So I've delved into the white paper and there's some things that still don't make sense to me. Like a lot of people I've seen the giant rewards for articles and thought it seemed too good to be true. So here are some questions for anyone kind enough to shed some light:
1. Currently steemd.com says there's 125,603,487.132 steem in existence, but the white paper says, "as of May 1, 2016, over 98.49% of all STEEM has been converted to SP." So does that total from steemd.com include steem and steem power, or just steem? Is there a way to determine how much steem there is currently which hasn't been converted?
2. Since steem is only held in the short term (b/c of inflation) in order to convert between steem dollars, steem power, and other crypto, who holds all of that steem? Is it just that which is currently being used to convert + what is placed into the pool from mining + that held by liquidity providers + that held by speculators on exchanges?
3. When steem is converted into SP is it held in a vesting pool from which only people "powering down" can access in order to convert SP to steem? Is this how the steem/SP ratio is calculated when people "power down?"
4. When a contributor gets their reward it's 50% steem dollars and 50% steem power. Before being paid out they are actually accruing steem (or I guess points representing a portion of the steem pool). How is the steem converted into steem dollars upon payout? Does the steem get destroyed? If not, where does it go? Is it converted into SP and distributed according to SP ownership?
5. People who vote also get rewarded on an article. When they get paid out is that also 50% steem dollars and 50% SP?
6. The white paper says, "for every SMD Steem creates, $19.00 of STEEM is also created and converted to SP." Does this apply to SMDs created for rewards as well as those created for interest? Is this SP distributed to SP holders according to how much SP they have? Similar to question 3, for SMDs created for rewards does the steem from the pool get converted to SP in addition to $19.00 worth of steem being created and converted into SP?
7. The blockchain only creates SMDs in order to reward contributors and pay interest to SMD holders, correct? Is there any other manner in which SMDs can be created?
8. What exactly are the powers of feed producers? If I understand correctly they can set the interest rate which defaults to 10% annually. How often are interest payments made? The only other power I believe is to set the SMD/steem price for conversion. Can feed producers also literally create/destroy steem or SMDs, or is their power strictly limited to setting the interest rate and SMD/steem price?
9. How often can feed producers change their price feeds?
10. Is there a way to determine how much steem liquidity there is at any given moment?
11. The white paper says, "SP balances are non-transferrable and non-divisible except via the automatically recurring conversion requests." If you start "powering down" are you obligated to continue doing so for 104 weeks? Can you start/stop "powering down" on a weekly basis?
12. The white paper says, "If this happens a SMD will be valued at more than $1.00 and there is little the community can do without charging negative interest rates." Is it possible for feed producers to set negative interest rates?
13. The white paper says, "Feed Rate following: The amount of STEEM for which the total SMD in existence can be redeemed will change based on changes in the price feed. This change is effectively destruction ("burning") of STEEM when the value of STEEM (as measured by the feed) is increasing, or creation of STEEM when the value of STEEM (as measured by the feed) is declining." Are steem ever literally destroyed, or does this just mean that, in the case of an increase in steem value, not as many steem are rewarded upon SMD -> steem conversion?
14. Is there any manner in which steem is destroyed on the network besides the “reverse split” every 32,000,000 blocks?
Okay now on to some concerns about long term viability.
Here's what seems to be the inward/outward "cashflows" of Steemit:
Inward cashflow -
1. People purchasing steem power
2. People buying steem dollars, i.e., debt instruments which earn interest in steem dollars
Outward cashflow -
1. Contributors selling off their steem dollars earned via rewards
2. Voters selling off their steem (dollars?) earned via rewards
3. Anyone with steem power (miners, contributors, people who bought SP directly with steem, etc.) who "power down"
4. People selling steem dollars
A business venture can't depend upon continued investment for growth, money has to flow in because the business produces something which is being purchased. Otherwise investors cannot get paid.
In Steemit the good being purchased is steem power which grants voting rights (i.e., the ability to "tip" contributors by getting them a larger portion of the steem from the pool, and also the ability to reap rewards by voting). But voting doesn't cost anything (in fact you are rewarded) so there's no need to constantly replenish your account by buying in again and again.
I assume most people who buy steem power plan on participating in voting so they can make gains. My point is that all of the capital that has come into the steem network can really be considered investment. If everyone is planning on making money then who is footing the bill? Where is the end consumer and what are they purchasing? The payouts now can be afforded because of the money that has been invested in steem power which is locked up and can only slowly trickle out.
