How Steemit Scooped Wall Street and Trumped Its Hottest Idea

in steem •  3 years ago  (edited)

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While blockchain-based technology gets most of the attention here (deservedly), there is a lot more going on under Steemit’s hood.

Forged in the world of high technology, it came to prominence with a whitepaper written by Wilson Sonsini, Silicon Valley’s most storied technology law firm, in cooperation with an institute at UC Berkeley’s School of Law. The Wall Street Journal’s Morning Ledger wrote about it a year ago, and the New York Times’ Dealbook touted it in the fall. This spring, a Forbes magazine writer took it up, doubting the existence of the problem it was created to solve, but concluding that the idea was worthy of experimentation. The New York Times was not so timid, issuing this ringing endorsement in March 2016: “It’s time to consider an alternative…that could shift the balance of corporate power.”

Yet it doesn’t even have its own Wikipedia page yet, though Investopedia added it in April.

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No, it’s not the latest innovation in cryptocurrency. It’s Time-Phased Voting, also known as Tenure Voting, a system designed to create and reward “strong hands” investors. It combines the best features of two existing systems of corporate governance, raising hopes on Wall Street that investors will have a better reason to see the bigger picture beyond short-term profits.

This community’s users, contributors, and investors need to understand time-phased voting because Steemit represents one of the first implementations of it anywhere.

This is cutting edge stuff. Existing public companies are studying it closely. Investors, particularly large institutional investors with a longer-term outlook, are actively seeking out companies who have committed to using some form of time-phased voting. As we speak, the next round of IPO candidate companies in Silicon Valley and beyond are designing their stock offerings to include this feature.

Steemit has it in place before any of them do. Only the Steemit implementation carries less risk because the concept of time-phased voting does not stand alone. It has been combined with lessons from financial instruments like Certificates of Deposit (CDs), which have been proven over a period of almost 400 years. Yes, ladies and gentlemen, there is more under Steemit’s hood than its blockchain-powered engine.

[Of course, Steemit is not a bank nor is it a financial institution or money transmitter. It is not offering financial accounts, certificates, or instruments of any sort to consumers. Steemit is a game involving tokens. No money is ever involved besides buying tokens (when one enters the system) and cashing out (when one exits the system). Steemit itself never handles anyone’s money. Government agencies and corporate spies, if you are reading this, you can safely go somewhere else for your fun.]

Everyone else, read on to understand a bit more about what’s under this hood and what it means.

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“One Share, One Vote”

“One share, one vote” was a founding principle of corporate governance. It was designed to create an equal playing field and spread voting rights to every investor, large or small. At the same time, bigger investors who owned more shares would have more votes. So just like with any democratic system of government, majority rule would prevail, but hopefully minority rights would also be respected and not trampled upon.

Dual-Class Shares and High-Vote/No-Vote Stock

Then came some other innovations, companies issuing multiple classes of stock that carried different voting rights. Many companies today offer two classes of common stock, such as Warren Buffett’s Berkshire Hathaway does. Berkshire is famous for its Class A stock (currently trading at about $213,000 per share) and Class B stock (now at around $140 per share). Originally, Berkshire’s were designed at a 30-to-1 difference, but Class B has undergone some stock splits while Buffett does not allow these for Class A.

Companies grant higher voting rights to their Class A holders, which are designed for the company’s founders, executives, and large investors.

Why have two different levels of ownership? In a word, sustainability. The theory is that “one share, one vote” is an easy game for take-over attempts and anyone with short-term trading agenda. To prevent any such disruptions, who would be the most faithful owners of the company? The company’s insiders and large investors would be more likely to keep the company’s longer term best interests in mind. And so most companies that issue Class A shares will grant a disproportionately higher voting strength that’s designed for those “strong hands” holders.

A typical weight is probably 10 votes per Class A share to every one vote for Class B shares. Other companies have made their Class B shares “non-voting” shares. And there are examples of companies with more than two classes of common stock. All of these are still common stock and they still share equally in distributions. None of these should be confused with preferred stock, which provides its owners with higher priority in dividend distributions and so forth; we are only talking about different voting classes of common stock.

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Time-Phased Voting: Allowing Others to Become Longterm Holders

Not surprisingly, the main problem with the dual-class share system is that it has created a real split between the two classes. You can think about the two classes as “haves” and “have nots”, but with many companies this manifests itself as a fight between the interests of longer term holders and shorter term traders. Also, more broadly, there is growing income disparity in the world today; Wall Street is often blamed for its role in making the rich richer and the poor poorer. Plenty of corporations and large investors would love to find a way to counter that impression.

It also makes some sense to reward those who are loyal to you. It makes sense to allow an influx of new blood and fresh ideas. And it makes sense to recognize that if someone holds their stock over time, they probably also have the company’s long term sustainability in mind.

