Inflation as a Platform Cost. Another Look at Stake

in #steem6 years ago (edited)

Inflation is a cost to the economic system. It dilutes the value of each token by issuing new tokens, and uses the tokens to redistribute funds. The cost comes from the market reaction to the supply increase.

Keep in mind that right now, in a year there will be 8% more Steem than current. That's a lot higher when compared to existing stable currency growth, and with the reasoning that there will be enough growth in the economy to support it.

By what metric are we going to be measuring this growth? In my view, and I believe in many economic analyses, it is about value transfer. The primary form in which this exists is that users create content, and others redirect rewards upon consuming it. But this is only meaningful if

  1. Rewards are a direct consequence of a real interaction.
  2. Reward values are consistent with the perceived value of interaction.

The voting system is meant to evaluate this, but it makes the interesting choice of trusting those with stake to do it. Of course this makes it highly dependent on the virtues of those with stake. Predictably, people have gone the route of being ignorant to this principle, shouting claims of "code is law" or "my stake, my money (or beating stick)". (Or with full understanding and greed).

But not everyone has, and I believe this is why we are all still here.

Measuring value transfer and allocating rewards appropriately makes the most sense for an attempt to set up a real alternative economic system. It's clear that incentives do not align with this goal. And this is why I am a fan of the proposal for true 1A1V (1 account, 1 vote) with an oracle to protect against abuse, as mentioned here.

The exciting part here is that oracles open up the possibility of changing stake based allocation to many systems imaginable, and we no longer have to trust stake-- it will be baked in by the individual SMT, and incentives can be made to align more closely with the true goal of measuring value.

But you know what, wouldn't it be nice if we could trust stake to do its job? People have been so focused on the money that they are blind to the larger picture of having a thriving economy. When people say not using VP as "throwing money away" because of the belief that the portion of the reward pool corresponding to the stake is earmarked for them, that goes against this vision, the long term prospects of the platform. Self voting, as much as people like to defend "just let me do what I damn please", is counter to this principle as well. And all sorts of questionable allocations of stake. I believe SMTs will make things better because of the ability to align incentives, but it really is a disappointment to see that our budding community cannot figure this out**.

**I should give our community credit where it is due though. Despite the current system being so raw, and not having any infrastructure, just look at what has organically popped up. Communities, curation groups.. games... dapps. It really makes me excited about the platform's future. Yes, despite having broken incentives, we have true value growing beneath the surface rubbish.

I've left something out in this discussion though up until now. Let's talk about investors, which are serving to bootstrap this budding economy. They should be incentivized to do so, but how much? I also believe that they should be, but only an appropriate amount that can be supported by the rest of the platform. You know, exactly how stock valuations and dividends work in the wild. You'll note that this is exactly why part of the inflation is earmarked for this purpose. Yes, it might not be enough, but that's what you get as a baseline. You get a bonus in being able to influence the direction of the platform, and what do you do with it? You act against the direction of economic growth. Thanks for nothing. (This isn't directed at anyone in particular, just general sentiment).

  • EDIT: See comments for why this is really not a dividend at all, and rather a partial compensation from diluted stake. And see comments for why dividends are anyway not expected for new projects. Thanks for the discussion all!

You want investors to be rewarded more by default? Then take away from the reward pool and allocate more to the vesting pool. That might help. But don't do it now, because the rest of the system is broken as stake based value assignment is failing us (but not entirely, thankfully). And maybe do it in accordance with what @therealwolf suggests here, when 1a1v is in place.

This is all coming from the recent discussions I've had with @meno and @tcpolymath as well as wider sentiment, so I'll be curious to hear what they have to say. And of course anyone else is welcome to chime in. Cheers.

(Also missing from the discussion: value transfer coming from exchange of goods and services. But that will come with the adoption. And already exists in some form here.)

Edit: removed earlier self voting comment as not productive.


So from the perspective of a writer, publisher, and artist I think it's very interesting that Steem has chosen to attempt to build its value system on a commodity that people more or less don't value in the real world. We talk a lot about unbalanced distribution of rewards here, but Steem has much better distribution of rewards than any artistic field.

