In this first part, digging deeper into the Steem economic system I'll explain the drawbacks of our current economic systems, discuss what 'bootstrapping' a currency means, what the Steem system is backed by and WHY there's money available right now.
There have been many discussions recently and in the entire history of Steemit about WHERE the money comes from. I think a better question is... WHY is there even any money here in the first place?
You see with Steemit It's not like there's this huge pile of cash stored in a magical 'blockchain' vault waiting to be distributed, as users hand it out left, right and center without any source of revenue, such as adverts or a big stash o' cash from a venture capitalist investor.
No, this entire project...this...idea, has been 'bootstrapped'. The phrase 'bootstrapping' comes from starting a business with very little money, with just the snap of your 'bootstraps' you were off into the big ol world of capitalism.
Steemit isn't bootstrapping a business, it's bootstrapping a currency....
Before we even go there, lets delve a little deeper into what currencies are for us today...
First we need to determine what a currency is...
...it's something you can use to exchange for goods and services, it needs to be divisible, (dollars and cents) it needs to be stable so when you go to buy some milk for a dollar one week it's not all of a sudden 5 dollars the next... we could go deeper into the technicalities but that's the general gist of things..
To create a currency, you just need to have a bunch of 'stuff' that people value.. such as gold and then write out some notes that can be redeemed for... lets say 1 gram of gold. You then need to reach a critical mass of users that will use that currency and trust it... as... a currency and never need to redeem it for gold.
Right now our currencies are based on a 'promise' from our respective governments through enforcing the taxation of labor among other taxes through violent means or imprisonment.
That 'stuff' that backs our fiat currencies today... is our freedom. We're not backing our currencies by gold anymore.
We've tried this system throughout history, what always happens? A bunch of bankers get together and decide to print their own money and lend it out for interest, for every dollar they have stored in the vaults they lend out, say.. 10 dollars, absolutely cleaning up profit wise in the process. Not to mention 'Quantitative easing' (read: printing more money) and bailouts.
Taking advantage of power...
Those in power take advantage of their situation, every single time in history, inflation takes place as more and more money is printed, people get paid an extra 2% per year but are actually paying 2%+ per year in living expenditure. The average person smiles as they get their raise not knowing there's another hand taking more away from them.
The middle class gets squeezed, bankers and those in power siphon off more and more of their 'fake' ... fiat currency by devaluing the dollar further and further and pushing up asset prices.
People don't really notice this complete exploitation... in general we're just frogs sitting in a slowly boiling pan of water not noticing the heat rising until it's too late. If we were thrown into the boiling water we'd immediately jump out, but as the temperature slowly adjusts and we're distracted by media and consumerism that heat slowly cranks up.
Until of course we get a financial crisis like we did in 2008 where all of a sudden that heat starts to become noticeable. We've seen political alliances shift to the extreme left and right across the globe.
The system is broken and completely corrupt...it always has been...
What if we could design a system, make it completely transparent, base it on a block chain and have the ability to adjust and fix problems as they came up by voting for a form of delegated government?
This is the real Endgame of Steemit - not a social network, the social network is just the trigger to gain a critical mass of users. The real goal is to create a stable currency, the Steem Dollar - and ultimately an economic system that can use that currency without fear of oppression.
What if the 'stuff' that backed your currency wasn't gold, wasn't the fear of losing your freedom but was in actual fact... the network effect of a growing social network combined with the network effect of adopting a new currency?
From Investopedia (edited):
What is the 'Network Effect'?
"The network effect is a phenomenon whereby a good or service becomes more valuable when more people use it. The internet is a good example. Initially, there were few users of the internet. As more users gained access to the internet, however, there were more and more websites to visit and more people to communicate with. The internet became extremely valuable to its users"
Steemit is attempting to combine the network effect phenomenon of something people know how to use... a social network, blogging site with the network effect of adopting a stable currency.
The Steem Dollar - is the currency backed by Steem; while Steem acts more like a commodity indicating the growth of the network effect. By buying Steem you're betting that the network effect of Steemit will take hold and that share will grow.
The more people that join Steemit, earn and use Steem Dollars, the more valuable the network as a whole becomes and ultimately the market cap and network effect of Steem.
Demand for the stable currency, the Steem Dollar and the influx of users to Steemit will in turn drive demand for Steem as a network and the growth becomes a looping feedback effect... until a critical mass of users is reached and a self-sustaining economic system is born.
So, instead of where is the money coming from.. ask why is there money right now?
It's mainly because user growth is so high and increasing. The 'Steemit' network effect is beginning to take hold and there are speculators that can see it growing further.
The biggest goal of Steemit is to reach a critical mass of users to take advantage of the network effect of first the social network and then the Steem Dollar, once that happens everything else becomes a self fulfilling prophecy. The Steem Dollar becomes a stable currency supported from multiple sources of demand. Supplied by the Steemit printing press.
Steemit is a 'trojan horse' into a new economic system.... we just need enough users... to reach a critical mass.
The mechanics of the way the three currencies interact, explained in considerable detail by @arhag in this brilliant article here ...push me to think that there's a good chance for success. With most Steem Power locked in and a small % of Steem Dollars and liquid Steem out there the price of Steem will have significantly less selling pressure than otherwise.
The money is here right now because investors within the system are holding onto SP and the investors outside the system are speculating on the increasing network effect of the explosive growth of users.
There are a few more ingredients for success however....
In the next part I'll cover the impact of 'sidechains' and 'sub-chains' on the demand for the Steem Dollar and build a picture, brick by brick of just how the economic system could be built.
I'm excited to discuss this further in the comments below.
For further reading and perspectives I highly recommend checking out: