Never ending inflation - do we really need it?
Steem is lessons learned from BitShares. But we seem to have gone from one bad extremity to another bad extremity, while the ultimate solution might be a combination of those two.
BitShares, since the very beginning, was configured the way a mature company operates: costs are aimed to be balanced with expenses.
It turned out to be a big mistake. This approach has effectively stifled BitShares growth, as funds for further development and expansion quickly dried up. The system was meant to be profitable from day one which is an impossibility. It is analogous to treating a baby like an adult - it can never work.
We've learned our lessons and here we have Steem as the glorious outcome.
But did we really draw the right conclusions?
Steem is configured the way a start-up company operates: rapid expansion is the priority, regardless of the costs. It's like launching a nuclear reactor: you need to put a lot of energy to start the process.
And here is the problem: we seem to be making yet another mistake, similar in nature to the one made with BitShares. This approach assumes Steem will be constantly in the start-up phase - burning its resources like crazy for the rest of its life. For most investors, this is psychologically quite unbearable, even if the economic theory is sound, as it implies that Steem is never meant to mature and be profitable. Instead, it looks like it is meant to be continuously expanding, which, as a concept, is totally unfamiliar to our daily experience.
The actual lesson learned from BitShares should be this: the system must not be fixed, it needs to evolve in time. Infinitely staying in the the start-up mode is equally destructive as applying a mature business model to a start-up.
What's the solution? Steem's inflation rate needs to gradually decrease as time goes by. It doesn't need to hit zero, but it needs to be asymptotically aiming at zero. This gives the signal that the business model is meant to mature and be sustainable in the long run.
And this sustainability does not need to be factual. Reality does not matter. Perception does. Investors are human beings: they need to see an end goal which they are able to perceive as sustainable. We can endure something negative for a long time, as long as we know there is going to be less and less of it.
Bitcoin got it right: decreasing inflation is a feature which has been absolutely crucial to its success. Bitcoin's genesis was an experiment in collective faith. It's safe to assume this experiment would have never taken off, if it had been configured by Satoshi the way Steem is: with never ending inflation.
If we keep the current setup, our main premise - if Bitcoin makes sense, so does Steem - loses a lot of its weight. I'm not saying infinite inflation is fundamentally flawed (I don't know this) but surely this is an economic model which nobody has ever attempted before, not even Bitcoin.
If anyone can give a valid reason why we need never ending inflation set a fixed level, please let me know. Otherwise I conclude that we shoot ourselves in the foot (by scaring off investors) while we achieve nothing significant in return. If Steem is to survive and market cap grows, there will be plenty of funds to distribute, even with inflation decreasing and close to zero in the very long run.
Inflation is need to fund rewords... or in other words, to give a paycheck to Steems employees which with daily activity and posting increases value of Steem Network.
Every company to survive need a source of income which comes from outside. This income needs to be big enough to balance the costs of network.
In other words.. Steem need a business model. In theory this could be ads or some premium features... but I think Steem can do something much better... and maybe @dan and @ned even right now are working on that:
If Steem will take a 1% fee from each transaction made on SteemBazar, then this can be more than enough. And... people will be happy to pay this fee, because they will know, that this is distributed later to best bloggers on the platform.
Right now to support you favorite youtuber, you need to buy a t-shirt directly from his shop. With SteemBazar you could just buy a t-shirt from anyone on the market, and thanks to that your favorite youtuber will have a chance to fight for those collected fees :)
But this is just a theory... but you know... we can make this happen :)
Having a profitable business model would be nice but it's not crucial IMO. None of the other major crypto-projects (Bitcoin, Ethereum, Dash) has such a model and they are doing fine without it.
What is crucial however is for Steem to fully replicate Bitcoin's business model, including inflation. As long as Steem's approach to inflation diverges from Bitcoin's, there is no real-life proof that Steem's business model has a chance to work. It's all just an unproved theory, never tried before.
I still have not found a good answer to this question: why do we need inflation to stay constant? The only argument I hear is this: "Inflation needs to stay high and at a fixed level because once Steem has millions of users it will need a lot funds for rewards". But the thing Steem does not have millions of users right now and is likely to go bankrupt before it can reach this kind of traction.
In other words, I find this approach quite disconnected from reality. I wonder how much more the price needs to tank before we revise our inflation strategy. The current one is clearly not working.
The inflation seems unsustainable because the user base is microscopic. If inflation is held constant and the userbase grows to millions or billions of users it will seem much more reasonable and sustainable. Steem Dollars and Steem Power account for the inflation that will still seem unreasonable when growth plateaus. I think.
To keep the cash flow coming, like many here expect, then you have to keep printing money, which results in inflation. The reason FB kept and keeps growing is their user base keeps growing. I tried to explain Steemit to a friend of mine and kept telling him that you make money for posting there. He said he didn't care. Everyone he knows is on Facebook, which is what appeals to him.
Take a look at how top heavy the tags are in regards to popularity. The best rule the roost. You may end up with a niche site here where no one else wants to play the game.
