Is Steemit a Pyramid Scheme?
UPDATE Feb 14, 2018: As explained below by @biophil, the formula discussed in this post isn't used anymore in the reward distribution process. I have written another post about the current reward distribution formula and why it's superior than the old one discussed in this post.
Why is it profitable to run voting bots on Steemit?
There has been claims that Steemit is a Ponzi scheme and I have explained in a previous post why it is not.
Yesterday, I read a comment from @dantheman about reward calculation on Steemit. If the formula given is correct, then we might end up with a pyramid scheme on Steemit. This might also explain why voting bots are profitable on Steemit.
In a pyramid scheme, participants contribute their money and sweat equity to the system. On the surface value seems to be created, but the system results in money flowing to the few at the top.
The Math
Here's the formula given in the comment.
NewPayout = (OldVotes + NewVotes)^2
To simplify, I'll use the following formula:
Payout = Votes ^ 2
Again for simplicity, let's make the following assumptions.
- There are two users, one with 9 Steem Power Tokens (SP) and the other with 1 SP.
- They post every day and they upvote their own content every day with full power.
- 1 SP is awarded every year.
As a result, we will have the following weights for the payout.
- User 1: 9 ^ 2 = 81.
- User 2: 1 ^ 2 = 1.
That means
- Reward for User 1: 1 SP * 81 / 82 = 0.9878 SP
- Reward for User 2: 1 SP * 1 / 82 = 0.0122 SP
In other words, User 1 ends up with the 99% of the rewards even though they only paid 90% of the reward pool. User 2 ends up with the 1% of the rewards even though they paid 10% of the reward pool.
If you are wondering, why low quality posts are getting high payouts while your high quality posts don't receive any payout at all, then this might be the explanation.
In an ideal system, bots shouldn't be working at all. It is the payout formula that enables this flaw in this system.
What's the Solution?
Distribute the rewards linearly. That is the payout is linearly proportional to the votes. Then you have a system where everybody gets their fair share and voting bots won't be profitable in the first place.
Payout = Votes
What are your thoughts? Am I missing something here?
Just for future reference, the comment you linked to by dantheman is very very old and Steem doesn't work that way any more.
Thank you very much for your reply, @biophil. I'm glad Steem doesn't work that way anymore, because that would be a disaster. I've written another post explaining the new system. I've linked to your ultimate voting power guide. It was a good one.
I don' think I've been here long enough (only slightly longer than you) to know what the solution is.
But perhaps https://steemit.com/steemit/@maxg/bid-bot-usage-report-for-02122018 might help the bots make sense - they always pay out less than they take in overall (kind of like casinos).
A more up-to-date and detailed explanation of curation rewards is here: https://steemit.com/steemit/@calamus056/curation-rewards-explained-in-great-detail
Thank you for your reply and the links, @samueldouglas.
What I understand from the summary of the first link is that people invested $68,774.03 and received $79,661.86. That's a 15% income in a day or week; I don't how the calculation has been made.
If you compound that to a year or multiple years, that's a huge income, which supports the theory above. That money is paid by all the Steem investors.
Correct me, if I'm missing something here.
Like I said, I haven't really worked it out yet. It's not as simple as $ spent on votes vs $ paid out though. The bid-bots often pay out more in votes than people bid in any given day. But, the curation rewards they collect can be considerable - @buildawhale collected approximately 1000 SP in the past week.
Your explanation is more detailed, but it supports the pyramid scheme theory above.
Money is flowing from the small investors to big investors through post and curation rewards.
The quality of posts is just a marginal factor. The main factor is the share of a user in the voting power.
I think @themarkymark's comment shows why I shouldn't be giving advice in this area yet!
No, on the contrary! I appreciate your contribution.
I wouldn't be able to find those links without your comments.
This is how we find the truth by discussing. That's why I invited feedback at the end, because I'm not sure 100% what's going on here either.