Beginner’s Guide. Part 2. Steemit: How the hell does it work?

In this article, we used layman’s terms to explain how Steemit works. We’ve explained in a very understandable way what Steem, Steem Power and Steem Dollar are all about. The article also tells about who votes, how to vote, the reward, and why some votes attract $100-500 to a post, while others don’t.

This part is devoted to the topic.
Steem

Let’s use analogies. Steem can be compared with gold. In the real world, gold has value. Its price can change with time and it is determined by supply and demand. In the digital world, Steem is the same as gold but only digital in nature. The Steem team opened its source of gold (Steem) and miners are working painstakingly to supply more and more new Steem in the system every day.

Steem doesn’t have its own servers and data center. The system makes use of a distributed database – Blockchain. Miners are people using their computers and software to process data and ensure that the system works perfectly.
Some features of Steem:

100% issue per year from the total amount of Steem;
There are no fees for any transactions (transfers from person to person);
Steem can be sold at the exchange or converted to Steem Power;
Steem can be exchanged for Steem Dollar at the internal exchange.

Steem Dollar (SD or SBD)

Now let’s talk about Steem Dollar. What do you understand by the usual US dollar? In essence, it is a paper secured by certain obligations. Before the gold standard was abandoned, the US dollar was rigidly pegged to gold, and you could always exchange the dollar for gold at a rate of $35 per troy ounce.

Steem Dollar is the same obligation that is always exchanged for Steem at the rate of 1 US dollar (1 SD = 1 USD within the system). It is smartly called convertible loan. It greatly eases the lives of users because you don’t need to always keep the exchange rate of Steem in mind in order to weigh your earned money against ‘reality’. Everyone in his or her country knows what he or she can buy with a dollar, and thus can assess his or her labor.

Steem Dollar represents the same obligation. You can at any time exchange your Steem Dollar for Steem (the equivalent of gold). And for your Steem Dollar, you’ll always get the same amount of Steem that is worth $1.

So what happens when you receive for example 100 SD from the system for your post? The system is saying “Well done! Take this receipt, you can at any time get from us as much gold (Steem) as you can buy with $100 at this moment on the exchange”.

Let’s present an example. Let’s assume that 1 Steem = 1 US dollar. By converting SD to Steem, you’ll get 100 Steem. So what if the exchange rate of Steem increases to $10 (1 Steem = 10 US dollars)? Converting your SD to Steem, you get 10 Steem.

By selling your Steem at the current rate, you’ll in both cases receive $100. Such mechanism gives the system stability and enables ordinary users not to depend on fluctuations in the exchange rates of Steem at the exchange.
SD has additional features aimed at checking abuse and enhancing user interest:

SD can be exchanged for Steem in the internal exchange;
SD can be traded for other cryptocurrencies at the exchange;
It takes one week to convert SD to Steem;
The average price for the week (rather than the instant value) is used for exchange transactions;
You can’t exchange back from Steem to SD;
If you keep SD in your account, you get 10% interest per annum;
SD that is already at the exchange does not generate interests.

Steem Power (SP)

If Steem is gold, and Steem Dollar is paper money, then what is Steem Power? Steem Power is a kind of rating/karma in the system. The power of your voice depends on your Steem Power. Besides, Steem Power is a kind of an equivalent to shares.

Let’s take it one step at a time. Let’s assume you’re Alice in Wonderland. You have 2 cool things: the potion Pishsolver and the cake Upelkuchen. When you drink the potion, you decrease in size, and when you eat Upelkuchen, you grow up.

A daily fair is organized in our Wonderland. The fair attracts sculptors, painters and artists (authors of posts and comments in Steemit) from around the country, who hope to enthral the discerning audience with their talents.

There are sponsors in this party – mysterious miners but known by everyone! Each day, the miners bring 10% of gold (Steem) produced from the mines to the fair. This gold is daily distributed among all the participants at the fair. Why? – Because that’s the agreement between everyone.

Residents of the Wonderland (Steemit users, including you the Alice) visiting the fair on that very day go around and vote for their authors. The more you overeat Upelkuchen, your voice becomes more reputable and powerful. The voice of young novice residents of the Wonderland is almost inaudible, but yours, the strong voice, already has weight. All the votes gathered by each author are written down on a piece of indelible paper. Every evening, money is distributed based on this paper. How?

75% of gold brought at the fair is divided proportionally among all the authors who exhibited their works today; the other 25% goes to the Wonderland residents who came to the fair and voted.

You may ask what happens to the remaining 90% gold that didn’t make it to the fair? This gold (Steem) is transformed into Upelkuchen (Steem Power) and is fed to all the Wonderland residents.

Let’s recall that Steem Power is a kind of an equivalent to shares in the system. Therefore, 90% of the mined Steem is shared among all members of the network as a ‘dividend’ proportionally to their ‘equity stakes’ (number of Steem Power).

Of course, you can convert your SP to Steem. To do this, you need to drink Pishsolver (press the Power Down button in your account). Each week, your SP will reduce in equal amounts for 2 years (104 weeks). So every week, you’ll receive your respective Steem equivalent.

This is done to bring stability in the notoriously unstable world of cryptocurrencies. Speculators exchange one cryptocurrency to another based on short-term growth expectations. Steemit wants to build a community that is owned and controlled by the people. A community that is guided by long-term outlook.
Features of Steem Power

SP can not be moved to other participants;
SP is not traded on exchanges;
Users can at any time convert Steem to SP at the rate of 1-to-1.
Steem issuance does not create significant inflation thanks to SP share distribution among all participants.

In the next section, we’ll explain the structure of the voting system and distribution of rewards between authors and curators.

Previous part of guide is available here: https://steemit.com/steemhelp/@lehard/beginner-s-guide-steemian-s-adventures-in-wonderland-part-1