Is Bitcoin a Ponzi too? A Simple Explanation about Where Does Money Come From for Dummies
The most frequent question raised in Steemit maybe "Where does the money come from?" In this post, I will provide a simple explanation about this topic with comparison to Bitcoin's reward mechanism.
Highlights
- Steem's rewards majorly come from STEEM holders by diluting their shares
- In some conditions, Steem Power holders also pay for the rewards via dilution, but the magnitude is much smaller than STEEM's
- Bitcoin also has the similar mechanism but all rewards go to miners, while Steem's rewards go to diverse agents, such as content providers, curators, validators, miners, and liquidity providers.
Introduction
Do you think that Steemit is a ponzi? If you answer yes, you also have to admit that Bitcoin is a ponzi because they have the same reward mechanism fundamentally. Here I will explain why.
Bitcoin Rewards Miners Only
Let's look at Bitcoin first. The current supply of BTC is about 15.8 millions. Everyday, 12.5*6*24 Bitcoins are created as a mining reward, and about 70 BTC is paid as fees.
Then, what will happen after a year?
- Current supply: apprx. 15,820,000 BTC
- Mining reward (estimate, 1 year): 12.5*6*24*365 = apprx 657,000 BTC
- Fees (estimate, 1 year): 70*365 = 25,500 BTC
- New supply after a year: 16,502,550
The total supply of BTC is increased by 4.3%. Given an assumption that Bitcoin's total market cap is fixed for a year, this increased supply means that BTC price will drop by about 4.3%. An important fact is that this 4.3% goes to miners.
Steem Rewards Contents Creators Too
Steem has similar mechanism with Bitcoin. Steem creates 400 STEEM per block (3 sec) currently and 90% of them goes to Steem Power pool. The details can be found in Steem Whitepaper page 35. Here I assume that there is no Steem power-up and down for avoiding a complexity. Also, I picked an approximate ratio between Steem Power and Steem (96% vs. 4%).
- Current supply: apprx. 134,000,000 STEEM (Steem Power pool: 128,640,000 STEEM / 5,360,000 liquid STEEM)
- Witness/Miner rewards (estimate, 1 year): 1.0476*20*60*24*365 = 11,012,371 STEEM
- Contents creation/Curation rewards (estimate, 1 year): 2*20*60*24*365 = 21,024,000 STEEM
- Liquidity reward (estimate, 1 year): 10,512,000 STEEM
- New supply after a year: 559,483,710 (Steem Power pool: 511,575,339 STEEM / 5,360,000 liquid STEEM)
We can discover a hyper-inflation, say 317% increase a year, from 134M to 559M. But this is not the point. If the inflation makes no changes in terms of a share (percentage owned), it can be considered as just a splitting your shares. Regarding percentages, we can find STEEM holders have dramatic decrease, from 4.0% to 1.0%. This means that a unit price will dropped down by 1/4 if the market cap is stable. Meanwhile, Steem Power holders have slight decrease from 96.0% to 91.4%, about 4.8% decrease. That is, when price become 1/4, you have about 3.98 times more STEEM because you are holding Steem Power.
Interestingly, we can find 3.8% of new shares go to contents creators and curators. Where does the money come from? Obviously from STEEM and Steem Power holders. This is a kind of redistribution as like Bitcoin, but while Bitcoin only rewards miners, Steem has diverse types of rewards and different dilution rate between STEEM and Steem Power holders.
Conclusion
Steem is not a ponzi scheme but a novel platform that rewards content creators and curators through redistribution.
To truly understand finance realize EVERYTHING is a Ponzi scheme. Social Security is a Ponzi scheme. Benefits are currently being paid by issuing debt and selling it to other countries. The payouts currently available to retirees won't be available to future ones. They'll be too busy paying back the debt.
The dollar is a Ponzi having lost 98% of its value in the past 100 years while effectively stealing the value of saver's deposits by inflation along the way.
Everything is a Ponzi it's just that some Ponzi's are 'official' and universally accepted and some are not. Not to say that's a bad thing just that it needs to be recognized to be profitably utilized.
