks like steem in the UI, but its not.

So how do you get stock in the company? The same way you get stock in any other company, you buy it. With Steem. Thats what happens when you power up. You're buying vests in exchange for Steem.

Awesome. Ima buy me some vests. How many vests to i get for my steem.

This is complicated. For reasons I'm going to discuss shortly ,the conversion rate between steem and vests increases by about 100% every year. Right now 1 million vests is worth about 240 steem. Remember how i said that that number represents how many Steem it would take to purchase the number of vests you have right now? Well, if you watch it for a bit, that number keeps increasing. Thats because the price of a vest is increasing. The rate of increase is such that a vest will be twice as expensive a year from now as it is today.

The Dilution Solution and the 1.9% Markup

So why double the conversion rate between steem and vests every year, and make things complicated? Why not simply keep it steady?

This goes back to vests being like stocks. Imagine there is a company that issues 1000 shares of common stock. I buy 100 shares. Those shares represent a percentage ownership of this company... in this case, 10% ownership. Now, imagine that the company needs to raise money, and decided to issue an additional 200 shares. First of all, no. This will not cut the price of the shares -- it doesn't work that way. Maybe it should, but it doesnt.

However, i have a problem. My 100 shares, which used to represent 10% ownership (100/1000) now represent about 8.3% ownership (100/1200). This effect is called stock dilution. I've basically had 1.7 percent of the company taken away from me.

When this happens with a real company, what the company will do is offer a cash dividend as compensation for that dilution. and pay for that dividend with proceeds from the new stock issue.

So lets say my stock is valued at $5 when the new shares are issued. Rather than charge $5, the company might charge $5.04 for the new stock. with the extra .04 from 200 shares, they would have $80.

With that $80, they could give about $0.08 to each share holder for every share that got devalued. So in this case, I would get $8 back for my on my 100 shares. Since $8 is about 1.6% of my $500 investment, its fair compensation (well close i wasnt wiling to figure out the math for 1.7%) for the dilution of my percentage ownership.

The exact same thing happens with vests. Remember, vests are like stock. They represent a percentage ownership. When the steemi-verse awards stock to others (like blogging rewards), the percentage ownership represented by my vests is diluted. So the 1M vests i had that used to represnet a certain percentage ownership in the company, now represent less. In order to compensate me for that dilution, it charges new buyers more to purchase the stock. By doing so, the steemi-verse is able to pay me more if and when it buys back my stock.

Steem power "interest" -- Nothing is Created

So how does the "interest rate" work? Lets consider 2 users, @moe and @joe. For the purposes of this example, assume that @moe and @joe are the only two users in the steem-iverse

Moe and Joe both have 240 Steem. Moe powers up right now, buying 1 million vests. Joe does not power up.

So right now Moe has 1 million vests, and joe has 240 steem

now we wait a year.

Moe still has 1 million vests. Joe still has 240 steem. Nothing has changed. Now, joe decides he wants to power up too, because hes sick of moe being a douchey whale.

However, the conversion rate between vests and steem has doubled. Joe's powerup one year later will only purchase about 500,000 vests (half as much as moes powerup for the same amount of steem did).

Now, if the UI showed what was really going on, it would show that Moes steem power had stayed the same (1M vests) and joes purchase of steem power came at a rate twice as high, giving him half as many vests (500,000 vests)

So in real terms, their steem and steem power would look like this
today moe:0 steem, 1M vests joe 240 steem, 0 vests total today=240 steem, 1M vests
1 year from now moe:0 steem, 1M vests joe 0 steem 500, 000 vests total 1 year from now 0 steem, 1.5m vests

However, they decided to make it so that the UI represented the decrease in the vest purchasing power of Joe's Steem, as an increase in in the value of Moes power. thats what they mean in the white paper when they say

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

So the Ui would display (somewhat incorrectly)
today moe:0 steem, 240SP joe 240 steem, 0SP total today=240 steem, 240SP
1 year from now moe:0 steem, 480SP joe 0 steem 240SP total 1 year from now 0 steem, 720SP

This makes it appear as though there was an increase in the total steem, because they both started with 240 for a total of 480, but 1 year later, the total SP was 720. But this is not real. What really happened is joes value halved. But rather than show it that way (because joe would be pissed) they represent it by saying that joes value stayed the same and moes value doubled.

