Is the Steem ecosystem in disequilibrium? (Part 4 – Passive Income)

in steem •  10 months ago  (edited)

Hi Everyone,

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In Part 4 of my five part series, which investigates the operation of the Steem ecosystem, I will be exploring passive income on Steem. Before I begin this post, I will provide a brief overview of the series.

In this series, I will be investigating, identifying and articulating many of the problems with the distribution of rewards in the current Steem ecosystem. The five parts to this series are as follows:

There are several ways of earning rewards on Steem. I will simplify these into five categories. These categories are content creation, content curation, applications and services, witnesses, and passive income. All of these categories obtain rewards from the increase in supply of Steem also known as the rewards pool. The right incentives need to be in place for the right balance of activity. All five areas are important for different reasons.

Passive Income

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Passive income involves obtaining a return from just owning Steem Power. There are several methods of obtaining passive income on Steem. These methods are as follows.

  • Interest on Steem Power and savings
  • Returns from vote selling
  • Returns from delegating to a bid-bot
  • Returns from delegating to an application
  • Returns from delegating to a project
  • Returns from delegating to a curator of content
  • Self-voting no/low effort posts

Interest on Steem Power and savings

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Accounts are able to earn interest on Steem Power and savings; 10% of newly created Steem is paid as interest. Supply of Steem is currently increasing at about 8.6% annually. Therefore, the interest rate of Steem Power is less than 1%. This a very low interest rate but that can be expected as the new supply of Steem is also needed to pay witnesses as well as fill the rewards pool. If interest rates were the only form of passive income, Steem would not be attractive to investors.

Returns from vote selling

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Returns from vote selling is considerably higher than returns from interest rates. Voting selling is typically conducted through vote selling services such as @smartmarket and @minnowbooster. These services automatically sell votes for accounts that grant them permission to do so. Once permission is granted, the vote selling account only needs to collect payments, which could also be automated. Vote sellers can also state the minimum required voting power/mana at which votes will be sold. For example, if voting power/mana is at 80% and the user states that votes will not be sold under a voting power/mana of 90%, votes will not be sold until the voting power/mana regenerates to over 90%.

The vote seller earns the curation reward (approximately 25% of the upvote given) as well as part of the fee charged to the vote buyer. After vote selling services have deducted their share of vote payment, the vote seller typically receives about 80% of the value of the upvote. It is possible vote selling can earn over 100% of the upvote, if votes bought are cast before large upvotes from whale accounts or bid-bots. Vote selling could provide the highest return of any activities on Steem.

Returns from delegating to a bid-bot

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Delegating to bid-bots is currently one of the most popular and highest earning forms of passive income. The bid-bot typically keeps the curation rewards, approximately 20% of the value of the upvote and the delegator is paid the value of the bids corresponding to the value of Steem Power delegated. Accounts delegating to bid-bots will receive approximately 60% to 75% of the value of the upvote they could have made self-voting themselves with the equivalent Steem Power they delegated.

Returns per upvote from delegating to bots is likely to be slightly less than vote selling per upvote but the total returns could be higher as bots optimize the timing of votes to maximise income. Annual returns from vote selling is approximately 10%, which is higher than the annual percentage increase in the supply Steem.

Returns from delegating to an application

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Some application offer direct returns in Steem or SBD while others offer returns in terms of upvotes. Passive income seekers would delegate to applications that pay Steem and SBD directly. For example, @utopian-io and @steemhunt reward delegators directly with payments.

Delegating to applications can help them grow and therefore benefit all Steem stakeholders. These benefits are indirect and the impact on the price of Steem cannot be directly attributable to the success of the application.

Returns from delegating to a project

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There are many projects running on Steem. Many of these projects are intended to improve Steem in the long-run, therefore may not produce any direct return to delegation immediately. However, some projects still offer a return to accounts that delegate above a particular amount. @steem-ua offers rewards to those that delegate over 5,000 Steem Power and upvotes posts of those that delegate smaller amounts.

