Where The Money Comes From - "Digging Deeper Into Steem" (Part 1)

in steemit •  2 years ago

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.

(Designed by FreePik)

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:


 My Journey Peeling back the Economic Layers of the Steemit Onion...


 Steemit's REAL Diabolical Plan For WORLD DOMINATION - Part 1


Where does the money come from? A look into the economics of Steem.


Steemit's new economic paradigm, or: Why Steemit might just work


Steemit's Evil Plan for Cryptocurrency World Domination

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Love your post. I'm an old guy and while I've been involved quite heavily in crypto for about 4 years I have a very hard time explaining it to others or even understanding all of the nuances myself. Looking forward to following the discussion here!


Glad you've got some value out of it, i'm just speculating but I think the potential of Steemit is far more than most average users have considered. Thanks for commenting :)


The fact that steemit is specifically created to be social gives it a FAR greater reach than the standard crypto-currency could ever hope to achieve. Also, just look at all the great content this platform is inspiring due to how it pays users that create rather than just those that have the computer resources and technical know-how.

The world is quickly growing tired of the current economic system. As you rightly point out, the abstract 'value anchors' that fiat currency are tied to are insufficient and outdated. More to the point, we have very little knowledge about where our money comes from, where it goes, and who's really in control, putting us all (apart from the fatcats at the top of the pile) at a serious disadvantage.

In the post-depression and baby boomer generations people simply wanted to know that enough money was being made - they didn't care where it came from or who controlled it as long as they had enough in their pockets. Today's information generation wants a qualitative measurement - they want to know whether that money is coming from good or bad sources, and going towards worthy or unworthy recipients. Thanks to banks and governments, the flow of fiat currency is all too often shrouded in so much secrecy that this becomes impossible.

This is why blockchain technology is so popular with the switched-on generation of today, and it's why cryptocurrencies are the future. Finally, we have a totally transparent, decentralized record of every transaction ever made that's built right into the currencies themselves.

Psychologically speaking, I can only imagine that the more people have knowledge (and therefore, power) of a currency and its use, the more they will want to use it themselves. A new crypto-based economy is already here, and people are making millions off it right here and now. As soon as it really takes hold of the public consciousness and reaches the critical mass you speak of (and Steemit, as a blockchain-based social network, is by far the best means we've ever had of making that happen), governments, banks, corporations, retailers - basically everyone who uses money - will either have to get on board, or get left behind. Gold simply isn't as shiny as it used to be.


What a great response. You've definitely broadened my area of focus, I often zone into something too intensely and miss out on other aspects. I try to consider history when I write but there's always more you can learn from others and their own perspectives of the influence of history.

I think you made a great point about the younger generation being more clued in, if Steemit really can shift into an economic system (I mean it's a pretty huge claim on my end) then the question of WHY? people would switch to it would have something to do with your analysis.

The younger generation are always the catalyst for change. They may start on Steemit just to make some cash, but in order to completely thrive they'll have to learn a little about crypto and money in general.... once it clicks.. who knows what kind of influence that will have?

Thanks for posting, I'll be following you in the future.


A pleasure, thanks for your insightful post as well. I think a lot of us are thinking the same way about this, which is great!

I've followed you as well, keep on keeping on.

Ah, I love this! This is why I'm so excited about Steem and what got me into bitcoin to begin with. I've been trying to get more people to think about this with the #bitcoinpizza conversation. Thank you, @wingz. Excellently written. I hope more people can truly internalize the ideas here and communicate them well to their friends and family. Understanding the nature of money is so critically important for improving human well-being. So many people are slave to something they don't even understand.


Thanks @lukestokes , I still find it tricky to just speak to friends off the top of my head about the true potential of Steemit. Much easier to gather my thoughts here and think clearly. Considering the potential and all the variables that could change is almost an impossible task at this point so many things could be developed from so many different angles and fields.

It's almost a 'singularity' moment (maybe not quite as significant, but close and in terms of economics) with Steemit and the potential it has to really develop given enough time.

This really is #bitcoinpizza time :P


I just announced the winners to the challenge and gave this post a nice shout out as well. I hope you don't mind, but I also copied the 5 "further reading" links and included them in the post. There's so much good content out there, and I want to make sure more people read it. Thanks again for getting people to think about this stuff!


So true lukestokes..they don't understand.

Great read. More people treat this with superficiality and cynicism but do no research and work. Good job.


I think when people start to understand that this is really all about mass adoption and something more than a social network then all of those top rated posts that people often complain about will start to make sense. Who knows?


in whales we trust? :)


I'm pretty sure their number one priority right now is mass adoption, look at the market cap growth and user growth so far. I think they know what they're doing. :)

>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.

The 'network might become more valuable because of that, the truth is steem and steem power does not become more valuable as a result.

>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.

