It has been roughly seven years since Satoshi Nakamoto released Bitcoin in 2009. And since that time much has transpired. Bitcoin has reached an impressive $9 Billion dollar marketcap, courted many venture capital firms, and expanded its brand-name globally. But the most interesting thing that has happened are the possibilities that Bitcoin has opened up. Bitcoin told the world that decentralized, internet money was possible during a time where such a sentiment might have seemed crazy to all but the most ardent security and cryptography researchers. One recent outgrowth of this movement I will be covering for the next few articles is decentralized social networking site Steemit, which is set for full release on July 4th of this year.

What Is Steem?

Steem is a blockchain-based social network that rewards users for posting and curating content. So think of it like reddit with a blockchain. The interesting thing is that Steem's premise means that users who post popular content will get financially rewarded if that content is popular enough, which is manifested by up-voting. The basics are that the more people like your posts, the more reward you earn. So unlike Reddit and Facebook, where your content serves to make the organization that owns the service rich, if you post things that people want to see, then you can earn financial rewards yourself. No longer will users be the workhorse for giant corporations; rather, this service will work for its users by providing an audience and rewards in a decentralized and verified manner.

The Steem currency system is a strange and complicated creation. But its core message is quite simple: decentralized, paid social networking. The founders of Steem have devised a way to not only decentralize social networking, but to also pay users for contributing to it via posts or curation (voting). Reading the Steem whitepaper is a little like getting your tooth pulled in a seedy foreign country. Especially if you're not financially savy, which I'm not as my formal training is in computer science, but the gist of it is this: they have created a way to incentivize, through cryptocurrency and blockchain technology, participation and curated content. And, more brilliantly, not only that, but they have also incentivized long-term holding of their cryptocurrency, so that the network rewards actions related to long-term growth and punishes short-term speculation.

They do this through a decidedly unique cryptocurrency they call Steem. Steem is one of actually three cryptocurrencies that this new system introduces. The currencies are:

1. Steem
2. Steem Power (SP)
3. Steem Dollars (SMD)

Why three? Because this way they can manage the inflation of the currency, while not allowing the kind of short-term speculation that seems to plague the cryptosphere. Steem itself is the basic unit of currency from which the others derive their value. It is also the unit which allows individuals to buy into the Steem network. Finally, it is the cryptocurrency most volatile and subject to inflation, as someone who holds Steem will be subjec to a .19% devaluation per day of their holdings. This inflationary model is more akin to a 'split' than true loss of value, however. This is because 90% of non Steem Dollar inflation is supposed to be returned to Steem holders proportional to their holdings of Steem Power, so if you're holding Steem Power your Steem inflation losses won't be so great. Only 10% of this non-Steem Dollar inflation is truly redistributed via inflation.

Enter Steem Power

SP is basically a form of long-term capital commitment for the network. Thus, users are incentivized to 'power up' their Steem by converting it to Steem power in order to maintain value. This is the tricky bit: 'Powering up' your Steem is instantaneous, but 'powering down' your Steem takes two years. Powering down is the term for converting Steem Power back to Steem. You cannot trade Steem power easily for US dollars or other currencies, but you can do so with Steem.

In this way, users who buy into Steem are incentivized to convert it to Steem Power due to Steems's inflation rate and the benefits of holding Steem Power. This pushes users to hold their Steem Power long-term due to this long period of time that it takes to convert it back to Steem. Thus, Steem creates a community which is incentivized to hold their currency, providing more than just short term funding. Steem Power is required to vote for or against content, so this provides another incentive to convert your Steem to Steem Power, further shoring up the network.

So What About Steem Dollars?

The final cryptocurrency introduced by this network is Steem Dollars. From what I understand of the white-paper, Steem Dollars are intended to be transferable 1:1 with US dollars. This is maintained via certain automatic market and block-chain forces that adjust the inflation rate based on interest-payments. So if the SMD is trading above $ 1 USD interest payments are stopped. While if the Steem Dollar is trading under $ 1 USD then the interest rate is increased, which should encourage people to hold their Steem Dollars and support the price. The total effect of these policies is predicted to be a narrow trading range between $ .99 USD and $ 1.01 USD for Steem Dollars, giving it a stable value.

What's the Takeaway?

This is a very low-level description of a new social network that aims to decentralize content creation and management so that good, well-liked content is financially rewarded while unpopular content is discincentivized, but we've barely scratched the surface here. By maintaining three cryptocurrencies, Steem is able to provide incentive for long term holding and development of its network while still allowing short term trading and profit, though this is not heavily rewarded. In the next article we'll continue our look at the fundamentals of this network, how to use it and a few other things from the white paper.

Keep calm and Steem on! #steemit