To put it simply, they are showing moe 480 steem for his SP because thats how many steem it would take to purchase the number of vests he has right now.

What Happens When You Power Down

So moe has 1M vests one year from now, and the UI shows him that he his steem power is 480 steem. What does it mean when he powers down?

As i mentioned before, Vests are an equity. Like stocks. But more importantly, vests are like restricted stocks. Restricted stocks have to be held for a certain time period before you can cash them out. (When your restricted stock is eligible to be cashed out its called "vested", which is why they call them vests to begin with). Specifically, you can only sell 1% of your vests per week.

When you power down, the Steem-iverse agrees to buy your stock back witih steem at the current conversion rate, as it becomes eligible to sell. The money for this buyback comes from two places:

  • Other people paying steem to buy vests (other people powering up)
  • issuing bonds (more on that later)

The important thing to understand here is that your decision to power down does not transform your vests into steem. It does not create anything that wasn't there to begin with. Your decision to power down creates nothing at all. You are merely selling your vests for steem, the same way you bought them for steem. Nothing is created. The Steem used to buy your vests would exist wether you powered down or not.
of Moe and Joe. Lets say that after Joe buys 500,000 vests for 240 he goes, gets some bitcoin, buys 240 more steem, and uses that steem to power up another 500,000 vests.

Now, moe and joe both have 1 million vests. Moe paid 240 steem for his 1 million, and joe paid 480 steem for his 1 million.

Now moe decides to power down. For a moment, lets ignore the weekly payouts and assume he can power down immediately. He would get 480 steem for his 1M vests, because that is the current rate of exchange (remember were a year in the future), which is double the amount of steem that he paid. This extra steem that he gets is a cash dividend, paid to him as a compensation for the dilution of the percentage ownership.

But, we have a problem. What if joe also decides to power down? In our example, these were the only two users in the steemi-verse. Therefore, the steemi-verse only has 240 steem to pay him.

Steem Backed Dollars are Bonds


A bond is basially an IOU. A SBD is an agreemnt that you will allow steem to borrow $1 worth of steem now, in return for an IOU paypable on demand for $1 worth of steem in the future. So a Steem backed dollar is really an IOU for one dollar worth of steem.

Now in reality, Steem would not pay a power down with SBDs (it would use them to pay other debts, like blogging rewards), but the purpose remains the same, to provide a steem buffer in case a short fall arises between the amount of vests being sold and being bought.

Well thats a giant wall of text. Any questions?

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Hello, thank you for the very interesting post. Maybe I have a good post for you with a chart, where you can see the correlation between Steemit activity values and Steem price: https://steemit.com/steem/@sevenseals/steem-statistic-charts-week-53

And here is a post about SBD price , SBD supply and SBD inflation and how it correlates: https://steemit.com/steem/@sevenseals/new-chart-steem-dollar-price-and-steem-dollar-supply-calculation-of-sbd-inflation

Hope you enjoy it.

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Very nice explanation. I learnt of this platform several months ago and am regretting only getting to play with it since last week. This is like a real marketing course right in front of you instead of sitting in a lecture room listening to blah-blah. I'm really hooked about strategies that can get us newbies climbing up the SP ladder. The idea that you can even loan some SP from whales really fascinates me.

Thanks for the explanation.

Awesome post, really, this needs more up vote.

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This is by far the best explanation I found about Vests. I have been searching for 2 hours now.
I wish I could give a useful upvote. I can not even resteem it :(

Thank you @sigmajin for the great post, and thank you @jesta for giving me the link to it.

BTW, Did any of this change with HF19 ?

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I think they need to allow resteems no matter how old and the author/curation awards go on for ever but decrease over time instead of only 7 days.

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MUCH MORE

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A really useful post, and the best explanation that I've found by far. As everyone has said, it deserved a higher reward. Can it still be resteemed by someone? Would that allow you to take another set of rewards from it? I haven't tried, because you mention below updating... Am following you so will watch out for more. Many thanks!

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Was just linked here. Why do posts like this get 20 bucks... the world will never know.

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Such an old post! Good one though.

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Correct me if I am wrong. The post is at the moment 2 years old so at the time of writing the post STEEM price was much lower so the up votes were not as "powerful" for that reason the author's didn't get as big pay out. Second reason is that the post won't get any rewards after 7days. Up votes will positively influence the repetition score though!

