An actual, relevant analysis of steem, and why its really not a ponzi scheme

@hisnameisollie finally drove me over the edge. I've seen like 900 posts that all said the same thing.

https://steemit.com/steemit/@hisnameisolllie/steemit-is-not-a-ponzi-scheme-it-s-an-economic-system-just-like-the-usdusd

Title, why Steem isnt a ponzi scheme.

Body. Ned and dan are awesome!!! vests!! cryptocurrency!!! we're all going to be rich!!!!

I explained in my comments to ollie why i hate these posts so much, and ill quote that explanation here. To be fair, though ollie was the straw that broke the camels back, his post was far from the worst ive seen.

1.They bring up steem in the context of a ponzi scheme. Which naturally makes one think that steem might be a ponzi scheme. Imagine there was a front page post on steemit every day titled "Ollie: Definitely doesnt have sex with cats. Im totally sure." Even if the titular claim was logically backed up, its not like it would help you get a job cat sitting.

2.which brings me to 2.. they never actually back up their claims. Theyre always ned and dan are awesome and theyre going to change the world and make everyone rich!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! there are literally that many exclamation points, then an explanation of the steem system and how its so great.... The main problem with this is that when you say XXX isnt a ponzi scheme, then you totally fail to provide proof that it isnt a ponzi scheme, it makes it look like a ponzi scheme. which brings me to

3.Because of 1 and 2 , You sound exactly like every piece of literature ever written by a MLM marketer, amyway salesman or other ponzi schemer. THey all have 100 reasons why theyre not a ponzi scheme. None directly related to use of investor funds. Thats what they do, They briefly address objections, basically long enough to mount an unsupported denial, then divert the conversation back to how awesome their MLM program or whatever is.

that said, i think there is value in addressing the issue definitively.

A ponzi scheme is a very specific thing. Ollie was kind enough to provide the oxford english dictionary definition, which is "A form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors:"

Lets keep this in mind for a moment as we follow Moe and Joe to get some oil.

two barrels of oil

NOTE: im aware selling oil does not work like this IRL.

Moe wishes to invest in some oil. Fortunately, he knows Ollie, who is an oil broker IRL. He goes to Ollies oil brokerage and learns that a barrel of oil costs $100. He gives Ollie $100, plus a commission, and Ollie goes and buys $100 worth of oil for him. Of course, it goes without saying that Moe is not going to store the oil in his own house... in such matters, he merely gains title to a certain amount of oil.

A month later, the price of oil goes up. It is now $110. Moe decides to sell his barrell of oil, and Joe decides its time to buy. Joe has heard good things about ollie from Moe, so he decides to buy two. Ollie sells Moes oil for $110. Takes $220 from Joe and buys oil for him.

What happened here is called an investment. Moe and joe bought oil because they believed oil would appriciate in value.

Evil Ollie perpetrates a scam.

Now, imagine a parallel universe where Ollie is a low down dirty scammer. Moe comes into his office, and pays $100 for a barrel of oil. Evil Ollie takes the $100, plus commission. But being evil, he does not buy the oil. Instead, he spends it on cocaine and prostitutes

Now, the price of oil increases, just as it did in the last scenario. Moe decides to sell. Unfortunately, there is no barrel of oil to sell. And, while cocaine and prostitutes have many wonderful qualities, investments in them do not tend to hold their value. Happily, joe walks in and wants to 2 barreles of oil. He's heard good things from Joe. Evil Ollie sells him the oil, takes the 220 plus commission, and gives 110 to Moe, then hookers for the rest.

False investment -- CWHDT?

Moe believed he was investing in oil. Evil Ollie took his money under a false pretense (a fake investment) and used it for his personal use. Then, when moe decided to sell, he took Joe's money to pay off moe, allowing him to continue the deception.

These are the defining characteristics of a ponzi scheme. EO took money as an investment in oil. But he really used it for prostitutes. Then he concealed the fraud by soliciting an investment form joe.

1. Investors falsely believe that they are investing in some endeavor or item that can make money.

2. Their investment is really being either used by the perpetrator for personal use or used to pay off prior investors.

Legitimate investments are vulnerable to demand decrease

The argument heard most frequently goes like this. "Early investors had steem. Later investors bought steem, and caused the price to increase. Investors after that bought steem and caused even more gains. Now, unless there are continuous new investors, the price will decrease. Therefore, new investors are maintaining the value of steem, and when they run out of new investors, the value will tank."

This may be so. Or, our lord and savior Jesus Christ might come back to earth ,open a steem account, start video blogging and we'd get all that christian money and the value will explode. Increase, decrease or stay the same, whatever happens to the value of their investment will happen for exactly the reasons they believe it will -- because of shifts in demand for steem caused by the performance of the platform.

But no matter what happens, investors in steem know precisely what will determine the future value of their investment, the success of steem as a company and a platform. The demand for their tokens. the argument that future investors are needed to prevent price decline is as invalid an indictment to steem as it is to Good Ollie. Imagine moe had bought his barrel of oil from good ollie, then two days later someone invented a car that runs on farts. As a result, demand for oil decreases and the price drops catastrophically. Ponzi scheme? of course not. Thats what investment is

legitimate investments are vulnerable to supply increase.

In the same vein, the fact that Steem, inc is making more steem through mining does not make steem a ponzi scheme. This argument goes "Well, steem is making more and more steem through mining, and that steem goes to increase the value of vests (to the benefit of SP holders) and stands to reduce current value of new investors with liquid steem. Therefore the new pay the old."

THe notion that an increase in money supply will cause price inflation, and subsequent loss of value is a popular one. It is also invalid as proof that steem in a ponzi scheme. Its this wrong headed argument that causes people to call USD, BTC and other staple media of exchange ponzi schemes, and it just doesnt hunt.

Again, the fraud aspect of a ponzi scheme comes in, as well as the frequent occassions where an increase in supply has failed to lead to these results. But even if the increase in supply were certain to yield these results, it would not make it a ponzi scheme.

power down not funded by power up

In a previous blog post, I speculated that steem gained through the power up proccess was used to pay off the powerdown process. It is not. Vests represent a share of a large portion of steem, held in reserve. and that is used to fund power down. The increase in the amount of that reserve steem due to mining (all steem enters the system as part of this reserve) is what funds power downs

Vests, the real unit of steem power, represent a share or stake in that reserve .... the steem value in the UI is just an estimate of that current value. Yes, under certain circumstances it is possible for those vests to decrease in value, thats why theyre an investment. But regardles of that worth, the investment as a percentage share of that reserved steem is guaranteed. It is not funded by outside sources.

At some point, i am going to try to model exactly what happens when you cut off all external investment to steem. But the reality is, very little. The system still works, because it doesnt depend on any outside money.