Had this question posted to me the other day, and although I tried my best to answer it quickly, unless you understand Economic Systems, it is hard to get your head around. Quoting words like Dilution, Inflation, Money Supply…really get’s us nowhere.
This has been touched on many times, however many users still don’t understand. I am hoping to help these users, not the one’s who already understand. Sometimes, it’s best to simplify to the point of not giving the FULL picture. This is a reasonably complex system (for Cryptocurrency Noobs), and in order to be able to use it, and understand what is going on, you DON’T need to know everything…
So, I’m going to give a very simple explanation for new users who are confused on this topic.
What is going on under the STEEM 'hood'?
As I write this post there is 127,641,779 Steem in existence. Steem has an Dilutionary model, like many cryptocurrencies and ALL National Currencies in the world. What this means is, new Steem is being created every minute.
I’m sure you’ve heard the term Printing Money, well this is essentially making new money out of thin air. This action is done by the Federal Reserve, Bank of England and all central banks around the world. Now for the time being, let’s not get hung up on why (or what impact this has), I will touch on this later.
New Steem is printed at a rate of 800 per minute (for the next 12 months or so). That means that everyday, 1,152,000 new Steem come into existence (800x60x24), so 24hrs from now, there will be 128,793,779 Steem (127,641,779+1,152,000).
Breakdown of the Contribution Rewards are as Follows;
Total Rewards: 800 per minute
Steem Power Holders Reward: 720 per minute
Miners/Witness’s Reward: 40 per minute
Curation and Creation Content Rewards: 40 per minute
So, 40 Steem per minute go into a pot to be divided out amongst the content curators and creators. So that is where the Contribution rewards come from…I’m ignoring Steem Dollars for now, but for understanding this, that doesn’t matter.
Why Print Steem for Contribution Rewards? Why don’t Steemit just Pay Everyone?
This is an important aspect to understand. Think of Steemit as a Start-up business with no revenue, no profit, no money. All Steemit has is Sweat Equity contributed by the developers and founders.
Steemit can’t afford to pay users to use Steemit, so they created a Currency that represents the value of users input into the site (think of Steem Power as Equity in Steemit). While new Steem is created every day, IF the value created by the users remained constant (constant user base, constant posts, votes and quality), the value of everyones Steem holding would be Diluted. This is represented bellow in an example (not real numbers);
‘Printing’ Steem by Numbers
Steem in Existence: 100,000,000
Your Ownership: 1,000,000
% Ownership: 1%
New Steem Printed: 10,000,000
Your Contribution to the Site: 0
Your Steem Power Reward: 50,000
Total Steem in Existence: 110,000,000
Your Ownership: 1,050,000
% Ownership: 0.95%
So, in these conditions, your % ownership has fallen. Essentially your fall in % ownership has been redistributed to Steemit contributors as a reward for their hard work. The numbers are not perfect, but this is essentially what is going on. Here some numbers closer to reality if you are interested;
Steem in Existence: 127,641,779
My Steem Power Holding: 12,697
My % ownership: 0.009947%
In 30 days
New Steem Printed (800x60x24x30): 34,560,000
Steem in Existence: 162,201,779
My Share of New Steem Printed with zero contribution to the site (34,560,000x0.00009947x0.9): 3,094
My New Steem Power Holding : 15,790
My new % ownership: 0.009735%
Fall in % Ownership in 30 Days: 0.000212%
Summary
So, if you contribute nothing, your % ownership position in Steem will continue to fall as time goes on. This is essentially why Steem is slowly redistributing away from the Top Steem Power Holders to the smaller holders. The system has been set up so that the Top holders cannot earn enough in Contribution rewards to cover what they are synthetically giving away…But it’s also easy for small accounts to earn above and beyond the dilution rate and increase their net ownership of Steem.
The $ value of your holding can go up or down…That depends on what happens to the price of Steem, which is influenced by the inflation rate of Steem, but also by Demand (which is a function of Many Many different factors).
So, Where do the Contribution Rewards come from…?
They come from every Steemit user, including yourself!!
For more detailed explanation on this topic, and others, you can see my blog…
Where does the Money come from?: https://steemit.com/steem-help/@hisnameisolllie/steemit-the-economic-system-and-where-the-money-comes-from
Steem Distribution: https://steemit.com/steem-stats/@hisnameisolllie/steem-distribution-revisited-top-steem-power-holders-to-distribute-up-to-34-3-of-their-control-over-the-next-12-months
Steem Dilution Rate: https://steemit.com/steemit/@hisnameisolllie/steem-dilution-rate-explained-currently-much-higher-than-you-might-think