Wow, so okay, Steemit's system is simple, right?
So simple in fact that there are tonnes of posts trying to explain it, all saying that THEY ARE THE SIMPLE VERSION or that this is the ULTIMATE GUIDE to Steem POWER, TOKENS & DOLLARS.
Well let me tell you folks, I haven't found one guide yet that does it succinctly. As they say, you haven't understood it until you can explain it to a child.
Now I am not going blow smoke up my bum and say that I have the answer, but what I will say is that I'm going to try to outline the difference.
Alright, so as the name would imply, STEEM DOLLARS are theoretically pegged to the USD. They are steem's attempt to create a cryptocurrency that will be accepted by all normal businesses (and society more generally) and is designed as a counterweight to STEEM tokens.
When you hold STEEM DOLLARS you should receive a percentage of their value as interest, which incentivises you to hold STEEM DOLLARS (just like a bank pays you interest so that you help keep their business running, that is what Steem wants you to do too).
Holding this currency pegged to the USD is effectively like holding USD valued convertibles notes in Steem, which is what gives it real world legitimacy (because outside investors can then actually value Steem in USD) as well as create USD value for posts, which makes people want to post more (as they can potentially earn a living from steem).
STEEM TOKENS by contrast are traded on the open market and are the basic normal cryptocurrency of steem. They are based on the blockchain and as they are not intended as being pegged to any specific value, are volatile in nature.
You do not automatically get STEEM TOKENS, as all posting/ commenting/curating rewards are paid out as a combination of POWER & DOLLARS. This is because the only tradable (i.e. convertible to USD or Bitcoin, etc) currency is the TOKEN and if you were able to withdraw more easily, then STEEM's liquidity would be at risk, not to mention the quality of it's content.
TOKENS can, however, be immediately converted to STEEM POWER and only returned back as tokens after a 13 week vesting period.
Converting TOKENS to POWER is called powering up. Converting POWER to TOKENS is called powering down.
Lastly, Steem decided to add STEEM POWER. It is basically a hybrid of STEEM TOKENS and STEEM DOLLARS in that it is designed as the convertible note version of STEEM TOKENS, which you can only convert to STEEM TOKENS after a vesting period of 13 weeks. During this period you are also paid more STEEM POWER as interest, because the number of STEEM TOKENS increase each year, meaning that there is an inflationary effect on STEEM TOKENS which is balanced by distributing some of these new TOKENS to existing holders.
STEEM POWER is acquired either as a payout from posts / comments / curations or after powering up.
So in summary the respective purpose of each form of STEEM are as follows:
STEEM TOKEN: this is Steem's connection to the blockchain and exchanges.
This brings cryptocurrency legitimacy and liquidity to Steem.
STEEM POWER: secures TOKENS within the Steem network, so that not all currency can be paid out at once and pays interest to users for this investment. This incentivises users to invest long-term in the platform (no pump & dumps) & to help build the network by posting / commenting / curating.
STEEM DOLLARS: make Steem's valuation in fiat USD possible which adds standard financial system legitimacy as well as making the benefit of participation clearer to users.
I hope that was helpful and if you have any comments or feedback, please drop me a line!