Where Does the Money Come From? - Ambassador Toolkit Item
This is a follow up to the What is Cryptocurrency and Why it's Not Scary post a few weeks back. The goal of these Ambassador Toolkit Items are to help empower non-crypto users with a better understanding of how Steemit (and Steem) work, to then have an easier time explaining and promoting the site itself.
The previous post had to start with a look at the US dollar, cryptocurrency/bitcoin and blockchains to demystify what is going on conceptually. This article will specifically look at answering the frequently asked question by prospective and new users of,
"Where does the money come from?"
This was one of the biggest questions I asked when first introduced to Steemit and I assume it is for others too. For me, finding how rewards are paid and by whom, is a big factor in determining if a project is a "too good to be true" situation versus the next big ground-breaking thing. While I don't expect anyone to be running through in-depth math or quoting the Steem white paper when talking about Steemit to others, having an idea where are rewards come from is important to instill confidence in non-crypto friends and family.
Post Rewards Aren't Tips
The first thing I mention to people is that the rewards we receive on posts (and comments) ARE NOT TIPS. When I get a one dollar payout on my post, that dollar did not come directly out of somebody else's pocket. Instead, there is a daily amount of new Steem that is printed for distribution, with "who gets what" is determined through votes.
How Much Steem is Created and Distributed Each Day?
The Steem White Paper says that each year 10% of the Steem market cap is created and distributed as post and/or comment rewards. The market cap is just the value of the total amount of available Steem (can think of this as shares) times the Steem price. So without getting too Mathy, lets look at an estimate of how much the daily reward pool is at the time of writing this post. I'm going to use approximated numbers to make it easier to read.
Looking at the Coin Market Cap Website:
Steem Price is $0.124773 (per Steem)
Available Steem is 198,974,231 (Steem)
Market Cap = Steem Price * Available Steem = $24,826,612
Remember that each YEAR, 10% of this market cap is printed as new Steem and rewarded to users. Obviously the market cap changes (both Steem price and # of Steem,) so how do we figure out a daily amount? That's easy...all we're going to do is calculate the yearly amount of rewards with today's market cap and divide that by 365 (# of days in the year):
Todays Market Cap = $24,826,612
Yearly Reward = 10% of market cap = $24,826,612 * 0.10 = $2,248,661
For a ONE day amount = yearly reward / 365 days = $6160.72 rewards/day
This is the estimate how much Steem is printed and distributed today.
Just to give a comparison, when the price of Steem was at $4 a few months ago, the daily rewards were approximately:
Market Cap = $386,000,000
Daily Reward Pool = $386,000,000 * 0.1 / 365 = $105,753 / rewards per day
The main point to take away here is that each day new money is created to give out as rewards. How much is created is based on the the available Steem and price of Steem. Who get what from the daily prize pool is determined through voting.
Steem Power has 90% Yearly Interest
Since there is new Steem printed each day, some people are concerned about inflation (which reduces the value one Steem.) If you hold 100 Steem in your Steemit wallet, a year from now you'll still have 100 Steem there, even though the price may have changed.
If you were to have that same 100 Steem powered up into Steem Power, after a year you would have 190 Steem in Steem Power (it is actually a bit more than this because of compounding interest.) The year time frame is just for easy explanation, you will see this interest apply to Steem Power very frequently. You can see this easily by looking at a wallet of a big account like @ned's and just hitting refresh, you'll see the Steem Power interest apply right before your very eyes.
One last note is that Steem Dollars give 10% interest per year, but are paid out less frequently, about once a month. The interest payments for these show up in your wallet under transfer history with a note that looks like "Receive interest of 2.523 SBD."
[NOTE: This is not meant as financial advice of what to do with your money. It is purely meant as informational material on how the system is set up.]
TL;DR
There is a percentage (10%/365) of the Steem Market Cap (Available Steem * Steem Price) that is printed as new Steem each day to be given out at rewards. Who gets what from this daily 'reward pool' is determined through voting. It's important to know the earnings we receive aren't tips coming directly out of somebody's pocket, but rather the newly created Steem being distributed.
