Steem sinks and raising scarcity

I was just reading a post by @aggroed from a few days ago on Token economics and something that has always interested me is the idea of sinks, the place where tokens go to die - to increase the value of those that keep living. While I think that burning tokens is a great way to reduce supply, I am also interested in the idea of storing tokens.

On Steem for example, there is Steem Power which is storage of the token supply to create a reduction of Steem floating free. This is similar to a rainforest that stores carbon and stops its release into the atmosphere. Burn a rainforest down and all that carbon is now free to increase the carbon supply.

What is interesting on Steem is that the storage of Steem Power into the temporary sink also allocates new supply of Steem from the pool, the faucet. Steem power is the pipe network that directs the flow of Steem to precise locations on the blockchain. However, that supply of Steem is shrinking.

The inflation of the pool drops a fraction every 250,000 blocks (if I remember correctly from what @gtg said) which means that the pool is continually shrinking in growth rate. At the moment, the inflation rate is around 8.5% per annum meaning that this year, around 26,000,000 Steem will enter into the environment directed (mostly) by Steem Power.

There is about 100 million liquid Steem that doesn't benefit from having influence to direct or collect interest from the pool. This means that the approximately 200 million Steem powered up is benefiting from all that liquid Steem as if it was powered up, there would potentially be 33% less allocatable Steem available. While all that liquid Steem puts pressure on price, it ioncreases the benefits for those who are powered up.

But, while the Steem pool is around 26 million this year and next slightly more, soon it will start reducing in size and by the time Steem is at 1% flat inflation rate, there will be about 630 million steem in circulation which means only 6.3 million Steem in the pool. This will very slowly increase.

However, like @aggroed said, for a token to have value it looks like this:

Value of Goods and Services / Currency Supply = Token Value.

It also needs distribution, use case and sinks. The distribution is happening and the those powered up are getting additional Steem for having it there while the liquid misses this opportunity. This is the cost of having liquidity. But in time, there is going to be more distributed steem from a decreasing pool, more use cases that allow the token to be spent and due to scarcity, less liquid Steem hitting the markets.

In simple terms, if there were 2 accounts with 50% stake each and 1000 in the pool, each could direct 500 Steem. If there was only 100 steem in the pool, each could distribute 50. Simple.

But, this is not what is happening, it isn't only that the pool is getting smaller to create scarcity, the ecosystem is getting larger in ways to use it and, the number of accounts powering up are growing as there is additional incentive to build a Steem Power support base than keeping it liquid. Sure, you might argue that this is not happening yet and you would be right but, once Steem starts getting hard to extract from the pool, price increases and as price increases, there is additional incentive to have SP also because of the value of Steem.

If we go to our simple example, 1000 Steem at 1 dollar is the same value as 100 Steem at ten. But if one account sells 50% of their stake at 5 dollars to the other, when Steem hits 10, there is one account that can get 75 Steem or 750 dollars and one that can get 25 Steem or 250 dollars. If the stake was a total of 1000 SP, that means that the account that sold 250 Steem for 1250 dollars. Once. The account that bought paid 1250 but can keep taking that extra 250 Steem out of the pool for eternity and at 10 dollars, that is 2500 dollars value worth.

This doesn't mean that Steem has value though, it just shows that the account will quickly make up the value if Steem price stays at 10 but, the account that sold is unlikely to ever be able to buy back in to the same level. Of course, this is a very simple case but once there are millions of accounts playing this game with thousands of use cases and various life circumstances and approaches, we could imagine that eventually there is going to be a great deal of scarcity in the system and at some point there is going to be more incentive to power up than to sell. '

This means that there will be a rush for the tokens that are floating free in liquid form which pushes prices up again and that makes Powering Up even more attractive as even though there is less Steem distributed, that Steem has an increasing price. Factor this in with the a future of SMTs and Resource Credit pools to power them and there is suddenly a great deal of upward pressure on the value of Steem both on the exchanges and in the ecosystem that uses them.

This all takes time because currently there is what would be considered a high inflation but in 15 years, there will still only be just over 600 million Steem tokens available but, how many users? Again, this is speculation not on the price but on the community and use cases Steem may have, and they are the most important part of the equation long-term.

But, I don't believe we have to wait 15 years for this to take effect for as the entire crypto and blockchain industry develops, there will be a flood of interest and users coming into all platforms, almost without concern for what they offer. Yet, Steem already offers a great deal more than most and will be a likely candidate to onboard a good percentage of those bandwagon future users. This means that while the economics are running in the background, the applications and user experience are going to be driving use case and with enough users, investors will see the potential to not only secure their ownership, but use it as a vehicle to increase their influence over the platform.

It is very hard to predict what the industry is going to be doing 2 years from now, let alone 5 or ten but I am taking a punt that there is going to be a massive amount of blockchain users who are looking for a very diverse set of experiences and this will encourage all kinds of investments into associated products and services, many of which will also be hosted on the blockchains like Steem. Couple this with changing cultural norms, increased unemployment and the search for supplementary revenue streams, things are looking very good. This is the benefit of being not only an early adopter, but an early investor, consumer and developer in an industry that is only in its infancy.

Don't worry about the FUD, learn for the future.

Taraz
[ a Steem original ]