Sometimes I feel these need reposts thanks for the explanation

What is steem? Jk :-) Great post. I will have to read a few more times. Thanks!

That helps a lot! Excellent post!
(pity we can't upvote it anymore.... only $23.86.... This is worth MUCH more!)

excellent work thanks a bunch

Thanks for posting this , It is the best explanation of the relationship and meaning of STEEM , Vests and Steem dollars that I have come across. I took @masteryoda advice when gave me a NOOB smakedown for asking a NOOB question on his stats post...

Thanks for the info! This post needs to get out there!

I didn't understand why SBDs were necessary. It is now clear for me.
And the explanation of Vests is excellent. Thank you.

i wrote a part two to this... accidentally posted it under a diff account that i was logged into to fight in the bot wars...

https://steemit.com/economics/@chiefjay/where-does-the-money-come-from-part-2-of-my-steem-economic-model

Man, what a great post! I'm so sorry I missed it originally. It definitely deserves more attention.

And no, @lukestokes one of them isn't relationships.

And thanks for the shout out! hahahah! (For those missing the reference, @sigmajin is referring to this post of mine).

I'm sorry this didn't make it into the #bitcoinpizza challenge! It would have done very well. I'm adding you to my follow list for sure so I don't miss the next one. Very well done!

Side note, though relationships may not be directly considered a currency, they directly influence one's ability to obtain currency. Just like Steem Power and SBD are not directly STEEM, they definitely have a conversion relationship to STEEM. Same goes for relationships here. I hope you make a bunch of amazing relationships so your relational currency can convert into more well-deserved Steem-iverse currency!

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actually. reading back over this i had so many things wrong... Read the other one... and TBH my conversation with you in other threads is what really got me thinking about this.

And yeah, i get your point about relationships... its just such such a van dreissen thing to say that i couldnt help a tounge and cheek jab at it...

Thank you! Best post I've found so far on this. I have a decent understanding of banking and the monetary system in general, this is awesome and super easy to relate. I'm looking forward to going and reading the second post that lead me here. It's by some chief guy? Maybe it's not the same person, either way it lead me here so I am supremely grateful.

Awesome awesome work.

EDIT Same person

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very welcome... glad to be of help...

Thank you for the clear information, it helped me a lot to understand the economics of the system.
So it means that if STEEM price:
-Stays the same along the year, we can make dividends as compensation.
-But if STEEM price decreases it will kill the dividens, leaving the amount to cash out almost the same as the begining?

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Well yeah with any position that youre going to hold for two years (especially one thats in a coin that just came into being a few months ago), price fluctuation is a danger. That said, you can actually take a pretty significant hit on price and still break even. At least in theory, over two years you should break even even if the price of steem goes down 75%.
THat said, one of the interesting things about the "bond" (and, in fact, one of the things bonds are used for in real life) is that its a hedge against the price of steem going down. So, for example, lets say i put $100 in Steem Power and $100 in SBD. If the steem power drops in price by 50%, the steem value of my SBD doubles ($1 now buys twice as much steem)

Fantastic post. Been here a few weeks and this is the best explanation I have seen so far. I am very impressed by what Steem is.

Awesome explanation. Much better than most others. Wonder why so less upvotes.

Great post...... Explains much.....

great. Very helpful. as a new user I think this should be promoted. the entire system is a bit obscure, even after reading the whitepaper, so this is really nice. good work!

Great information , this might of interedted for @kerubez

Really good post, good job. Still really helpful today.

Great job! All in one place! Thanks a lot. Wish I could resteem and upvote this because of long time period, but now I will follow you. Thanks again!

Hello from 2017! Frankly saying it's kinda hard to figure everything out.
Thank you for that information and your hard work!)

A quick note on this. I am not as sure as I once was about whether vests transform into steem and vice versa or whether there is an actual exchange with the steemiverse.... im looking into it, but wanted to clarify

Very good explanation

Thanks for your valuable posts. Up-vote ^^

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I like this explanation :)

It will take time, but I will get it. Thanks for sharing this.

good post

very helpful to understand the VESTS value in my account. Refering to the stock market helped me a lot to get it. Thank you for detailed explanation for the community! Now i know i need much more VESTS :)

This VESTS thing was voodoo to me, now I understand it better. So, it's best to keep powering up and in a year or two collect more STEEM when powering down!?