Returns from delegating to a curator of content

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For curators to acquire more influence they need Steem Power. Several of the large accounts delegate or have delegated to curators to enable them to reward good content. The passive income to delegators can be expected to be low. The maximum a delegator should expect to receive is the value of the curation rewards obtained by the delegatee, otherwise there is no incentive for the delegatee.

Delegating to good curators can be very beneficial to Steem. Good curation can help the best and most popular posts gain visibility and earn sufficient rewards to retain existing users as well as encourage new users. This will also have a spill over effect of encouraging investment. These returns are not direct, predictable or attributable; therefore, many investors would not include them as a form of passive income.

A similar alternative to delegating Steem Power to a curator is to follow a curation trail. There are several curation trails with varying objectives. The user just needs to join the curation trail using a website such as steemauto.com. The passive income is equivalent to the curation reward obtained from the upvotes. The rewards from following a curation trail might be less for a large account than delegating to a curator because of the accounts front-running the larger vote.

Self-voting no effort posts

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If a person creates a post that requires both time and effort, a self-vote should not be considered passive income. If a person creates a post or comment that takes a few seconds, I would define that type of self-vote as passive income. These self-votes, if not downvoted, return 100% of the upvote to the user. In the absence of downvoting, self-voting these types of posts or comments produce the highest return per upvote. To maximise this return, a person would need to create ten of these posts or comments a day.

Downvotes can reduce the returns from self-voting very low effort posts and comments. Abuse fighting bots such as @spaminator and @steemcleaners, sometimes locate these post and comments. These posts and comments are sometimes downvoted by other users as well. The high cost, the risk of retaliation and the negative response from the community reduces the likelihood of downvotes.

Defining the problem

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Many forms of passive income produce higher returns than creating content and/or curating content. Good curators might only receive 30% to 40% of the value of their upvote. Vote selling, delegating to bots, and self-voting typically returns over 80% of the upvote. Bid-bots also time voting to maximise daily rewards (i.e. upvotes 10 times a day).

What is also concerning is that the annual return from passive income through delegating to bots and possibly vote selling is greater than the percentage increase in the supply of Steem. This could be because the rewards obtained by the content creators and curators are not covering their investment in Steem. This could also be because of the inactivity of large accounts such as @steem and @steemit.

Passive income, as the name suggests, requires minimal or no effort. Most people would rather not work if it meant receiving the same or higher rewards than working.

For the Steem ecosystem to run effectively, rewards need to align with the value added to the platform. For example, if a user has 50,000 Steem Power, the user should earn more by actively contributing to the platform than simply delegating and walking away. In the current Steem ecosystem, this is not the case.

Possible solutions

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There are three broad approaches to realigning rewards to activity; these approaches are as follows:

  • Reduce passive income rewards
  • Increase rewards for actively contributing to the platform
  • Combination of the two above approaches

A strategy that involves both reducing passive income rewards and increasing rewards for active contribution to the platform is most likely to be successful. In Part 2 of this series, I covered several possible solutions that would attract users to more actively curate content. The solutions suggested in that post, which are most pertinent to passive income are as follows:

  • Content creator and curation rewards to be split 50/50 instead of 75/25
  • Content creator and curation rewards to be split 25/75 instead of 75/25
  • Creation of a separate downvote mana pool
  • Introduce curation beneficiaries to enable delegation of Steem Power to curators
  • Linear and superliner rewards
  • Smart Media Tokens (SMTs)
  • Combination of solutions

In addition to the above-mentioned solutions, the following suggestions could reduce the rewards obtained from passive income. These are as follows:

  • Account-based voting using resource credits
  • Sigmoidal stake-based voting
  • Capped maximum upvote value
  • Penalties

Account-based voting using resource credits

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Authors such as @liberosist and @nealmcspadden have discussed account-based voting in some detail. I have discussed account-based voting on the basis of being trialled as part of an SMT in Part 2 of this series. Account-based voting could restrict passive income and thus encourage manual curation of content. Account-based voting also has several problems. Some of these problems are as follows:

  • Users could create multiple accounts and distort the distribution of rewards in their favour.
  • There is very little incentive to buy Steem Power if it does not increase the value of the upvote.
  • Applications will not be able to earn revenue from delegated Steem Power.

