Steem's Economic Model - Thoughts on Profits and Sustainability

Disclaimer.-I think it would be proper to start this article with a short apology to anyone that would tackle this read. In truth, there is almost no way for me to make the text short, and more importantly to condense it into simplicity. Money, economics and all of its mechanics are by their very nature abstracts with limited representations in physicality. So any attempt to be to the point in a sentence or two misses by a mile or four. My goal however is to share with those who ponder about these subjects some of the ideas I think are unique to the Steem economic model(at least when it comes to cryptocurrencies), with the caveat that I don't claim to possesses any sort of universal truth, but I'm rather fishing for polished opinions on this very subject and of course everyone is welcome to disagree with me.

Initial Expectations of the Steem Economic Model

All of us, almost without exception, had this idea that the profits we would make on the steem platform would be directly correlated with the amount of contributions we could make. This meant in our minds, that a hard working Steemian could and probably should have good results granted he or she practiced consistency and subjective quality. I say subjective because beauty and it's cousin quality are biased by nature.

Our inability to fully grasp what effective contributions actually mean, at least in the stage that Steem currently resides in, leaves the newcomers confused and disappointed. In truth, the effectiveness of contributions could be best measured for their ability to bring social value to others and not the subjective quality itself. This means, that my pet peeve of poorly written english is somewhat irrelevant to a post, if said post had a positive social effect in the way of interaction, resteems and what have you.

In conclusion, the initial expectations we have must be discarded in order to set the right expectations in our minds. If we understand that the true goal is to expand one's network, one's effectiveness within our microsystem of interactions, then we also can adjust our activities for maximum results.

The ones who learn Networking

By one avenue or another understand its compounding power. For instance, and effective communicator, blogger, vlogger, etc. Would be able to find clever ways to interact with his/her audience thus offering value back to them in return for their voluntary support. In other words, the voting power of this account might only be a tiny fraction of the the content creators medium payout, but his/hers effectiveness to keep people engaged and coming back for interaction allows for the network effect to do it's magic even at its micro level.

A great example on this very blockchain would be the lovely Hive account@coruscate who has a dolphin account with a vote of 80 cents or so. This means that effectively her potential earnings as content creator and curator in isolation would roughly be very close to that number(her upvote) multiplied by her VP capacity. For contrast, we could easily imagine a hypothetical Hive account@coruscate as an account that provides very low social value to the platform, does not interact well, and thus does not enjoy the benefits of the alliances she could effectively create.

This hypothetical account would be making an insignificant fraction of the earnings that the real Hive account@coruscate makes and none of us would be surprised. However, what is surprising to me is the inability for some to recognize this effect, and to emulate in their own way, a similar situation.

I propose to you that someone like Hive account@coruscate would more likely than not double if not triple her earnings with a none linear correlation of her total SteemPower Increasing. A more mature(in Steemian time) trued and tried example of what I'm trying to convey could be observed in the likes of cherished Hive account@papa-pepper, who has a dolphin account but is much more successful than accounts that hold three or four times the SP of his wallet.

Social Value converge into real Profits

And this is precisely where I begin to draw a map in my head. The amount of interaction, the effectiveness of a micro-network generated by a user can and should reflect on the earnings of said user. This is not a far fetched idea or a fringe concept by any stretch of the imagination, it's more accurately described as a micro-ecosystem working in an effective manner.

The methods and mechanism employed in order to maximize social value vary very much with the personalities that understand the dynamics. I would be self defeating to attempt to adhere to someone else's ideas as some sort of one size fits all approach, simply because in order for the network effect to take place, the connecting between the Social-HUB and it's proxies should be as meaningful as possible.

(Note.- All references to Social-HUB from now on are intended to describe a Social Entrepreneur with a descriptive noun)

This implies in a very abstract way, that only connections with other human beings that establish something we could only define as "real relationships", can be considered true pillars of financial and emotional support for a content creator or hub as I'm choosing to call it for the purpose of explaining the dynamic system.

Profits are not measured exclusively with Steem or SBD

At least not in the sense that every single Social-HUB would put the same weight on different aspects surrounding his or her experience. We could say effectively that a sense of purpose, a sense of belonging and the always needed percepcion of relevance are something like profits, but no one would dare to measure them in any type of known currency.

A profitable Social-HUB would subconsciously be creating also a safety net around him or her. This would probably happen organically as the social value of what I'm choosing to keep on calling a Social-HUB would increase with time and with the expansion of his/her micro-network.

What I mean when I say insurance, when I use the ugly word we usually despise. Is to say that conversely a user like Hive account@papa-pepper for example would not become irrelevant to the platform, simply because god forbid he needed to power down heavily and revisit minnowhood temporarily. However those who have not built these safety nets would probably see their income heavily reduced as some of their alliances have a more superfluous nature. Yes, I'm referring to vote exchanging and other practices not worth diving into at the moment.

Effective Work can outpace Steem inflation

And this very fact seems to upset those who have chosen to be a little more black and white about their investments options. In other words, with the current system, with the current promotions tools, curation guilds and all, being solely a big SP holder does not warrant a great return. Specially when one takes into account the amount of selling that happens every single time the token is attempting to rally up in valuation.

To say however, that the valuation will never reach new heights is to deny the evidence available to all of us. Steem in the long term could and should increase against USD, but with the added caveat it would by design always decrease on valuation against BTC.

Now, it's important to say, that this does not mean that someone who invests in STEEM is by it's very nature betting on a dying horse. But what we can infer is that a passive investor currently is placing that bet. The inflation of the currency, the loss of valuation against BTC and the slow pace of accumulation that an SP investor would benefit from simply by being powered up, would never outpace the inflation, even when we reach the lowest of tiers in nine years time. But, putting the SP to work, can.