If the dollar is a Ponzi and Steem is pegged to the dollar there's no way Steem couldn't be a Ponzi as well. Again, not saying that's good or bad, just pointing out that's the way things work. One could even say the crashing of the housing market or something similar is a generational Ponzi collapsing. Our economic system runs and reloads Ponzi schemes continuously by its very design.
I see your point, but I would avoid extrapolating the term ponzi to include all of finance.
A true ponzi isn't sustainable from the get-go. And you need to ante up cash to get in.
EVERYBODY I KNOW said BTC was a ponzi. I'd ask them, can you explain what a ponzi is?
THEY COULD NOT. It was just the easy common thing to say to appear knowledgeable.
Cryptos are all making money from thin air. Some create value better than others.
Like the Fed, dollars from nothing.
Doesn't mean either is a ponzi. Social Security? DIFFERENT STORY!! Definitely a ponzi.
I remember a 'debate' I was having with Tone Vays about steem in the YT comments section of the World Crypto Network. I said cryptos all create money from thin air, from nothing. He said that was ridiculous! BTC is given value from the electricity used to produce it.
My response was, so with no exchanges in operation BTC would be worth almost $600 today... because.... electricity? Not expanding the user base? As demand for BTC increases, price increases. Duh.
If demand collapsed tomorrow, the BTC price would plummet down to under $20. Eventually $0.05.
And the exchanges play AN ENORMOUS ROLE is giving value.
His reply was "ok".
What gives the US dollar value? Wood pulp? The ability to print more? What gives the USD value is the same thing that gives anything else financial value, perception. The government being able to print more dollars at will is a negative, a debasement of the currency. Cryptocurrencies with limits on how much can be produced don't have this problem. Ironically you've done a good job of describing some of the problems inherent to fiat currencies which some have turned to cryptos to avoid.
Well said!
All stocks are Ponzi schemes. Yes sure you are calling a company valuable thus raising it's stock price but, until the next sucker comes along who's willing to pay that price.. it means nothing. So ultimately all stocks are a Ponzi scheme.
Nope a stock is not a ponzu scheme and steem is not either.
I am sick of people that cannot understand how things calling them Ponzi schemes, so they can sound smarter than they are.
Ponzi scheme: middle man takes person B's money and gives it to person A and calls it "earnings." Stock market: middle man takes person B's money and gives it to person A and calls it "earnings." Please explain the difference to me. No hatred here...I wanna learn.
I think you are right in a way. If we are not strict with the definition of a Ponzi scheme, a lot of things can be classified as Ponzi.
People who call Steem a Ponzi are in fact implying that stocks and other crypto-currencies (including Bitcoin) are also Ponzi. Which obviously does not make sense.
When you buy a stock in company (or a Bitcoin token), you do it because you assume that in the future there will be someone else who will buy it from you at a higher price. So yes, the financial outcome of your current investment depends on someone else making a new investment in the future. If we treat this as a valid symptom of a Ponzi scheme (which is wrong!) then yes, most financial instruments (Steem included) are Ponzi schemes.
Agreed. Or if we were in a brokerage industry and didn't want to get into legal trouble we'd simply point out they are 'speculative investments'. Same difference.
@gmalhotra " Where does the money come from? Obviously from STEEM and Steem Power holders"
please again give little more attention to the above sentence which @clayop written in his post and most easy sentence at the end in conclusion is that Steemit platform that rewards content creators and curators through redistribution.
So in Steemit you only get your earning through contents rewards,curation rewards in distribution and redistribution.
I think @gmalhotra has a good point which I explain in my reply to him/her. No need to bash people for asking legitimate questions.
In a Ponzi, person B still has a claim on the money, despite it having been fraudulently distributed to A.
When company earns profits from customers (B) and then gives those profits to shareholders (A), B no longer has any claim on the money.
That is the difference.
Now it is possible that some companies are indeed Ponzies, where earnings are nonexistent or overstated, and money from other investors is misrepresented as earnings, but that is not the general case.