Enter time-phased voting, also known as tenure voting. It rewards anyone who holds their shares for a certain period of time. This could be set at any length of time, such as two years or three years. And the rewards come in the form of earning a greater voting power. So if an investor holds the stock for more than three years, for example, a given company may reward that investor with three times as much voting power. This system is still possible to game, but it’s a lot harder and would take much longer, so most shareholders who gain additional voting power are probably there for the right reasons.

It is a system designed not only to put voting power in strong hands; it is also designed to create and reward more “strong hands” investors. This creates a more dynamic group of owners with voting strength, yet one that is unlikely to change overnight. So the company’s long term best interests are still in good hands, and in fact those hands may have better ideas about how to keep it sustainable into the future.

Steemit’s Voting and Earning Power

Steemit has implemented time-phased voting power and also combined it with time-tested financial elements. Savings accounts have been around as long as banks have existed, and certificates of deposit first came into use in the 1600s. You can “Power Up” in Steemit, either through depositing your own money (buying Steem Power tokens) or re-investing Steem Dollars (tokens) you have earned from work (consisting of creating content or curating/voting on others’ posts). Your Power Ups increase your vesting power. That includes both voting power and the right to earn greater rewards yourself through your work. Steem Power Up holders are rewarded with 90% of any new money created.

You also can earn a return on your Power Up investment, and that’s the part of this that more closely resembles a Certificate of Deposit. The catch is that you have to keep it locked up for a period of time, just as with many CDs. You can only cash this out in weekly payments over two years, which represents 104 weekly payments. (Again, for any government agencies reading this, we are talking about tokens here, only tokens, tokens and more tokens, entire boatloads of tokens, enough tokens to…oh, never mind). Those tokens, of course, can be converted later to something you can spend.

That’s a Wrap

The blockchain gets all the attention with Steemit, as it should. These developers are brilliant. And anyone who gets addicted to posting and reading and voting on other peoples’ blog posts online can tell you that it’s quite possible to go through an entire day without even thinking about the blockchain. What blockchain? This is a social media site! And I’ve barely even touched the financial elements.

However, after reading this article, I hope you’ll also understand and appreciate just how revolutionary its voting/governance machinery is also. The voting/governance system might be only the third or fourth great thing about Steemit, but it is worth more than a token of your appreciation for both its innovation and its reliance on old school wisdom. So many neat things, all rolled into one.

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Some Useful Source Links:

Tenure Voting Whitepaper from Wilson Sonsini Goodrich & Rosati: https://www.wsgr.com/publications/PDFSearch/tenure-voting.pdf

Wall Street Journal blog: http://blogs.wsj.com/cfo/2015/03/18/the-morning-ledger-tenure-voting-could-blunt-activist-demands/

Investopedia article on tenure voting: http://www.investopedia.com/articles/investing/041516/tenure-voting-what-it-means.asp

NYT Dealbook critique of dual class system: http://www.nytimes.com/2015/11/05/business/dealbook/shareholders-vote-with-their-dollars-to-have-less-of-a-say.html

Forbes article: http://www.forbes.com/sites/timworstall/2016/03/02/the-economic-mistake-behind-tenure-voting-for-us-stockholders/#14dfb1ba2dad

Later NYT article: http://www.nytimes.com/2016/03/02/business/dealbook/tenure-voting-rewards-the-shareholder-for-sticking-around.html

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Great post!

  ·  3 years ago (edited)

Very exciting insights! Especially links. Thanks. Added to Awesome Steem

Thanks for the explanation of time weighted voting. Very helpful.

I read this post right after reading your post "Would Albert Power Up", and I think they are very complementary. I think that you have done a wonderful job in both posts highlighting the aspects of Steemit that make it reliable and likely to succeed in the future.
I also think that both of your articles are a must read for anyone entering Steemit because they provide the rational for why we should be loyal community members of the site - we are all long term stake holders! It is easy to get caught up in the posts, votes, and how many steem dollars are coming your way, and it is important to understand why powering up is in the best interest of both Steemit and yourself. Because, in the long run, a mindset of "take the money and run" will also end up hurting your own long term investments. Thank you for explaining how we are all taking part in the beginning of a revolutionary voting system!

Excellent post. It makes me wonder if we can apply some of the concepts here to incentivize investment into scientific research over the long term, a sector which struggles having to rely on government grants.

#Steemit is pretty hot... but I was taken aback by its market cap - more than $100m?! That peaked at $300m?! Those are completely insane numbers... I don't see a site like Reddit or Medium making more than a few million a year... $50m valuation tops in my mind. Granted, Twitter makes almost $2bn in advertising... and Facebook about $20bn... but it could easily be another 5 to 10 years before the traffic here could even get close to those, and a lot can happen in 5 to 10 years!

This is one of the best articles I've read on here and I'm pretty sure its not even as relevant anymore, thanks for posting it @donkeypong - can you point me to somewhere that explains it as it is today?