Steemit Reward Pool Abuse, Myth or Fact?

in #steemit6 years ago (edited)

UPDATE: I published a new solution proposal to the reward pool abuse problem taking into account the feedback by @biophil below. Here is the proposal: Variable Inflation Rate Is the Solution to the Reward Pool Abuse Problem.

And what can you do about it?

On the surface, there seems to be reward pool abuse on Steemit. Low quality posts are bubbling up to the trending and hot tabs and get significant payoffs, more than they seem to deserve.

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Alexas_Fotos/pixabay

When I saw the reward distribution formula in a comment by @dantheman, one of the founders of Steemit, I thought that that formula would result in abuse and it must be changed. I have written three posts about it [1, 2, 3].

Luckily, @biophil reached out to me and explained that the formula I mention above was already corrected. I've also found a post by @shenanigator to confirm this fact. All of which is great to see! That means Steemit is on the right track.

The new formula, distribution of rewards linearly proportional to the Steem Power, doesn't allow reward pool abuse. On the contrary, it punishes it. Then how come, we still perceive reward pool abuse?

First, let me explain, why the new reward distribution rule doesn't allow abuse. Then let me explain why we perceive reward pool abuse. And finally what we can do about it.

The Linear Distribution of Rewards Doesn't Allow Abuse.

For simplicity's sake, let's assume the market cap of STEEM is constant in fiat terms. Each year 9.5% of the existing amount of Steems are created out of thin air and added to the Steem supply. That means each Steem token will lose approximately 8.68% of its value each year in fiat currency, e.g. USD.

That means everybody who invests in Steem starts with a disadvantage. There are several ways to offset that disadvantage. The first and obvious one is that more investors invest their fiat money in Steem and increase its price. Since that benefits everybody the same, we can ignore its effect.

The second way to offset the dilution is by earning rewards from those 9.5% extra Steems. The reward pool is distributed using the following formula:

  • 75% to the reward pool
  • 15% awarded to holders of Steem Power
  • 10% witnesses to power block chain

For the following calculation, let's assume that everybody upvotes themselves to maximize their share of reward pool and no one else.

A regular user can only receive 90% of the extra Steems, which means they can only recuperate 90% of the dilution maximum. That means they will still lose 0.868% at the end of the year.

A witness seems to have 100% recuperation of the dilution on the surface, but don't forget that they have to pay the electricity bills.

This means, if someone wants to abuse the system, the best they can make is around 1% loss on their capital every year or break-even on their capital but electricity bills to be paid and equipment depreciation.

So, taking into account the updated, linear distribution of rewards, Steemit reward pool abuse is not a profitable business in theory.

Why Do We See Abuse Then?

There is a perception of reward pool abuse on Steemit. In reality, it's theoretically impossible to abuse the system according to the new updated, linear distribution of rewards. There are two explanations to perceived reward pool abuse.

Those posts really get the upvotes.

In order for a post to be profitable, it needs to get upvotes from users that do not participate in promoting that post. Otherwise, the promoters will lose money on their investment.

Laziness

The second explanation is the laziness of passive investors of Steem Power.

In order to see a truly fair distribution of rewards, every user has to cast at least ten votes per day (check @biophil's post for more explanation on this.)

The market cap of Steemit is $1 billion USD. That means that there are a lot of millionaires invested in Steemit. I can hardly imagine all of those millionaires logging in to the site every day to upvote at least 10 posts. That's not going to happen. That probably won't happen even for regular users.

So, most investors (most probably) either don't use their voting rights or delegate it to bots. In either case, they lose money on their investments in fiat currency terms. The only way they can make money is the appreciation of Steem in fiat currency. So, reward pool abuse is not as profitable as it seems.

What You Can Do About Reward Pool Abuse

There are two things you can do about the (perceived) reward pool abuse. First, log in to the site and cast at least 10 votes every day. 10 seems to be the optimal amount. Better do that every 144 minutes to maximize your impact, but probably that's infeasible unless you are a bot.

Second, explain to the whales that their promotion scheme doesn't benefit them and they are better off if they contributed directly or indirectly to better content on Steemit. I'm going to write a post how to do that indirectly tomorrow.

Don't worry about the reward pool abuse. It's not profitable according to the current reward pool distribution. Those people who seem to be profiting are either losing money or they get sufficient votes from others to make money.

Publish good content. Cast your daily ten votes. Be a good Steemian. Promote your posts if you want, even using bots. And wait for the mainstream to discover Steemit. That's the only way to make money on this platform. And forget about the reward pool abuse. It's a myth.

Do you have any questions or comments?

Let me know in the comments and I'll do my best to answer them.

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In either case, they lose money on their investments in Steem terms.

Don't you mean in USD terms? In Steem terms, anybody with SP has a growing balance.

I think you're making an assumption somewhere that the market cap (in USD terms) of STEEM is constant? Thus, it would seem to follow that people who sit on their SP and never vote are taking a loss due to dilution. People who do nothing but cast self-votes are taking a small loss due to dilution (since not all of the printed Steem goes to the reward pool).

If 100% of the total stake were voting actively, those conclusions might make sense. One issue is that much less than 100% of the total stake is voting actively -- probably less than 60% (though I haven't checked the number myself). Thus, 60% (or possibly much less) of the stake is allocating the entire reward pool, so depending on exactly how full the reward pool is and what these numbers actually are, you can easily beat dilution by self-voting.

And you can do the math yourself to verify it: I self-voted a comment at 47% voting power and full slider power and it gave me $0.16. So 0.16/0.47*10 gives me the total author reward I can allocate myself per day if I vote on nobody but myself. That comes to $3.404. STEEM is worth about $4 right now, so call that 0.85 STEEM. I have about 1200 SP, so that's 0.07% daily return, and to compute a lower bound we can ignore compounding and multiply that by 365 to get a whopping 25% annual ROI in STEEM terms. That's quite a bit higher than the 9.2% (or whatever) inflation that we currently have.

Or have I misunderstood you somewhere?

Oh, and since SBD is trading so high right now, the numbers I wrote violently underestimate the real return you could get in STEEM terms if you take your author rewards at 50/50.

Thank you for your feedback, @biophil. You found a mistake and explained the issue much better than me. So, corrections are in order.

Don't you mean in USD terms?

Yes, I mean in fiat terms. I'm going to correct this.

I think you're making an assumption somewhere that the market cap (in USD terms) of STEEM is constant?

Yes, I make that assumption to keep the calculations simple. I've mentioned it in the post: "If the amount of fiat investment in Steem remains constant" I will update this also.

If 100% of the total stake were voting actively, those conclusions might make sense. One issue is that much less than 100% of the total stake is voting actively -- probably less than 60% (though I haven't checked the number myself). Thus, 60% (or possibly much less) of the stake is allocating the entire reward pool, so depending on exactly how full the reward pool is and what these numbers actually are, you can easily beat dilution by self-voting.

Yes, the assumption that 100% of the total stake voting actively was implicit in the calculations. Do we have a reference handy where this percentage data can be verified? If not, I can google this later.

I believe the solution to this problem is to get everybody to use their voting rights every day. If they can't do that, they should delegate it to someone they trust who would work as an "editor" on Steemit.

Or have I misunderstood you somewhere?

No, you have understood me correctly.

I need to update the post, because the thesis here won't hold if less than 100% of the stake is voting actively.

After running the numbers a few more times, I came to the conclusion that as long as there is reward money, it's impossible to prevent abuse. That's why I came up with another solution proposal, which I explained in the post: How to Solve the Reward Pool Abuse Problem Once and For All.

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