These problems could be mitigated with voting resource credits. Upvotes, comments, and transactions all come from the same resource credits pool. If there was a separate resource credits pool for voting, more Steem Power would give users more votes instead of higher valued votes. For example, if 100 Steem Power could allow a user to vote once a day. Therefore, 100,000 Steem Power could allow a user to vote 1,000 times a day. To vote 1,000 times a day is unrealistic for most users. Therefore, a user could choose to vote 20 times a day and delegate the remaining 980 votes. The delegatee would earn a percentage of the curation rewards and the rest of the curation rewards would go to the delegator.

How does voting resource credits solve the above-mentioned problems?


The creation of multiple accounts will have no effect as these accounts will not have sufficient resource credits to contribute many votes. There is incentive to buy Steem Power because a user can cast more votes or delegate resource credits to other users to make the votes and therefore earn curation rewards from the votes made by the delegatee. Applications could obtain delegated voting resource credits instead of Steem Power. Some of the advantages of stake-based voting will still be lost but the applications will be able to earn rewards from upvoting many posts instead of a few. If the application has many users, the disadvantage is minimal.

Sigmoidal stake-based voting


The relationship between Steem Power and vote value is linear. For example if a user with 10,000 Steem Power has a vote worth 0.5 SBD with 100% voting power, a user with 100,000 Steem Power will have a vote worth 5 SBD with 100% voting power. Sigmoidal stake-based voting values would follow an S-curve. As more Steem Power is acquired, the value of votes increase at an increasing rate initially and then increase at decreasing rate after a particular point, see Figure 1.

Figure 1: Sigmoidal relationship between Steem Power and vote value

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This approach to voting has several advantages.

  • Returns to delegating to bots over a particular size will be greatly reduced.
  • Less influence will be held by the largest accounts.
  • There are strong incentives for smaller accounts to invest in Steem to earn much higher rewards as Dolphin accounts.

Unfortunately, this approach also has several disadvantages. Two such disadvantages are are as follows:

  • Large accounts can spread their wealth over several Dolphin accounts. For example, a large bid-bot could be split into 10 dolphin bid-bots. Delegators would spread their delegated Steem Power over these accounts instead of just one. Voting oracles might be able to resolve this problem.
  • Many of the smallest accounts might be hesitant to invest and decide to leave, as their votes would be worth very little.

To learn more about sigmoidal stake-based read this post by @nealmcspadden.

Capped maximum upvote value

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In the current stake-based voting system the value of upvotes are only limited by Steem Power and voting power. A maximum cap on upvotes would affect the large accounts such as whales and bid-bots. For example, if a maximum upvote of 15 Steem was implemented per account. If 15 Steem was the unrestricted maximum upvote for an account with 200,000 Steem Power, this account could still cast 100% upvotes. If an account has 1,000,000 Steem Power, this account could still only cast upvotes worth a maximum of 15 Steem but instead would only use 20% of the account’s voting power. Therefore this account could make five votes valued at 15 Steem at the voting cost of one full (100%) upvote.

Capped maximum upvotes has mostly the same advantages and disadvantages of sigmoidal stake-based voting. The effect on bid-bots is likely to be minimal as large bots can be replaced with multiple smaller bots. A much lower vote cap could inconvenience bot owners sufficiently that running bid-bot services would become more difficult and possibly not worthwhile. Bot owners could still switch to a vote selling service, which utilises many individual accounts to sell votes.

Penalties

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A possible course of action would be to penalise accounts for upvoting the same accounts too frequently. For example, upvoting the same account multiple times within a short period could result in a reduction in the value of the upvotes. For example, the first upvote at 100% could be worth 1 SBD. If another upvote for the same account is made 6 hours later, that upvote would only be worth 0.8 SBD. If a third upvote for the same account is made another 6 hours later, that upvote would be worth only 0.64 SBD.

Penalties would affect the profitability of self-voting but would not make much of an impact on vote selling or delegating to bid-bots. Adding these types of penalties could be very difficult to implement and likely to be impractical because of the complexity of the code required to establish vote timing between accounts.