Simply said, an account like Hive account@kevinwong for example, with an effectiveness of a social network of the likes of Hive account@coruscate could see potentially an effective result of 25 times her earnings. I'm careful to call this an absolute, because I'm sure the effectiveness of a micro-network is dampened by a soft curve of social interactive capacity. Imagining a fellow human establishing thousands of meaningful connections and alliances sounds highly improbable, but the tolerances are probably unique for every individual.

Another aspect that we can't fail to mention is the amount of time invested into the platform that a Social-HUB would be willing to spend. As we all know, everyone has different ideas of what working hard means and with that, different ideals to follow. To someone, writing one post per day is more than enough, and yet to others like the unmatchable Hive account@tarazkp four is just the crazy standard.

HODLing is not enough

For an economy to thrive, said economy needs to have a healthy speed of money. The people involved in the economy need to feel compelled to spend their holdings. This is to say, that as much as we all play the game of becoming rich one day by HODLing tokens for ever, the result of never using them also means that they are effectively worthless.

Is this an attack on BTC or Ripple or any major token out there? Of course not. I'm simply implying that any healthy economy needs to have the psychological frameworks to promote classic commerce.

Earlier today I had an extended conversation with Hive account@dana-edwards and touched on this very subject. Because a lot of the conversations regarding cryptocurrencies usually revolve around the idea of maximizing the valuation of the tokens we HODL, yet the conversation on how they would or should be spent is almost always absent.

Traditional economic models had this very idea down packed. This is of course before we got rid of the gold and proceeded to print monopoly money. But, the idea was back then to create an inflationary currency against the backing of gold that would guarantee its value. This makes perfect sense to me. There was a time, not that long ago mind you, that you could go to a bank with your paper notes and exchange them for gold.

A worker back then, could effectively through his contributions to society increase his holding on the inflationary currency, and then safe heaven them into gold as he/she saw fit. Was this common back then? I'm sure those who understood economics practiced this common sense move, but those that didn't, lived a happy life clueless. However, what's relevant to the conversation or the parallel I'm trying to draw, is that Steem is effectively the inflationary currency for the workers and today, right now, BTC is the gold of the story.

This angers some people, specially those who worship white papers. But, it's not secret that Bitcoin stopped being a currency a while ago and it became a storage of value. The fact that all alt-coins trade against it and that most on/off ramps to crypto are built around it, is testament to this very fact. This could very well change in future, which is why I'm being specific to the expiratory nature of my assertion.

What I'm attempting to convey however is the social necessity for these dynamics to flourish. Because all of us should believe in the equality of opportunity but not in the equality of outcome, it should be easy for us to look at an economic model with an inflationary system and deduce from its very nature that this would ensure a more level starting line, but a healthy distribution of results in the long run aligned with effort and merit. Granted for the sake argument I'm choosing not to address systems of corruption that could be present in any economic model as I'm sure there is not a single that achieves perfection.

To make it a simple as possible to explain, a healthy economic model requires both. A storage of value, and a currency that is very likely to be used, with an effective distribution system, fast, safe, etc. In this sense it's completely plausible to imagine BTC and Steem working in this very manner in the future.

Floor Valuations, Keeping up with BTC

It's probably here where the conversation needs to be focused in. In other words, the unsustainability of the current system should be obvious to anyone who has decided to read deeply into it. We've noticed two years in that the valuation of the token has to fight in two fronts. The first one being the inflation, which of course is by design, and the other one being the lack of motivation from big and small stake holders to not sell as much.

In other words, we've arrived at a catch 22, a situation were whales like Hive account@blocktrades need to partake of heavy selling at any rally that might show up, simply to maintain the needed liquidity of their exchange. I'm not implying some sort of fault here and I'm certainly not attempting to point any fingers. It's just obvious to me that if that did not happen, the business could effectively not function.

However, we could be at the brink of establishing another point of value for our token, which in turn would create a solid floor valuation. When SMTs launch, if we are effective in promoting it, if we capture enough attention from the markets. We could effectively operate in a system that is thirsty for bandwidth.

Let's imagine for the sake of argument a platform of the likes and size of facebook being built on top of this blockchain using SMTs, and attempt to imagine what kind of bandwidth such platform would need and the amount of tokens said platform would have to hold in order to achieve it.

Since STEEM at that moment would become a bandwidth token, and the profits for the platform would be extracted from the speculative markets of their own token (assuming they don't use an ads model or something else) - then effectively we would have reached a higher floor valuation for the Steem token and thus reduced the amount of dumping big accounts operating on STEEM would have to do to stay liquid.

Are we betting on SMTs?

In short, yes. But of course the components being built at the moment are a crucial part for the launch of the SMT tokens. It would be hard to imagine an effective launch of STM's without the other tools in place.

Think of a big platform or project attempting on onboard thousands of users per hour with the current system and after the headache starts you will get my point. And that is only one of the challenges they would currently face.

I've explained this a few times, but since this particular post is already excruciatingly long and one more stripe won't kill the tiger: If the STEEM blockchain becomes a competitor for Ethereum and other platforms alike, we would effectively be selling nitro and shovels to the gold diggers. If there is gold on the mine or not, if they ideas are good or not, would be a complete different issue. We already sold them the shovel and the nitro.

In conclusion - Thank you

If you've gotten this far, first of all I would like to thank you. I kind of knew after having that extensive conversation today, that the ideas on this subject would take a lot of time to hash out and write. However, I'm glad to have done so. If you agree or disagree with some of points, please feel free to let me know. My intention has always been to have meaningful conversations with others, and to learn a little more every single day.