Deep down this partially correct. More correct is - money are here because crypto speculators (investors ???, give me a break) buy STEEM (for whatever weird reason they do it)

Some Extended Thoughts on the Subject - "Beyond the STEEM Whitepaper – Chapter 2"


If you think of the value of Steem as the money supply per day, i.e the amount of Steem Dollars printed each day then you'll see they both go hand in hand. In order for an economic system to function it needs a currency in enough circulation to exchange goods and services.

The speculators are buying because of the above point, the money supply and the value of the network.

As for the demand for the Steem Dollar, the demand that generates a need for an ever increasing money supply - well that comes down to the sidechain and subchain 'industries' that can be built. I'll go into more depth in the next part.

Thanks for your feedback.

Very well-written! Personally, the price disparity for Steem/USD between the internal Blockchain market and the external open market is what attracted us to make our original investment in the ecosystem.

We've converted part of our holdings to SP, but we hope to earn a profit by holding (and possibly converting) SteemDollars. As the White Paper states, it's like we're lending credit to the network, but we're protected by the built-in conversion measure if there is a large difference between internal and external pricing.

After we convert, we can either reinvest into more SteemDollars if it's at above-market prices, or cash out into Bitcoin. It's just such an amazing concept.

It takes a couple of days to really get a feel for how Steem works - and why - but once you do, it's a no-brainer to expand your influence and presence in the ecosystem and earn a profit doing it.

Thanks for sharing.

Couldn't agree more. I plan on doing a video soon where I discuss similar concepts and this article will be a great help to me. Thanks for writing


Haha, I'm very much looking forward to part 2 of your real world domination videos! Right up my alley.

Thanks @andrarchy

Your explanations really helped me understand the investment of time and how it will ultimately lead to increased market value. I look forward to your next article covering sidechains


It's some kind of inception level economic system development the founders have created. If you haven't already I'd check out the whitepaper again and again, It's a treasure trove of information.

Excellent and well thought out post. I've shared this with some other people that were sitting on the fence about joining steemit. Keep up the good work.


I didn't expect this to be something for those on the fence... haha, my articles are always overly analytical (in my head anyway). I'd be interested to see what your friends thought.

Thanks :)

Great post! I was trying to explain all of this to my girlfriend the other night. I'll send her this article.


Glad it could potentially appeal to a wider audience.. I almost thought I went on some kind of anti-fiat rant halfway through - hopefully it makes sense to her :)

Well, the dig is deep haha :)
i would say that is possible, because steemit is something completely new,and we have thousands of ways to use it. We did not have anything like this before, so i think the same that the change is going.


Whats the opposite of a brain drain? A brain pump... or something haha. When we look at the incentives for smart people to come here and help develop and build the system I think there's a good shot at success. Take @xeroc for example with this post https://steemit.com/piston/@xeroc/piston-web-first-open-source-steem-gui---searching-for-alpha-testers.

I can see similar incentives developing for subchain and sidechain app developers. With the smartest people leading the way.

I can't even begin to consider the rapid pace of innovation once smart developers see the potential to work on the system.

You appear to dislike quantitative easing, but this is essentially what Steem does: Inflate, and inflate again both currencies STEEM and SBD.


I don't dislike quantitative easing. I think you took it out of context, I was using it to make the point of the reduction in the spending power of a currency.

Inflation of a currency is necessary as it becomes adopted and used by more people. In fact the huge inflation actually makes the system fairer as people are given an incentive to contribute their value. If it wasn't inflated to this extent then all the rewards would accrue entirely at the top.

The 'big idea' of the Steemit system is that it can change and be 'fixed' in the future through hardforking etc.

Thanks for calling me out @cabi5oh

@wingz : Excellent article.

Do you have any fear that the current "whales" are the equivalent of the fiat bankers? Not necessarily by the intend of the individuals, but by the design of the system.

> * 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.


Hey @gikitiki I think a fantastic rebuttal of your arguments is provided by @the-alien in this recent article https://steemit.com/whales/@the-alien/whales-from-a-strictly-extraterrestrial-point-of-view

My view... and this comes solely from observation is that the system if fairer than you think... take @stellabelle for example... after a couple of months she has almost 5% of the SP as one of the top 3 whales. I went into more detail in this post...


Hope it helps :)


Thanks @wingz

Those are both excellent articles.

I assume you'll be taking a look at where the money comes from in the future, since "it comes from speculation" doesn't work in the long run.

I've been a little bit shocked at how few people see this, but it seems abundantly clear to me that in the future the money will come from people who realize that on Steem, you can explicitly purchase influence. Money here is voice, and people will pay for that.

If you like my writing and ideas, check out my series on the game theory of steem!


Thanks @biophil. I've read over some of your game theory articles in the past, a very interesting application. Mostly understood :) I only did Economics at an undergrad level.