Look no further then into your back pocket and pull out one of them crisp bills And ..Voila the great note of the Federal Reserve. The biggest Ponzi scheme ever. So big even Charls Ponzi him self would be in shock that they pull the wool over the publics eyes on this one. It makes me laugh when people say steemit is a scheme, yet they rely on the fiat currencies of central bankers.
I say if it's got trust it has purchasing power.
absolutely @knircky say right, the people who think or comments that stock or cryptocurrency like bitcoin or Steem is ponzi actually jealous or the people of third party like ponzi,scam and hyip schemes.
Definitely am not jealous. I wrote this: https://steemit.com/ponzi/@gmalhotra/ponzi-vs-stocks-vs-bitcoin-vs-steem-my-opinions
Its a full explanation of my views... If you care to read it. Just trying to create a healthy dialogue... No jealousy :)
@knircky Thank you i'm tired of the nonsense too
Companies usually have a business model. They produce something that a target market will pay for.
Steem's only source of money flow is the investors themselves, and the invested money is distributed between content creators (and other rewrad earners) cashing out, the founders and early birds cashing out, and yet the investors expect to get at least as much money out of it as they invested (otherwise, what's the point of investing?).
So more money is flowing out of the system than into the system, unless they balance this by constantly increasing the number of new investors.
Unless of course, investors are not in it for the returns. They accept that their investment will be distributed and they will actually lose money. But in this case, steem is either an over-complicated tipping platform (assuming investors are generous like that), or a glorified advertising platform (assuming investors are not just tipping out of generosity).
Steem has a business model. Just like Bitcoin.
What business model? Bitcoin does not produce anything. It is free, so it does not have earnings. It is a currency, or a open source bookkeeping platform. Steem can be a currency, too, but I suspect the high built-in inflation rate will hobble it as such.
That said, I think Steem works just fine for content curation. The model is quite ingenious, and could eat reddit's and hopefully even facebook's lunch. Just don't expect them to convert into hard cash forever.
Bitcoin is not free. Don't forget the fee.
That's the economic innovation that crypto-currencies have introduced: you don't need to have a profitable (in accounting terms) business model to be able to survive. You stay sustainable by expanding contentiously.
This very feature makes people think it's a Ponzi, but it's not. The key difference preventing crypto-currencies from being a Ponzi is the fact that the outcome of their existence is perceived as valuable - you can't say this regarding a regular Ponzi.
The point is, Bitcoin (or Ethereum or any other major crypto-platform) faces exactly the same problem as Steem: they need to contentiously expand to remain sustainable. Having transaction fees solves nothing and it just a hindrance for the user.
@orly has it nailed, I think. Steem can only have value if people buy it. It cannot have value from being handed out for posting, curating, mining, etc. In the long run (other than speculation), the only reason people would buy Steem is so they can distribute them amongst content creators. This amounts to paid speech, aka advertising.
Upvoted solely because I disagree with whoever flagged your post and wanted to balance that. I don't agree with it or think it adds much value.
If anyone cares: https://steemit.com/ponzi/@gmalhotra/ponzi-vs-stocks-vs-bitcoin-vs-steem-my-opinions
I wrote that as a full explanation of my views.
Your article is completely ridiculous... The main problem with this platform is the inflation rate of SteemPower. There are 100M steempower today. In 10years at the current inflation rate there will be 100Billion SteemPower and in another 10years there will be over 100 Trillion SteemPower....
You do the math.
You do the math, your numbers are wrong.
You are right!
At 90% yearly inflation assuming 100M SteemPower using the formula to calculate annual growth
The total SteemPower in 10years is 32,268,769,777
And 10 years after that the correct number is: 19,784,196,556,603
If you double something every year how much will you have in 10years ?
https://en.wikipedia.org/wiki/Wheat_and_chessboard_problem
No point of saying that here man, they are not interested in giving you actual answers. There's no need to complicate things.