I like that I can post here, make a few dollars and share it on FB and Twitter. At least the posts I want people to see. I also share posts that I find of interest. If enough people on FB start to see interesting articles from this Steemit site it may get them curious.
I can remember the early days of the web. I had found it and would tell people in my community. They would look at me with these bemused smiles as I would talk about the potential and how it could be such a huge benefit for us. Some have eventually told me that they remember thinking I was nuts, but not so much now.
I don't vote without commenting and I Tweet everything. I have a post in my blog about it, but in a nutshell, I think we should reach out to the rest of the internet and tell them we're here.
I understand this and I don't say we should stop printing money. I'm just against keeping the printing rate at a fixed level, as if we aimed to be a start-up forever. This achieves nothing, yet sends a very unpleasant message to people investing in Steem.
We could say that inflation starts decreasing after e.g. 2 years (and continues decreasing slowly for the next 100 years). If Steem does not gain much traction by then, it will be a failed business anyway and no amount of financial incentives for bloggers & curators can change this.
Anyway what is better: have 5% to distribute from a market cap of 500M or 10% from 100M?
STEEM provides value for Steemit by creating a tangible product to reward for participation. Steemit's value to STEEM, thus far has fostered interests and grown the market capitalization. When the paydays start dwindling, interest is apt to ween as well. There is a finite number of people that will be interested in being involved with crypto in any way, STEEM included.
They're watching all this and may or may not invest when the time is right. The good news is, you do have a growing member base that has made a lot of money here. Let's hope they come back in after they've cashed out. There's one sure way to ensure future growth...re-investment.
Interesting comment about a friend not being interested because everyones on Facebook. I remember when no one was on Facebook but I got that this social phenomenon was going to be huge. As I watched hundreds of friends join , I made a business page and invited them to like it and now Facebook want to charge me for my friends to see my posts...crazy stuff but I guess thats why Facebook price is, ( NASDAQ: FB - 22 Aug., 7:57 pm GMT-4 124.15USD ) ... wouldnt it be great if some of the $350B market cap of FB was shared among their 1.5B users? Maybe.. just.. maybe, Steemit will get to 5 million or even 10 million users some time soon and we will share in the value of helping to build an exciting and viable social network of our own.
My friend didn't care about the money. FB has always been about exclusivity and inclusion. Zuckerberg saw an angle and he stole it. It worked, big time. The creators of Steemit see their angle and have been successful so far. One of the differences between Steemit and FB is that we all get to be involved in the success or failure going forward. FB people just had to be sheep, we have to be rams here at Steemit.
I like the sheep to ram metaphor. Simple, but says it well.
I feel that through that inflation platform gives more to new users. If it was no inflation we would have to transfer value manually like other systems do. But things like reverse stock split http://www.investopedia.com/ask/answers/06/reversestocksplit.asp
can keep the price of steem in check.
In fact, inflation of steem is a beautiful thing since thought that inflation everyone is forced to create new values and those that don't contribute lose their value, but not in a very meaningful way since a big part of inflation is targeted towards of those that own steem (in means of SP) in the first place.
Come on, people. Please read the post carefully. I'm not saying that we should not have inflation - quite the opposite.
I've gone through it again. But the basic idea of rewards is to be gotten through new steem creation (800 per min), or inflation. We could transform it to be smaller % by giving less to existing owners, but that wouldn't be fair to them and would be opposite what whitepaper says. IMHO it's not too big and it should stay the same especially if u take in consideration effects like a reverse stock split.
Else as I stated in previous posts we would need some other way of rewards sharing to take place. With more users, individual rewards fall down so we might need even more steem to be produced or even bigger inflation.
Even with the current system, one could argue that you have inflation % reduced every day as steem is produced at fixed rate if u don't watch only on a yearly basis.
It's just mine uneducated opinion.
I agree with your basic premise @innuendo, but applying this in practice is a little more challenging.
If steem continued inflating at this rate forever then investors are scared off by the inability to meet expectations at some point.
If steem changed it's inflation rate over time, for instance as you say, by beginning to decrease the rate of inflation after 2 years and asymptotically approaching 0 over 100 years, it may not coincide with steem's growth chart.
Leaving it as is for now and trying to change the inflation rate later on down the road will be difficult, it is not easy to reach a hard fork consensus once a crypto grows larger.
I guess the solution would be to have the inflationary function based on growth within the last X amount of time. I don't have a concrete answer on this, but I think basing steem's inflation rate off it's empirical growth is probably the best solution?
Maybe it should be tied to M2 growth. It's been growing 6 percent the last few year. If Steem grows slower than m2 it would probably be long term deflationary. Adding 4 percent in value seems easily doable . It's barely over population growth ( which is embedded in m2). https://fred.stlouisfed.org/series/M2
I think inflation really is a concern. I mean, I get it. They need to keep issuing steem to keep it running until the platform is successful but then what? from an investors perspective its not really attractive.