Where do the Contribution Rewards come from? Steem-Help - Requested by @leksimus

in #steem-help8 years ago (edited)

Had this question posted to me the other day, and although I tried my best to answer it quickly, unless you understand Economic Systems, it is hard to get your head around. Quoting words like Dilution, Inflation, Money Supply…really get’s us nowhere.

This has been touched on many times, however many users still don’t understand. I am hoping to help these users, not the one’s who already understand. Sometimes, it’s best to simplify to the point of not giving the FULL picture. This is a reasonably complex system (for Cryptocurrency Noobs), and in order to be able to use it, and understand what is going on, you DON’T need to know everything…

So, I’m going to give a very simple explanation for new users who are confused on this topic.

What is going on under the STEEM 'hood'?

As I write this post there is 127,641,779 Steem in existence. Steem has an Dilutionary model, like many cryptocurrencies and ALL National Currencies in the world. What this means is, new Steem is being created every minute.

I’m sure you’ve heard the term Printing Money, well this is essentially making new money out of thin air. This action is done by the Federal Reserve, Bank of England and all central banks around the world. Now for the time being, let’s not get hung up on why (or what impact this has), I will touch on this later.

New Steem is printed at a rate of 800 per minute (for the next 12 months or so). That means that everyday, 1,152,000 new Steem come into existence (800x60x24), so 24hrs from now, there will be 128,793,779 Steem (127,641,779+1,152,000).

Breakdown of the Contribution Rewards are as Follows;

Total Rewards: 800 per minute
Steem Power Holders Reward: 720 per minute
Miners/Witness’s Reward: 40 per minute
Curation and Creation Content Rewards: 40 per minute

So, 40 Steem per minute go into a pot to be divided out amongst the content curators and creators. So that is where the Contribution rewards come from…I’m ignoring Steem Dollars for now, but for understanding this, that doesn’t matter.

Why Print Steem for Contribution Rewards? Why don’t Steemit just Pay Everyone?

This is an important aspect to understand. Think of Steemit as a Start-up business with no revenue, no profit, no money. All Steemit has is Sweat Equity contributed by the developers and founders.

Steemit can’t afford to pay users to use Steemit, so they created a Currency that represents the value of users input into the site (think of Steem Power as Equity in Steemit). While new Steem is created every day, IF the value created by the users remained constant (constant user base, constant posts, votes and quality), the value of everyones Steem holding would be Diluted. This is represented bellow in an example (not real numbers);

‘Printing’ Steem by Numbers

Steem in Existence: 100,000,000
Your Ownership: 1,000,000
% Ownership: 1%

New Steem Printed: 10,000,000
Your Contribution to the Site: 0
Your Steem Power Reward: 50,000

Total Steem in Existence: 110,000,000
Your Ownership: 1,050,000
% Ownership: 0.95%

So, in these conditions, your % ownership has fallen. Essentially your fall in % ownership has been redistributed to Steemit contributors as a reward for their hard work. The numbers are not perfect, but this is essentially what is going on. Here some numbers closer to reality if you are interested;

Steem in Existence: 127,641,779
My Steem Power Holding: 12,697
My % ownership: 0.009947%

In 30 days

New Steem Printed (800x60x24x30): 34,560,000
Steem in Existence: 162,201,779
My Share of New Steem Printed with zero contribution to the site (34,560,000x0.00009947x0.9): 3,094
My New Steem Power Holding : 15,790
My new % ownership: 0.009735%
Fall in % Ownership in 30 Days: 0.000212%

Summary

So, if you contribute nothing, your % ownership position in Steem will continue to fall as time goes on. This is essentially why Steem is slowly redistributing away from the Top Steem Power Holders to the smaller holders. The system has been set up so that the Top holders cannot earn enough in Contribution rewards to cover what they are synthetically giving away…But it’s also easy for small accounts to earn above and beyond the dilution rate and increase their net ownership of Steem.

The $ value of your holding can go up or down…That depends on what happens to the price of Steem, which is influenced by the inflation rate of Steem, but also by Demand (which is a function of Many Many different factors).

So, Where do the Contribution Rewards come from…?

They come from every Steemit user, including yourself!!

For more detailed explanation on this topic, and others, you can see my blog…

Where does the Money come from?: https://steemit.com/steem-help/@hisnameisolllie/steemit-the-economic-system-and-where-the-money-comes-from

Steem Distribution: https://steemit.com/steem-stats/@hisnameisolllie/steem-distribution-revisited-top-steem-power-holders-to-distribute-up-to-34-3-of-their-control-over-the-next-12-months

Steem Dilution Rate: https://steemit.com/steemit/@hisnameisolllie/steem-dilution-rate-explained-currently-much-higher-than-you-might-think

I hope this helps…If it does, I'm happy to take requests for further steem-help posts...

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All these guides are soon inscribed in my brain forever. Who needs augmentation.