Any smart trader (the ones who are actually supporting Steem price, if you call that support...) knows Steem won't appreciate in price, quite the contrary, its inflation is crazy as you mentioned. The solution they give you is to power up. The problem is that with SP investors think they are gaining "interest" but SP is just diluting their initial investment slower. So what's the point of investing in Steem? There's no point, you will most likely lose a lot of money unless you are a very active participant or an early bird/founder.
That's the real dumb math many here still fail to understand.
If you get SP and SBD from the site that's fine and all. But as a long term investment is one of the most ridiculous thing I've ever seen in crypto and I've seen a lot. I do enjoy the platform for what it is and there are many great content creators though.
Exactly!!!
Clearly you have forgotten what you've seen. Bitcoin after, 6 months of existence, was in a very similar position: people burning electricity like crazy and some "stupid" investors happily paying for this.
How that worked out for them? I agree with you though...I wasn't involved with Bitcoin at that time (2011) but I know many were just having fun and trying mining for the first time, that's it. A bunch of nerds playing around if you will. We'll not get into technicalities or even fundamentals on why Bitcoin is what it is today.
Investing in Bitcoin at that time was crazy indeed, and definitely not something a "smart trader" will do either. There were a lot of doubts and questions to say the least and so far most of the mainstream population still don't know how it even works.
Steem on the other hand for me and many others is actually pretty clear. At least how it currently works. But they are hard forking weekly so maybe next month we have a different system and I could see the value of locking SP for 2 years. Or maybe not since they could change it back in the next month.
All fine, but the question is about long-term sustainability.
I'm no economist, but I feel that the fixed rate of dilution/inflation and interest rates in the steem system is a mistake. They must float freely according to current market conditions.
Also the prominent "Buy Steem Power" button on the front page looks desperate, feeding the impression of depending on continuous outside investments to keep the "ponzi" going, and should be removed.
While inflation rate of STEEM is fixed at 100%, the number for Steem Power varies.
I agree
Steem dollar rate varies too.
Eh no one needs your money or anyone else's money and you just sound very ignorant.
I agree. Having the "Buy Steem Power" button is a very bad idea. It achieves nothing, yet gives the wrong impression.
Very cool just like our US dollar hyperinflate that sucker to pay debts... works well
both Bitcoin & Steem are neither PONZI nor Scam !!!
I have understand all you have described here very well but one question in my mind still exist i don't say Bitcoin or Steem or any other crypto currency is ponzi and who say that Steem is like ponzi are actually don't aware or jealous from Steem or Bitcoin, but in start or in beginning any crypto currency suppose like STEEM who are or who will be the STEEM holders ?
Steemit is an elegant design.
By logo, pagination, or concept?!
Yes
I think this explanation is missing something because you don't analyze SBD in this. No one holds steem. People only hold SBD and SP. Where does SBD factor into your analysis?
True. The main reason is that SBD makes it complicated then hard to deliver my focal point-where does money come from. I will deal with it in the future.
Yes, SBD makes it complicated, but it is the core of the issue. The claim is SBD is pegged to the dollar because it is backed my Steem such that more Steem can be printed to back SBD as needed. This seems to me to provide a mechanism that enables huge inflationary pressure in a financial instrument that can be liquidated quickly, causing a problem if there isn't enough demand for SP.
"No one holds steem"
Lots of liquid steem is being held, currently there's 5.31 million of them which are unvested.
I was speaking in hyperbole. 5.31 million is a very small portion of total Steem.
For any currency or money there is a universal truth. They only have value because people think it has value. Even government backed currencies eventually have to hold to this truism.
Bitcoin has its inflation scheme (aka block-reward) system set in such a way that early adopters are punished, causing the value of the coin to not grow exponentially. With the vast majority of the coins having been mined that will ever be mined, this no longer applies.
Steem doesn't stop charging holders, though. The inflation isn't there to "kickstart" the currency, it is a loop in and of itself. Not the same thing.
In Steep the holders see their value diluted so new content creators can get paid. And in exchange for them holding they get voting power.
I would agree that Ponzi isn't appropriate in the original sense for either.
What Steem does is it creates a platform where people with more holdings can decide what others read by up/down voting.
I'm still on the fence if that is a good thing.