Where The Money Comes From - "Digging Deeper Into Steem" (Part 1)
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.
But...
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.
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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
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.
That was exactly my first 'trading' perspective, taking advantage of the arbitrage opportunities. It's still pretty lucrative now, with the Steem dollar trading around $0.8 earlier today after having fallen from $1.40+. The internal market dynamics are very interesting, especially after the removal of the liquidity rewards. Could be plenty more profit opportunities available to stabilize the system in the coming months.
I really - REALLY - hope they add a referral system, and the marketplace, soon.
The marketplace, for sure. I think there was something about a referral system in the works. Not entirely sure if it would be a great idea. It all depends on the implementation.
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 :)