Nice write-up. Steem is indeed designed such that ownership is being redistributed form large holders to smaller holders. Unfortunately too many people don't get this, and that's problematic. So thanks for helping make people more aware.

No problem @tombstone I have written about that in the past, but some people don't believe it. Numbers don't lie, and from calculation I have been doing of late, it is already happening in a significant way, as you well know.

Yes, your last post on the topic was also very enlightening for anyone not aware of the distribution dynamics built into steem.

Great post! One thing I would love to add is that the Steem token is traded on a stock exchange and the speculation of its future value is critical. Without this there would be no value in Steem.

Yep!

They come from every Steemit user, including yourself!!

Well, not if you make a $1,500 posts on regular bases :) but yes!

You say

The system has been set up so that the Top holders cannot earn enough in Contribution rewards to cover what they are synthetically giving away.

What's this? I didn't know about that. How does that work?

Distribution is key to Steem becoming a stable cryptocurrency. At @dan @ned have set up the rewards algorithm heavily weighted to Creations, that they cannot keep up with. Apologise for the self promotion

https://steemit.com/steem-stats/@hisnameisolllie/steem-distribution-revisited-top-steem-power-holders-to-distribute-up-to-34-3-of-their-control-over-the-next-12-months

pshaw... after youre done cooking up those books, are you going to make us some dessert.

But whales could grab a huge chunk of the creation rewards for themselves, right? If they're what @dantheman calls "evil whales?"

The problem for the Whales is, there accounts are so large, that they would need to have blockbuster posts every day to cover the Dillution.

Most of the Whales are anachist, and would not want to be seen supporting such elitism (you see this already with Whales, downvoting Whales/pulling upvotes before payout, it happens a lot, probably at the request of the poster).

Your right, 'they could', but it will kill the project so they won't...

Or they'd have to get almost all of the block production rewards and most of the (SP based) curation rewards. (spoiler alert they do)

Ahhh, right of course. It's all in the percentages. That is clever, I hadn't thought of it.

And I know that even if they could, they wouldn't because they understand the long-term consequences. I just really like asking the questions "but what if they wanted to hurt the system? Could they? How badly?"

Thanks for the reply!

:) I've seen your work on Game Therory. I would expect nothing less. Always great to bump into someone looking at all the angles ..

Total Rewards: 800 per minute
Steem Power Holders Reward: 720 per minute

Small correction, only because its nomenclature in the whitepaper.

The rewards part is 80 steem per minute.
What you call the "sp reward" is called "sp incentive" in the white paper and treated differently from rewards.

This is essentially why Steem is slowly redistributing away from the Top Steem Power Holders to the smaller holders.

theres a bunch you didnt take into account in that model. INcluding that BP rewards all go to the top 19 witnesses (who are almost all in the top 1%)

It would be just as easy to make a case that rewards are concentrating, not diluting.

The top 1%, depending on your definition of a user (I go by weekly actives) are around 170 users. These 19 witnesses make up ~12% of the top 1%.

EVEN these users need to achieve a 17.5% return on capital to cover Dillution over the next 12 months (all the other users are around 35%).

I posted my opinion on this in my previous post regarding Dillution, BUT I am activily collecting data each week monitoring these levels, so over the coarse of the next month, we will have a good idea what is actually happening

The top 1%, depending on your definition of a user (I go by weekly actives) are around 170 users. These 19 witnesses make up ~12% of the top 1%.

orly? i suppose that depends on how you define user. For instance @dan and @dantheman
1 user or two users?

I think that concentration is an important issue thats worth discussing. That said, most of what youve written appears to be very very biased in favor of telling a story that simply isn't true.

I took the liberty o f analysing your numbers, and pointing out the errors in your method and your assumptions, at least as I see them:

I hope youll take a look and comment

https://steemit.com/steem/@sigmajin/cooking-the-books-the-real-story-of-whales-and-dilution

I'm so happy to see more "Where does the money come from?" posts! I started a #bitcoinpizza contest a few weeks ago to try and get more people to think about this stuff. I think it will probably take many more explanations over time and, eventually, each one of us will have to be able to articulate it in our own words before our friends and family will truly understand what's going on here. This gets me really excited because it just might finally cause the tipping point in society where people challenge their own notions of where value and money come from and, hopefully, pave the way for a more voluntary future without centralized, monopolistic control of value.

Well done. This was really easy to understand and the examples were nice. It might make it a little easier if you hypothetical example synchronized the 50k and the 10,000k. The rewards should be 90k if you have 1 % stake and you get 90% of dilution. So your ownership would go to 0.99%.

Thank you very much @hisnameisolllie. This is very clear explanation. Steem on!

I'm glad to hear that @jjchic

Very good explanation. I really have a big question mark for this for a long time. You have made it vrry clear. Thx @hisnameisolllie.

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