Impact of Token Creation
Rate At first glance, 100% annual increase in the STEEM supply may appear to be hyper-inflationary and unsustainable. Those who follow the Quantity Theory of Money may even conclude that the value of STEEM must fall by approximately 5.6% per month. We know from countless real-world examples that the quantity of money does not have a direct and immediate impact on its value, though it certainly plays a role. Because 90% of all STEEM created is distributed back to holders of SP, the result is similar to having a 2:1 “split” every year rather true inflation. The total rate of expenditures used to reward contributors is about 10% of the market capitalization per year, a rate well below what Bitcoin sustained for the first 7 years after it launched. Creating new STEEM to pay an incentive to a particular user or group has a negative effect on every other user’s balance in terms of their percentage of the STEEM supply. If exactly 90% of the STEEM supply is held in SP, then the negative effect of Contribution Incentives on SP holders’ balances is exactly balanced by the positive effect of Power Incentives; SP holders get more STEEM (in nominal terms) but their percentage of the chain (in terms of fraction of the total supply) is unchanged. If less (more) than 90% of the STEEM supply is held as SP, the two effects still point in opposite directions, but the positive (negative) effect becomes greater and the sum of these two effects will tend to pull the SP balance toward 90%. This “pull” does not mean that the SP value must hold at 90% over the long term, because incentive recipients will (and in some cases must) put their STEEM in SP, which means the “pull” towards 90% is not the only force on the percentage of STEEM supply held as SP.
From August 2008 through January 2009 the U.S. money supply grew from $871B to 17 $1,737B, a rate of over 100% per year and then continued to grow at about 20% per year for the next 6 years. All told the money supply in the U.S. has grown by 4.59x over less than 7 years. During that same time, the value of the dollar relative to goods and services has fallen less than 10% according to the government's price index . This real-world example 18 demonstrates that supply is only one component of price.
The price of a digital commodity, like STEEM, is driven by both supply and demand. If new STEEM is allocated to those who are holding long-term then the increase in supply is offset by the corresponding demand to hold. The impact of this change in supply is postponed until a future date when the long-term holder decides to sell. The sell pressure is then distributed over 2 years.
When a long-term holder decides to exit, the supply of STEEM on the market will increase and push the price down. This downward pressure is countered when a new long-term holder decides to buy up the STEEM and convert it back into SP. We can therefore conclude that the price will mostly be impacted by a change in demand for holding STEEM long-term.
Of the 100% annual increase in the virtual STEEM supply, 5% of it is in the form of Steem Dollars (SMD). SMD represents a commitment to create a dollar’s worth of STEEM in the future and does not impact the amount of STEEM on the market today. The change in debt-to-ownership ratio may impact the perceived value of STEEM, but it does not map directly into a fall in the value of STEEM. If the value of Steem rises over time, then the amount of STEEM that may be created in the future will be less and the corresponding “inflation” never actually happened.
All told the total “spending” Steem does to fund content, curation, mining, and liquidity rewards amounts to just 10% APR or 1.2% per month. The same wealth transfer could be implemented without any change in the STEEM supply by implementing a negative interest rate on liquid STEEM of around 10% per month. Stated another way, it could be implemented by charging a 3% fee (similar to credit cards) on every transfer and having 1% of all STEEM transferred every single day. The Bitcoin network transfers 400,000 BTC out 19 of 15.5M (or 2.5% daily).
The purpose of liquid STEEM is to facilitate changes in ownership between long-term holders. It is this change in ownership that the network “taxes” to fund growth. This transfer tax can be avoided almost completely by automatically selling STEEM for SMD every week as the network converts SP back to STEEM. The total time spent holding STEEM will be so small that any impact of changing STEEM supply will be insignificant next to volatility and other market fees.
http://www.investopedia.com/articles/05/010705.asp
https://fred.stlouisfed.org/graph/?s%5B1%5D%5Bid%5D=AMBNS
http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1&year1=2008&year2=2016