  • Even with all the vote-selling and delegation, a higher percentage of people are voting on content here than are doing its equivalent (buying periodicals, books, and art) in the real world.
  • Rewards for content creators are distributed in considerably broader fashion here than in reality, where the entire economy is dependent on huge hits - one of the big reasons I'm absolutely against returning to nonlinear rewards.
  • Publishing here is very weird but very democratic. Anyone can build a curation initiative, show their ability to select interesting content, build an audience, and be modestly successful as a publisher. There was a huge paradigm shift in publishing when putting work online dramatically reduced overhead costs, and I see Steem or its successors repeating that pattern.

So when you say it isn't working, I think it's absolutely working. There are the foundations of a new economy here. It's one that isn't primarily based on content, but that was never going to happen, because we have all the evidence in the world that people don't value content enough to base an economy on it.

Steem is changing that, and the fact that it's changing that by increasing the value of content by 100% instead of 10000% is just a reflection of real human values and the fact that the original idea was overblown. What it's actually doing is still pretty amazing.

I agree, it's quite amazing. I realize that I may have given too little credit in my ** section but you have explained it here beautifully. I guess in my view, it is amazing in spite of behavior that I would say is not as productive.

So getting back at this from an economic perspective.

I've left something out in this discussion though up until now. Let's talk about investors, which are serving to bootstrap this budding economy. They should be incentivized to do so, but how much? I also believe that they should be, but only an appropriate amount that can be supported by the rest of the platform. You know, exactly how stock valuations and dividends work in the wild.

You're working from a stable zero when what we actually have is a zero that's constantly moving backwards. Yes, there's a small amount of "interest" paid for staking, in the form of the increasing Steem/MVests rate, but it's not net interest, in fact it's net-negative. You're saying to people "buy into a currency with 8% annual inflation, and we'll give you 1% interest as a reward." Essentially this is buying an inflation-adjusted bond at a rate of -7%, which obviously nobody in the world is ever going to do.

Distributing the interest equally by stake essentially keeps everyone even vs. the continually-flowing current of the inflation rate, and it's the only way to do that. There isn't any extra money to pay out dividends or net-positive interest.

Bot owners really like to talk about "profit" from delegation to them, but that's dishonest; it isn't profit, it's loss. (Or would be absent @steemit not voting.) Delegators are losing more in the fundamental value of their currency than they are getting back by getting more coins.

For all its weird reputation, Steem is not actually a good place for passive investors at the moment and it probably never will be. When they passively invest they're creating small bits of value for active users, as our effective share of the inflation gets larger. Everyone who is delegating to a bot is making a -ev decision, and that ev accrues primarily to the middlemen and those of us who buy votes.

The -7% inflation adjusted bond is hard to think about as I'm flipping through web searches about things like TIPS (which I don't think matches this). Although maybe it's more like a non-inflation adjusted bond of a foreign currency that has high inflation but lower yield. So in this case, a bond for a currency that inflates by 8% but is paying out 1%. Ok nevermind, that's fine. But maybe this isn't a useful way to look at it....

If we want to make a comparison back to stocks, this is as if a company is continuously diluting their shares by issuing more and giving it to various parties. Generally this isn't seen favorably but if there's growth in the company it could be justified.

A passive investor would need to balance the continuous dilution of their shares with growth potential of the shares.

Under the latter framing, as I'm thinking about this out loud, an investor has the opportunity to get back quite a lot of the diverted stock by exercising stake powers and say self voting, but they cannot recoup all of them since 10% of the funds raised by dilution goes to witnesses.

I guess then, this is a long winded way of saying that you are right about it being a loss, and I really can't think of this as dividends at all. It's more like a partial dilution offset.

Okay... But now I see what you are saying when you say that self voting is fundamentally neutral (slightly negative, even) so this was very useful.

However, what's remaining is exactly the market valuation of this system. It's neutral from the perspective of stake / dilution %, but without signs of growth, we might all just be maintaining our % of nothing in particular. So... I guess my question is: Is neutral actually neutral?

Okay... But now I see what you are saying when you say that self voting is fundamentally neutral (slightly negative, even) so this was very useful.

Well, it's only sort of true in that sense, and maybe my original comment was misleading, because the inflation rate, the Steem/MVest rate, and the vote value all have different denominators. The inflation rate is based on total Steem supply, the Steem/MVest rate is based on total stake, and the vote value is based on total rshares used in rewards calculations.

@preparedwombat had a very good post about how the Steem/MVest system works yesterday.

