Steemit Economics 101

in steemit •  9 months ago

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If you told people they could make money for posting on Facebook, Twitter, or Reddit, what would they say? “Sign me up”, right? It’s not just the money. It’s the fact that people already spend many hours of their lives posting, watching, reading, and responding to others’ posts on social media sites. This work enriches the sites’ owners by creating a more valuable site that can sell more advertising, but the user who posts or reviews content does not get paid for it by Facebook, Reddit, or other social media platforms. Did we say ‘work’? It’s not work if it’s fun! And if you find posting and reviewing others’ posts to be fun, then Steemit is the perfect place for you. It’s time you got paid for all your hard work and fun. We have discussed the posting and upvoting opportunities, which reward you with payouts. Now it’s time to talk about the financial aspects of Steemit.
Before we do, please keep one thing in mind as you read this section: Steemit never handles real money. This is not a bank or a financial institution. It’s not a stock or a commodity. No financial product or service is being offered. When you Power Up, you are not “investing” in any financial sense. There are three “currencies” in Steemit (STEEM, STEEM Dollars, and STEEM Power), all of which are merely tokens inside this ecosystem. When you get paid for posting, voting, or commenting, the money is paid directly from the blockchain and not from Steemit, Inc. Viewed this way, Steemit is a massive multi-player game. It just happens to be a game where you can earn rewards that are paid 50% in the form of price-stable tokens (STEEM Dollars) that are worth about $1 apiece. With a few clicks of a button, these can be converted outside Steemit to Bitcoin or other currencies. And you also get rewarded (the other 50% of your payout) with other tokens (STEEM Power) that grant you the promise of more rewards, the more you accumulate and hold, and the longer you hold them actively (though you can cash them out also over a two-year period if you prefer).
Where does Steemit’s money come from? First, its platform and business model are much leaner than any other social media site. Because Steemit uses the blockchain, which can verify and automate much of the work (such as payouts), there is no need for an expensive corporate structure. The money that’s saved can be paid to users.
Second, Steemit uses an inflationary cryptocurrency that has tremendous value inside this system (and soon, we hope it will have more value on other websites that accept it also). Essentially, this is the same way that the U.S. dollar has inherent value, except there are fewer uncertainties with Steemit. The rate of inflation with STEEM is programmed in; a certain amount of new STEEM is created each day, and that is what is paid out to blog posters and voters. People who vote with their STEEM Power stakes decide how the money that’s created will be allocated.

Steemit’s Market Value

Like any company, Steemit is valued at a certain price by the market. Facebook has a market capitalization of $325 billion, which the market arrives at by taking the price of Facebook’s stock and multiplying it by the number of outstanding shares. If someone wanted to buy all of Facebook’s shares, they probably would need to pay more than this, and that would establish a
different fair market value.

Steemit’s liquid currency, STEEM, also has a market cap, which you can find by visiting the site www.coinmarketcap.com. This site displays the coin price and total market capitalization for Bitcoin, Litecoin, and all of the other cryptocurrencies. Taking the quantity of outstanding STEEM and multiplying it by the current market price of STEEM, the site is able to display a
number for its market cap. The number might be $10 million or $50 million or more.

That’s a good start, but we know that Steemit is much more than a coin. In Steemit’s young history, there have been short periods where the user base has grown by hundreds and the website ranking has jumped considerably, yet during that same time period, STEEM’s market cap has declined by 1% or 2%. And that’s because the market cap does not look beyond the available currency, nor does it consider the stakes held by founders, even though they are releasing it into the market over time to help pay for development, marketing, and user rewards.

STEEM’s market cap is only a fraction of Steemit’s net worth. A better measure would consider all three of Steemit’s currencies, STEEM, STEEM Dollars, and STEEM Power, and including some of the founders’ shares as outstanding currency, though even that would probably underestimate the site’s value. If you would like to read more about the issue of valuing Steemit, please click here for an insightful post by Daniel Larimer on that issue.

Advertising provides the main source of revenue for social media sites like Facebook. And yet advertising revenue represents only a portion of that site’s actual value. The rest of its value is in
its people. Remember, Facebook’s high valuation comes largely because it has access to one billion people. They also spend a certain period of time on the site and remain engaged with it, which leads to a higher valuation.

Ned’s Buckets

As Steemit grows and adds users, its value will grow, too. What Steemit’s founders did was to establish a market cap valuation for STEEM first and then use the new money that’s created from this inflationary currency to reward people who post and curate content on the site. If you read the mining chapter earlier, then you might recognize this idea. Yes, anyone doing the work of posting and voting is essentially mining STEEM Dollars and STEEM Power.
Steemit’s CEO, Ned Scott, has discussed this using the analogy of several buckets being filled.

As new money is created to fill buckets, this money can be allocated to reward payouts. The money already in the buckets, which is needed to maintain Steemit’s market cap valuation, is not
touched. So the best of two worlds exist at once:

1.) Steemit has a stable market cap and can pay people partly in a market stable currency token (STEEM Dollars).

2.) Yet Steemit has a constant source of income as new money is created. This money can be allocated to pay users who are “mining” the currency by doing the work (posting and curating) of creating a more valuable site. Yes, it anticipates and leverages future growth, but even in the
event that growth does not come, the market cap provides a floor and payments can continue.

Steemit Has Unlocked the Untapped Value in Social Media In conclusion, the big takeaway from this chapter is that Steemit has found a way to unlock the value of a social media platform. Why not let them get paid for doing the work of building a
more valuable business? And so, rather than sell them advertising and mine their data so that advertising can be targeted to them, there’s a better way to tap into the site’s value. Steemit has managed to unlock value, leverage growth, and yet maintain the established market cap as a floor to protect reward payouts to its users.

The caveat here is that the value of money in Steemit is constantly being diluted. It’s
inflationary. As new money is created, existing currency is worth less. But there is a place where a lot less dilution occurs, especially when you remain active on the site. Please read the next chapter to gain a fuller understanding of STEEM Power and how its proportionally increasing rewards are the icing on this cake.

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