Steem power for influence and even just curation income is a variable to add demand. In addition it's really all about the demand for the sidechains and subchain 'apps that will support the supply of Steem Dollars in the long run.

We should reach a few steady states. I think we might both be able to add value and I'd be interested in doing some kind collaboration post in the future, if you are or just want to discuss some ideas then get in contact with me on Steemit Chat. I have the same name.


Cool! I like collaboration. Do I need an invite to get into steemit chat (is this on rocket chat?) I'm in the Pevo chat system if that's good enough.

Great and powerful post! thanks for the input of such important sharing. Namaste :)

I wish I could upvote this more than once!

Having said that, the frog metaphor does not work, frogs are actually far more intelligent than humans.

Anyway, I have been trying to wrap my brain around Steem from when I first joined it, and your post helped nudge a few more puzzle pieces into place. I can see how SD can become the next global currency.


Thanks @nenad-ristic Glad I could help, I'll hopefully nudge a few more pieces in the future.

Excellent post. I strongly believe the next generation or two of people will bring about serious political, economic, and social changes. Steem is as good a place to start as any.

EXCELLENT job on this.

I think this is an area of confusion for alot of people, though this writing helps to generate clarity. still more depth to cover bit by bit, though this serves wonderfully to help increase understanding of the system dynamics... :-)

Great post and answers the question really well, that is the most common question asked when I tell people about Steemit platform! Thanks for explaining it and I think the bigger the platform gets, the better it is for us :) Well done x


Thanks Alla :P

Great post. There are so many nuances in Steem. It really takes time to absorb it all.

It's always the rich who help themselfes and the poor who have to pay for it. l live in hope with Steemit


Have you ever heard about the crab in a bucket analogy? I didn't talk about it in this article but through cooperation and good curating I think Steemit can reverse that analogy with it's internal dynamics. Maybe build a virtual society off those principles? Maybe I'm just an optimist... exciting times ahead though


No never heard of that saying , I hope your right would be nice putting money into the little people's pockets



It comes out of a feeling of scarcity. The social dynamics and psychology in giving someone an upvote that isn't out of your own pocket and the help you need from other people to get your articles noticed might be some kind of 'reverse crab mentality' .. maybe... :)


I understand now thank you for that. I'm more a giver than taker maybe that's why I am always skint, I do enjoy seeing other people going well especially those who don't have much

Very simple, insightful and inspiring. I particularly like how you contrast Steem with central bank controlled fiat. Just one question. Two actually. How do you define "money" and do you consider Steem in its current form to meet that qualification? I guess another way of asking is... has Steem as a currency been created or are we still creating it, hoping that it will someday qualify as money?

Great post for newcomers, I will be sharing with all my friends who are new to crypto's. Look forward to part 2.


Thanks @jholmes91 , I'm still learning loads from the people around me.

Nice post.....

Love all the posts about how the economy of steemit works but I'm still confused everytime i need to explain it all or make moves myself. Just today i converted a lot of steem dollars into steem and it all disappeared. I know it said the process takes a week. But why is there no ledgernin my wallet recording the transaction. At this time im grinding my teeth, praying my SD return as STEEM a week from now. Thats a long time to not know for sure if your hard earned $ are safe


All I can say is it arrived for me. But you are right, it should show up somewhere, it isn't gone in the meantime.

The other thing is, I wonder if those who can power up faster by converting SD into STEEM via Bittrex aren't in an advantage if (?) there's no interest on the SD in that week? I'd be glad to see the math done.

Dude, Loving this article You dropped on Us. Excellent. So true. Keep up the good work. You got an upvote!

Steemit and the blockchain space are the closest things we have to a basic income. In my opinion, it will be a blockchain much like Steemit that will provide a basic income in the future.

The future is fascinating. I find that we are in truly remarkable times and those that are involved will look back on these days much like many look back to the rise of the IBM compatible. One thing is for sure and that is the future is being shaped.

Thanks for this information :)

wow - great writeup! Thanks, also thanks for the list/links of other info - very handy. Hopefully steemit can continue to grow - could be massive!

very easy to understand the content and you have the ability to get your message across
Regards Xpilar

That 'stuff' that backs our fiat currencies today... is our freedom. We're not backing our currencies by gold anymore.

Is this your own opinion? Or you have some sort of proofs.

Hey I noticed you are using the max amount of tags for this article... but did you know that you can easily spoof the system to allow for an additional tag?


I have yet to see anything like Steem its like a Dreem!!!

The article is brilliant with so many golden nuggets there, however the most important it is so much information and talking away the confusion relating to to the money flow. Great read. @wingz Thank you for such a value.

Let the revolution begin!!!

This is a fantastic post. You’ve done a great job of explaining the broad scale economic picture for Steem in a way tha is very easy to understand. I’m an economics student too so I really enjoyed how this was written.