Thanks @sigmajin for such a clear explanation of STEEM economics!

excellent & didactical for geeks &dummies

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in the single electron universe nothing is impossible ...gratifying self reply

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of course some already will use cyberbots to create endless chains

This is just what I was looking for. Thanks for taking the time to spell this out!

Thanks for explaining the vest aspect of Steem. This is so practical.

That's a very very very good explanation with nice examples!

Thank you for this... I may need to read it more than once though :-)

How do we check how many vests we have?

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https://steemd.com/@jackolanternbob

its listed under "vesting shares" on the left hand side. there is no direct way on steemit that i know of.

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Why does that website always say node is down for maintenance?

you helped me understand it better and I'm in my second year of steemit. thank you very much.

Interesting discussion. Really appreciate you bring this to our attention. The decision to buy a coin should be based on real analysis of the coin. I found that people keep buying coins without have any knowledge of them. This is considered high risk. I really advice people to take a look at: https://www.coincheckup.com. I'm really enthusiastic about this site, they let you analyze every single coin out there. Check: https://www.coincheckup.com/coins/Steem#analysis To check Steem Investment analysis.

A very helpful article. Thank you for the time you took to put it together. I know it is older but it clarified a lot of things.

I'm able to understand the steem-iverse better now, but I'm still missing a few pieces. Say I have 1 BTC and I want to make the best investment in steemit for the long run - say 5 years. Do I buy STEEM, convert to Steem Power and then the Vests are automatically added to my account? I've read I need to be aware of the rate when converting, but I'm not sure what they're referring to, and it doesn't help that https://steemd.com/distribution is currently down for maintenance, so I can read about it there either.

Fucking fantastic post. Thank you @sigmajin

Nice detailed explanation, which answered most of my questions on Steem economy.

Bravo @sigmajin on this explaination. I'm new to steem and working on full understanding of the steemiverse. I do think the adams and eves of Steem could have put more time and thought into the terminology. I think they should revisit this to make it more digestable to newcomers. But hey, we have users like you laying it down for newbies like me, so no real complaints here. Thanks!

I'm new to Steem. Your explanation is excellent. Thank you.

A bit long, but I am happy reading it to the end and learning a lot from it.

By far the best explanation of what all goes in the world of Steemit.

I'm having fun learning about all this stuff...

This indeed does that deserve more coverage than it got, and deserve my up-vote. However, you may look into reposting this. Please let me know somehow when you do, and you'll have my immediate up vote! Maybe a YouTube comment on @crypt0. Cheers, and thanks. I'll give it a shout out in the future, if you do.

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thanks for the upvote and the kind words... ive actually been doing some research on the system, and i am going to update a bunch of things i kind of glossed over or wasnt correct about soon... ill let you know

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Excellent. Please do, as I'm curious to see what new you've unearthed.

Thank You for this post. Very informative and clear. Now I have a better idea about what the hack it's happening here.
Very fast readers on steem :)) was no votes when I started to read. Just few second after the post came out. By the time I finished already 6. Nice one :))) Then I decide to up-vote too.

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thanks glad it helped

Very informative article.

And that's how it's done

Great information, thanks for taking the time to put this together!

I recently heard about steemit, and got confused with this system.
THis is a very nice explanation, thank you!

Prior to this article, I had no idea about the concept of dilution of shares in a company. There is a lot to Steemian economics thank you for explaining some of these concepts.

Steem Power

"What that number is really telling you is the amount of steem it would take to purchase the amount of vests you have right now."

Most helpful line in this post! Thanks!

Thank you very much for this explanation. It really is a complex syste but I think I'm starting to understand it.

Is there an article that can describe this very subject in human readable lingo?
Something that can be understood by people who are not 'bankers'

Maybe vreak it down into small articles.
What are
Vests
SBD
Steem
etc.

What is the deeper 'conspiracy' behind steemit. :-)

Real people will need real, human readable, information.

Thanks for this article, eventhough I don't have a clue what I just consumed.
No taste whatsoever...

This is the best explanation so far. I'm new and still trying to wrap my head around the whole Steemit economy.

Really brilliant article which has answered my queries completely. Thanks!

I was searching an answer on the question: "Why does the VESTS value keep increasing" and this is the best answer I found! Thank you a lot @sigmajin!