People have a long established understanding of how money works and for that reason it is difficult to explain where the money people are making on steemit is coming from.

Money doesn’t come for free.

Usually when you’re getting something for free we use that old saying

If you’re not paying for it, you’re not the customer, you’re the product

This is true in the case of most networking sites we use like facebook. You might remember when facebook first took over the world, there was lots of speculation that there would someday be a charge to have an account or use the website. But of course, Mark Zuckerberg didn’t need to make money from his users. He cleverly saw that what he had built was a shopping window. People don’t buy shopping windows. Shops do!

So how is steemit any different?

Well the money you get from steemit simply isn’t free. You are being paid for content and contribution. This could be the same content and contribution that you’ve been giving away for free if you’ve ever written a blog or contributed to topics on online forums or even on facebook.

So why would somebody suddenly want to pay you for something you’ve been giving away for free?

OK forget where they get the money from for a second. Where does money itself come from?
Well let’s take a quick history lesson!

Remember the good old days of barter? No, me neither. But there is a theory that society once worked like this.

Imagine three neighbours called Johnny Jenny and Gioseppo!

Johnny has milk from his dairy farm
Jenny has weed from her weed garden
And Gioseppo claims to talk to the dead!

So Jenny wants some milk from Johnny but Johnny wants something to trade as barter. Jenny offers him some weed but Johnny doesn’t smoke weed. Jenny is in a conundrum…
Meanwhile, Johnny is mourning the death of his wife. He goes to Gioseppo to send her a message in the underworld. He offers Gioseppo some milk but unfortunately Gioseppo is lactose intolerant.
Now Gioseppo comes to Jenny asking for some weed. He tells her he has a message from her grandmother and she slaps him across the face!

Do you see where I’m going with this? There was a need for the concept of putting a numerical value on goods and services. In truth, it's unlikely that society ever actually functioned this way. Another theory is that people just constantly kept a ledger in their minds of who they were in debt to. But this is unsustainable. And so this began the use of universally accepted goods as money.

Wikipedia defines money as

any clearly identifiable object of value that is generally accepted as payment for goods and services and repayments of debts within a market or which is legal tender within a country.

Once a general consensus of monetary value is established then the goods used to represent this value increases in value. For instance the piece of paper in your wallet is pretty worthless as a piece of paper but when you and the community around you give it monetary value suddenly this piece of paper is valuable to everyone.

Because of its scarcity gold was used as the people's ledger, so that people did not have to keep track of who they were in debt to.

So how did people protect their gold?

Banks of course!

And how did the banks convince the people to trust them to mind their gold?

With paper notes of monetary value!

So enough history! What is the Steem Dollar?

Well the Steem Dollar is a form of cryptocurrency. Have you heard of Bitcoin? Bitcoin is also a cryptocurrency.

Cryptocurrency is a new form of digital currency. What this means is instead of using a piece of paper that can be stolen from your wallet to represent monetary value, it uses digital encryption. Cryptocurrency operates without the need of a bank because all of your funds could be held on something like a memory stick!

Can somebody steal your memory stick?

Yes. But they won’t have access to the money on it without knowing the encryption key, which is like a password or bank account number.

But if you can’t put it in your pocket, is it real money?

Well Bitcoin certainly is.

Bitcoin has already established itself as a globally recognised currency of monetary value. People use it to pay their bills! You can purchase things on Amazon with Bitcoin and there are 30 different digital currencies accepted at GiftOff where you can shop from over 120 different retailers!

Back to steemit!

So now we know what the Steem Dollar is, lets get back to why on earth somebody would pay you for something you have been giving away for free.

Well, remember how paper money became valuable. As a piece of paper it's pretty worthless. But once it became recognised as something that can be exchanged for goods and services, well that gave it monetary value.

This is what the distributors of steem want for their Steem Dollar. And it’s happening. As more and more people join steemit, more and more people are using the Steem Dollar. And as more and more people use the Steem Dollar the value of Steem gradually increases!

You can see why the first people to have steem would want others to use it. Not only is it more valuable as more people use it, but also the sooner you get some the more valuable yours will be when everybody is using it!

So now that we’ve established why they would pay us for something we’ve been giving away for free, lets talk about where the money is coming from.

For this I need you to imagine a party.

Imagine a money party!!

I don’t even have to explain what a money party is you already want to go don’t you!

Well lets say there’s a million dollars to be won at this money party.

How do you get your hands on it?

Well you can’t have it all! That would spoil the party for everybody else!

Instead everybody gets a signature book. Then as parties go everybody talks and makes friends and parties but as we party we each decide who is making the best contribution to the party.
Every time we meet somebody who says something we like, or makes us laugh, or has a good idea we write our signature into their signature book. By the end of the party some people have a tonne of signatures because they were maybe the life of the party while others have very few signatures because well maybe they spent the time sleeping.

This is how the million dollars is distributed between everybody at the party.

But wait!

Don’t jump to conclusions!

While you might assume that the people with the most signatures would win the most money this isn’t always the case. This is because not everybody’s signature is valued the same. For example if you were to get a signature from somebody who has been actively participating at these parties for a long time, well his or her signature would be worth a lot more than the signature of your friend who just arrived for the first time. Similarly, if you were to get a signature from the million dollar distributor well this signature is worth more than anybody’s!

This brings us to the Minnows, Dolphins & Whales analogy which I have already explained in another article.

Here's another great article answering the difficult question of where the money comes from.

Conclusion

Steemit pays you for your content contribution to an open source website that is growing so fast the developers can barely keep up!

The reason they pay you is indeed for their own gains, but for the same reasons the banks wanted to hold our gold for us.

As the use of the Steem Dollar expands to the masses, the value of that currency increases.

Eventually there could be no need for banks as we could be holding all of our money on something that physically cannot be stolen.

When you’re ready to join the party make sure to read my other posts to help with your ‘introduceyourself’ post (not mandatory but proven very popular).