Image Sources:
Laptop Spewing Money
Printing Money
Upward Graph
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Thanks! I was just getting ready to write a question post about this very subject. I think I understand it a little better now.
You're very welcome. This was one of my first posts a few months ago, asking this very question. It's an important one in my opinion.
Feel free to ask if you have any other questions, or can hop into #steemprentice in steemit.chat. Everyone is in there just to help out and answer questions. :)
I had trouble getting into steemit chat, probably my weak chromebook. I'll try again.
My question centered around why a ledger system for exchanging goods and services for services and goods needed to have tokens with intrinsic value, I think you answered that obliquely, in that people won't want them unless they start with original content creation in either goods or services. Why work for a ledger point if they are being given away freely?
Umm, this might be over my head so feel free to say if I miss what you're asking.
The Steem currency itself (and the associated blockchain) are not solely a means of exchanging goods and services (even though it's available without fees) but also an attempt to have a social/blogging site to site on top of it (Steemit) where non-crypto content creators can be rewarded for what they produce. I wouldn't necessarily term this giving 'tokens' away so much as providing a motivational mechanism to draw people from outside the cryptosphere, ideally content creators and consumers alike. Simply getting people over the initial hump of entering crypto is a great benefit to the currency that achieves it by (ideally) causing greater demand as time moves on.
Now for those that are not looking to focus on creating content do still get benefits from selling their goods/services for (usually) Steem Dollars for a few reasons:
I'm sure there's probably others out there that can answer this better (or completely if I missed the mark on your question.)
Well, any elucidation at this point is on spot, since my areas of ignorance are so large!
But I am just learning it out of curiosity. I have a pension, my needs are simple, and time is no longer my friend. I have been a long time promoter of meshnets, distributed services, homeschooling, self-employment, etc. So Steemit seems like a good home for my work.
Feel free to ask whatever, if i don't know, i probably know someone who does. :)
I think you'll be a great fit for this community! :D
If you're referring to the amount being given to SP holders, it's because you receive more based on how much you already have. Syko pretty much answered your question, but I thought I'd reiterate that.
Great post and thanks for explaining it in such easy to understand terms. It was a great refresher for myself to understand exactly "where the money comes from" ;)
There does seem to be some confusion though... myself included. That 90% (roughly) interest that is earned on SP per year... is that earned no matter what or is the "interest" earned actually by voting throughout the year and can be as much as 90% (or more). The white pages weren't entirely clear to me and some others on that topic...
That's a great point and I had to do a bit of digging...and I might be off on my interpretation here. From the white paper:
My understanding is that the interest earned on SP occurs even with zero site activity (like posting or voting.) It's a mechanism to basically offset the inflation caused by new Steem created each day, so those who have Steem locked into Steem Power for the 2 years don't lose value on it.
I view this as a way for holders of SP to maintain it's overall value while the new Steem is created....essentially providing more Steem/Shares to offset the slightly lower Steem price due to the daily created money.
I've not run numbers myself on if this merely maintains current value of holdings versus increasing the value.
I went back and read the white paper in its entirety... and I think you are exactly right. The 90% is independent of any activity on the site... so really with the 90% and curation rewards, one can earn quite a bit of "interest" on SP over the course of a year...
Glad that's how you read it too! This way i don't have to edit, lol.
Very clear post! I will now read the first one! :)
Ty! :D
Great post. I think this and the article I wrote should be cross-linked, so if it's alright with you I'll post a link here and in my post (if not lemme know and I'll remove them). The post is here.
Definitely no problem. That's a great post to go along with this!
Good one! Resteemed and upvoted!
Also, don't want to steal anybody's thunder here, but maybe you could find some food for thought here https://steemit.com/steem/@dragosroua/steem-is-a-river-sbd-is-bottled-water-and-steem-power-is-a-dam if you're looking at ways to explain Steem / Steem Power / SBD without resorting to financial knowledge. Hope it helps :)
Def no worries, that's a great post! Actually just read, up voted and resteemed yours earlier today :)
Just saw that, thanks :)
Thanks for this. I am going to try and add this to the welcome page that we are working on.
Definitely welcome!
Love to see it on the welcome page :)