For the voting sense, this means that a self-vote is worth considerably more than inflation because every Steem that's liquid, every account sitting at 100%, every vote on a declined-rewards post, and every downvote inflates the relative value of a vote against the inflation rate, whereas only the witness rewards and the "interest" deflate it.

Ah yes, the devil is in the details. I roughly know how that works, and it definitely is an important distinction. Earlier I was going down the rabbit hole about how that claimed rshares worked and even that's a little... Odd let's say.

People have to stop saying “but investors”. There’s no new money coming in, it’s all mostly pre-$1/STEEM stake, much of it much lower acquired even.

Anything else is staying away because of the vulture behavior on the platform.

Those are not investors. Anyone investing in new knows there won’t be any return for 2-5 years and when there’s a return it’s not from dividends or anything like that. It’s from selling equity in follow-on rounds rather than becoming diluted beyond imagination.

PS: I did predict that last September that this behavior won’t bring new investors.

Serious investors in BTC for example throw shitfits over even small changes to the code. I don't see how we're going to pull any serious investors given the very one-sided way that forks are pushed here, and the............. "murky" inception of the blockchain. Inflation wouldn't be such a big deal as it is now if there hadn't been the initial distribution that there was, or other periods of arbitrary superinflation. The economic model of a coin has to be sound, and if things are just changed on whims from one centralized entity then that's going to scare away anyone who likes steady, stable, and decentralized.

The one thing I'll say is that people that use steem do a, how should I put this, relatively good job of distributing steem and sbd to content, and we haven't quite hit the point of 100% roi chasing by vested stake. Most blockchains don't have cultures that encourage such behavior.

First thing required is that we stop calling those “serious investors” investors. Most of them have never invested and would never be welcome in an investing round either.

I’m not saying the latter is a good thing tho.

But, second, they all need to learn and accept that investing doesn’t mean that there is a guaranteed return. Even not when investing in teams. No, I don’t consider ICOs currently an investing use case for this argument. I’ve seen way too many “insight in a profitable portfolio” articles which all just relied on btc dominance and market run, rather than on insight.

So... investors will need to accept that a majority of their 2-3 years bets will fail. That is also why they need to aim 20-40, rather than short term 3-4x.

Because so many will fail that it is important that the one or two successes are huge.

It’s why investors gather in rounds, to share the risk and lower the cost of failure.

Not because they are used to throwing 300x $5,000 round in diff projects. $5,000 which they only had because of bull market btw. They did not get that $5k because of awesome insight and support.

The market is currently mostly still only traders and crypto angels who like to call themselves investors but have never previously invested.

That loud megaphone is what we are up against, I know. 😖

I get what you mean, and no, I don't think most large wallets are sophisticated investors.

Yeah, exchange manipulation, the whole tether+finex combo really made everyone feel like a trading genius there for a second, and it's starting to make everyone feel like a real dumbass by this point.

I mean serious investor as in entities with actual large amounts of money that actually do DD and their legal paperwork before stepping into the waters.

I do think that steem is somewhat handling the inflation better than any other POS unlimited supply coin. For example, a lot of steem is powered up.
However i do think this is a result of having no fees. PIVX sloves it inflation problem by changing a real small fee for a tx which gets burned.
I wonder for like high value/heavy tx steem and put a tax. This might help lossen the resources needs of the chain. PIVX also has it own steem power aka masternodes. I wonder if SMT are just a ploy to get more steem locked up. More steem power as SMT the more Reasouces credit it gets right?
Inflation ain't bad as long as it managed and the coin has demand.

I think their resource credit system that's coming soon is precisely what's going to resolve this issue. Even now it's got some primitive throttle for resource concerns, and I'm pretty excited to see how it will work. I don't thin kit's a ploy, most of us probably won't be using the blockchain so heavily to even have to care about it. But yeah, it's a different issue than inflation.

Hi there @eonwarped

Just wanted to say thank you for showing your support in my post related to resteeming bots. So here I am ... coming with little upvote :)

Continue up with creating interesting content - it may be hard at the beginning to build reach and solid followers base.
But Steemits needs solid content builders so just dont ever give up! :)

Already followed and upvoted :)


@eonwarped You have received a 100% upvote from @steemguard because this post did not use any bidbots and you have not used bidbots in the last 30 days!

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