There is no FREE money on Steemit

“The latest to hit the social scene is a platform called Steemit, who’s CEO Ned Scott, calls it an incentivized social media platform that pays its users with the digital currency Steem to post blogs on their favorite subjects” (see here).
Some people are still asking me: Where do Steemit (and Golos.io) get money to pay for posts? I am here to clarify things and I will be very happy if you leave me a comment.
(SPOILER) — Steemit has an Advertisement Business Model.
Agenda:

• Steem is a technology built on top of a BitShares/Graphene blockchain.
• Steemit is a social network built on top of Steem technology.
• STEEM is a main cryptocurrency that is used by Steemit.

Please also notice that some rules have already been changed since the first version of Steem was released, for example:

1. Due to community demand, on December 6th 2016 the inflation rate of Steem was changed to 9.5% per year, reducing it by 0.5% per year.

2. The 2 years vesting period was changed to a 13-week period.

In this article I am mostly talking about the first release, but 95% of the information can still be applied to the current Steemit version.

Introduction

It’s been awhile since social networks have tried to motivate users by paying them some “money” (either real or not). Take a look, for example, at the Reddit’s try:

"We are thinking about creating a cryptocurrency and making it exchangeable (backed) by those shares of Reddit, and then distributing the currency to the community. The investors have explicitly agreed to this in their investment terms."

And there were some others:

"Paid-for-post platforms are not new. A few forerunner platforms are Tsū and Bubblews which are now defunct. Both business models rely on posters to contribute content and their revenue is from advertisement. Patreon is similar but works slightly differently. Patreon is a network with content creators and fans directly supporting their content via monthly payments or per creation. So this is a direct tipping model from fans to content creators."

Also take a look at the Empire.Kred social network: Empire.Kred is designed to drive social media activity and interaction between the registered members. A player’s value increases, in part, as a result activity on social media sites and their own verified blogs and rss feeds. In addition, a player’s value increases through dividends paid-out by other members he or she has invested in. Thus, the social media activity of a player’s investments also contributes to his or her game wealth. It is in the player’s self-interest to follow, favorite, or otherwise contribute to the social media activity of those they invest in.

But let’s continue with Steemit!

STEEM/Steem Power Currencies

Steemit features 3 internal currencies:

• STEEM — diluted each year by approx 100%
• Steem Power (SP) — vested for 2 years, diluted each year by approx 10%
• Steem Dollars (SD) — we omit this to simplify things

High dilution rates motivate one to keep all money converted into SP. Steem Power is something that gives the content writer (but not the reader!) benefits. What are they? Let’s first discus how the Steemit platform works.

Key Steemit Features

1 — Content is curated by the community

The content is curated by the community (Content Curators) and filtered to eliminate spam, porn and irrelevant information. Instead of having a special internal team of moderators or automatic spam discovery tools (like Facebook has), this is delegated to the community.
"Economic incentives enabled by cryptocurrency can dramatically facilitate the growth of a new social media platform. It is the synergy between cryptocurrency and social media that we believe may give Steemit a powerful advantage in the market."

2 — The content creation is rewarded

2 — The content creation is rewarded

1. The content creator (article/comment) is rewarded with cryptocurrency (i.e. money) that can be exchanged into real USD or into “power” (i.e. rating/ranking in the community)

2. The reward is calculated by using some weird formulas.
   “Any widespread abuse of the scoring system could cause community members to lose faith in the perceived fairness of the economic system”

3. Reward is vested — this maximises the long-term value of the platform, i.e. reward is taking form of 50% SMD and 50% SP (that can’t be immediately withdrawn).

3 — Influence (rating/ranking)

1. The more “likes” you get, the more Steem Power you will have on your balance — the more influence you will have.

2. STEEM can be bought freely on the cryptocurrency exchange. It means that you can buy yourself a good starting “influence”.

3. Individuals who have contributed the most to the platform (as measured by their account balance), have the most influence over how contributions are scored.