Conclusion

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This brings us to the end of Part 4 of the series. In this post, I focused on passive income. I have looked at the possible sources of passive income as well as the rewards tied to these forms of passive income. I have identified the problems with the existing rewards system as well as identified some of the possible solutions. Many of the solutions have been discussed in Part 2 of the series. To supplement this post you can also read my post ‘Advice to potential investors in Steem’, in which, I outline approaches investors can adopt to earn returns on their investment

Across the first four parts of this series, I have discussed the ecosystem in regards to the five broad categories of content creation, content curation, applications and services, witnesses, and passive income. The final post will pull together the suggested solutions from these four posts to determine if a combination of solutions could be used to better align rewards with value added by all five groups of users discussed so far.

Thank you for taking the time to read my post. I would be grateful for any feedback or suggestions that you might have regarding rewards distribution to passive income.

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I like the Sigmoidal stake-based voting solution. The specific ranges of X, Y, and Z can be argued and tested over time. Optimal configuration may depend on the price of STEEM and popularity of the platform so these could be on a sliding scale. I think empowering small investors and limiting larger investors will attract and retain more users.

You mentioned the problem of multi-accounting with this method and I agree it is somewhat vulnerable but there are caveats. Exploitative multi-accounting could be reasonably limited by mathematical models and/or technical means. There are diminishing returns on the effort and time required to manage 100 accounts instead of 1 account. In addition technical means could be implemented such as limiting resource credits based on IP address or a proof of brain/identity system. Multi account voting circles can be identified through technical analysis of the blockchain and self governing downvoting can continue to reduce negative influences. The exploitative behavior of whales multi-accounting would be limited to knowledgeable power users of the platform. Most whales may be knowledgeable power users but not all of them will be. Sometimes we spend too much time worrying about negative behavior and limit our ability to make small positive changes. We already have a platform where some users know how to exploit the system to maximize benefits and that will never change, but if this improves experience for the average new user it should be attempted for growth.

I think sigmoidal stake-based voting would be an improvement over a simple account-based voting system. What concerns me a little is large stakeholders determining an optimal Steem Power to maximise voting. For example, a stakeholder could have 500,000 SP and the optimal Steem Power could be 20,000 SP to maximise returns per SP. This stakeholder could divide the 500,000 SP into 25 accounts. Then automate voting for 24 accounts or just create a curation trail to maximise voting.

You are right in regards to people always finding a way to exploit the system. We just need to create a system that minimises the damage caused by this exploitation or make it very difficult to exploit the system so that not many users will follow.

  ·  10 months ago (edited)

This post contained some typos in its mentions that have been corrected in less than a day. Thank you for your quick edit !

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I am awful with Steem name spelling, thanks for the pick-up, post updated.

Absolutely excellent post. I think there is no magic formula to improve the situation. We should leave investors to decide which method of the proposed they prefer most. If we start to complicate the things I’m afraid Steem will suffer more

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Thanks for your response @toofasteddie. Steem is still fairly new. It is very hard to predict what will work and what won't work. As we are able to observe more behaviour, it will become easier to tweak the system to benefit users that are adding value.

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23 SBD and 399 votes sounds great, I would be happy with half of that.

Wow. This is a really great post i must really say. You really emphasize more and more about the reward system of steemit. Actually if i am given the chance to have a large portion of steem power. i will always prefer the option of selling my vote than delegating. I still prefer selling my vote than delegating because of some reasons which i guess it is more favourable to me than delegation. But others prefer to delgate their steempower than vote selling so it depends on individual opinions about it. Everything is also affected by the price of steem. When the price of steem goes up, there is more rewards to get while when the steem price goes down, the reward also reduces. Great post i must say you have written

Thank you @adenijiadeshina. Using vote selling services enables you to hold onto your Steem Power so you can curate content whenever you like. Delegating to bid-bots prevents you from manually curating content, which if you are an active user is bad. The returns from delegating is probably slightly higher as the bot times the votes to maximise Steem Power for rewards.

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