Steem itself is typically only held temporarily to convert. Most buyers of steem immediately become sellers. Besides speculators on external exchanges and liquidity providers the only times this isn't the case is when people go from other crypto -> steem -> steem power or when they "power down" from steem power -> steem -> other crypto. As long as that buy pressure meets or exceeds the sell pressure the steem price should remain stable or increase.
There's also people selling SMDs in order to reap rewards. Counteracting that are investors buying SMDs to earn interest (the advantage over SP being that you can immediately sell all of it if you want).
If I understand correctly, SMDs are created to pay out rewards and created in the form of interest to pay those holding SMDs, so this causes an increase in the SMD supply. SMDs are only destroyed when people use the "convert to steem" option, although if they opt to sell SMDs on the internal exchange or on external exchanges the SMDs do not get destroyed.
Using the "convert to steem" option requires users to wait a week in order to get their steem. Some have suggested doing away with the convert option entirely. The problem is that the SMD supply would increase indefinitely. How does the network guarantee that more people opt to "convert to steem" in order to stem SMD inflation?
As it stands the SMD price on Poloniex is ~$0.84 USD whereas if you "convert to steem" the price is 2.05 SMD / steem, so 1 SMD = 0.49 steem * $1.52 USD/steem = ~$0.74 USD. This will encourage people not to use the convert option (unless they are confident there will be a short term steem price increase).
Presumably feed producers will re-target SMD/USD parity by lowering the SMD/steem price (more steem for your SMD), but if the steem price continues to decline users may still opt to not use the convert feature.
At any rate, any SMDs which are destroyed through SMD -> steem conversion will translate into higher steem inflation, which will place a downward pressure on the steem price. Everyone who is trying to move SMDs out of the network via SMD -> steem conversion will increase the steem supply on the market. The only thing counteracting this trend is new investors buying up steem to "power up" which takes that steem off the market.
Steemd.com says there's currently 1.9 million SMDs, so at the expected price of $1 USD/SMD that's $1.9 million in debt. I don't quite understand how SMD holders can really be classified as "creditors" since there are no individual debtors, just a promise by the network to pay out interest in more SMDs created out of thin air. Neither the liquidity providers nor SP holders nor anyone else are obligated to exchange those SMDs for other assets (as the white paper indicates).
Overall it seems as though the Steemit network can only survive through continued investment. The steem price has risen because of the increased interest and the purchase of steem to convert to steem power, but everyone who has invested is expecting more in return in the future. SMD holders expect interest in SMDs at USD parity and SP holders expect rewards through continually voting. Content contributors who haven't invested anything (except time and effort) are also getting rewards.
Some may counter that the value of the network is in the quality of original content produced but I don't think this is the case. No one is paying for that content directly. There's no end consumer continually putting in more money to reward contributors and all incoming cashflow is expected to translate into a profit. In effect, today's contributors are paid indirectly by investors who are expecting future earnings.
As far as I can tell, once new investment/re-investment slows down and the selling off of steem or SMDs increases (whether it "trickles out" through "powering down" to steem or leaves as rewarded SMDs which are sold off) the price of steem will have no choice but to go down. This may take a while since so much of the Steemit network is locked up in SP but I don't see how it can be avoided.
Some may take issue with viewing Steemit like a business. Bitcoin for example doesn't require continued investment because it provides a wide variety of abilities which create a demand for BTCs. Steemit also has utility because it allows a means to reward content contributors, however the network is designed to promise everyone more than they put in. The only reason contributors can be rewarded is because there's a constant flow of investors who expect to be paid out later.
I think the discussion of whether or not Steemit qualifies as a "ponzi scheme" is irrelevant. Of course, you don't have to put money in to get paid if you are contributing content. Nevertheless some people do have to invest in order for the Steemit network to function, and if everyone putting money in is eventually expecting more out then there's no way for all of them to get paid.
For the record, I'm not a Bitcoin maximalist and I love seeing new projects in the crypto space. I have no skin in the game when it comes to Steemit. I've just seen a lot of people promoting it and I don't understand how it will end up working. I apologize if I've misrepresented Steemit because I'm getting things wrong on how the network actually functions. If that's the case please feel free to disagree or correct me.