4 — Data is open and free

All data is open to the world — others can read and analyse it without using Steemit services. Of course, Steem’s blockchain system is mostly controlled by the Steemit company itself, but at least anyone can participate in decentralization and start his own node.
That is very different from other social networks approaches. There are different options:

1. Facebook’s approach: Make all data private property of the ‘platform’

2. Steemit’s approach: Make all data public and let it be ‘community property’

3. Future’s approach: Keep all data on the user ‘side’ so user has full control and access to it.

Platform Users

These are the Steemit users:

1. Content creators/curators
2. Content readers
3. Investors
4. Founders
5. 3rd-party analytics services
6. 3rd-party frontends for Steem core
7. 3rd-party applications built on top of the Steem core

Business Model

"Cryptocurrency tipping platforms require users to give something up to reward others for their contributions. With Steem, rewarding others is as simple as voting for a post, such as you may do on Reddit, or as you would Like a posting on a Facebook."

There are 5 typical social networks business models:

1. Freemium: Flickr, Vimeo, LinkedIn

2. Affiliate/lead-generation: Illuminated Mind, ShoeMoney

3. This is a model in which a business makes money by driving traffic, leads, or sales to another, affiliated company’s website

4. Subscriptions: Netflix

5. Advertisement: MySpace, Facebook

6. Micropayments (pay-per-read) model: Tsu

In Steemit internal currency is used to:

1. To reward good contents (because voting and reading are free!)

2. To buy a rating. The more Steem Power some have — the more influence his posts make. Also, he gets more money from curation. As a result of having a big rating — posts get better visibility.

3. To pay for decentralization of data — money are sent to witnesses and miners (blockchain nodes) for supporting the network.

Where does the money come from?

Steemit’s intent is — “Readers no longer have to decide whether or not they want to pay something from their pockets, instead they can vote content up or down and Steemit will use their votes to determine individual rewards”.
That means voting is “free” for the voter.
The only source of money that is coming into the system is the money that other content writers invested in. That means that by upvoting some post you redistribute OTHER’s money (writers, not readers).

Profit for investor?

Q1: Ok, if I buy 1000 STEEM (for $200 dollars in the beginning) and just sit and wait for 2 year — what profit will i get?
A1: In the long run you will lose your money. 1000 STEEM will cost $50 dollars after 2 years in the free market without speculations. However, that doesn’t mean that in the short term in the real market (with speculations) you can get huge profits.
Q2: Ok, if I invest 1000 STEEM ($200 in the beginning) and convert it to Steem Power and then just sit and wait for 2 years — what will i get?
A2: You will get back 4000 STEEMs back. But the value of this amount will be equal to $160, because of ~10% annual dilution. You loose $20 per each year.
Q3: But if STEEMs are diluted (100% each year) and STEEM Power is diluted too (10% each year) and I lost my time (2 years minimum to get my money back) what do I get?
A3: You get ability to vote (curate) and earn money by writing good contents.
Q4: Does that mean that if I don’t write or curate i can not earn anything just by holding STEEM or STEEM Power in the long run?
A4: Yes. If not taking into account short-term STEEM trading and market manipulation -> in the long run just holding STEEM or SP will let you loose your money.
Q5: But where does money from curation content come from?
A5: Other users are really “paying” you money that they are losing during inflation. It’s not very different from the model where they just “transfer 5 cents from their account to the content creator if they liked or upvoted posts” (micropayments model). But in reality it’s working like that: “transfer someone else’s 5 cents to content creator because i liked and upvoted your post”
Q6: Ok. But as a content creator why would I invest my money, lose my time, and lose its value (20% in 2 years)?
A6: Just imagine that you are paying 10% of your money for annual subscription just to be able to:

* Use the Steem social network (read, write, comment, upvote, downvote, etc)

* Receive a reward if your posts are popular.

Q7: But does that mean that Steem is only for “writers”?
A7: No. You can read for free (just don’t invest your money). But in order to earn some money by writing posts you have to invest first and pay annual “subscription fee”.

Conclusion

If you thought that Reward money comes out of the air: no, it can’t be true. Each of Steem’s content writers pay some hidden “subscription fee”.
Steem team said “no” to advertising and “explicit pay per read” or “pay per vote” (micropayments) models. But they said “yes” to “losing 10% of your capital for the subscription fee. Earn only by generating new content or curation”.
Finally, what business model does Steemit have?
You can’t call it a “hidden micropayment business model” because readers not need to have any investment to read articles.
The correct answer is that it is an “advertising business model”. Steemit has no explicit ads, but you can imagine each post as a single advertisement. In order to attract attention or “sell the contents”, one should invest his money. If people like your post you will get your money back and even earn something. Other content creators will lose.