When I meet up with people preparing for ICOs most of them say they want to make a robust community that provides compensation like Steemit and see token value rise. This article looks into why there are so many Steemit ‘wannabe’ projects, what are some points to consider before initiating such a project, and discuss the limits of Steemit.
Why benchmark Steemit?
Why are so many projects striving to create a community like Steemit?
Steemit made a business model that was impossible in traditional business possible. The revenue model of conventional content platforms was twofold: advertisement or charged service. However, Steemit created a model that compensates content creators without using one of these two models. Without advertisement, Steemit does not have to tiptoe around advertisers and create contents with sincerity. In addition, the revenue that centralized centralized agency took are shared among those who contribute to the community by uploading, liking, and sharing good posts. Deviating from the conventional revenue structure of a centralized company taking the profit created by user activities, Steemit’s innovation was able to receive more spotlight.
Moreover, Steemit’s structure that enduces user participation is inevitably attractive to platform companies. By providing rewards in a community, users will be driven to be active which leads to platform utilization. The weak UX/UI of Steemit maybe gives inspiration to people that they could create better community.
This fantastic structure that Steemit has might be the reason why many projects aspire to become like Steemit.
Something to think about when issuing new tokens:
where are they used?
What makes the Steemit model remarkable is that it gives monetary reward for community activities even without advertisement or service charges. Then where does the money come from?
Steemit issues new tokens and rewards users for their activities. To handle rewards, the Steem token is set at a 9.5% annual inflation rate (meaning that the amount of issued tokens increase 9.5% annually).
Because tokens are issued without injection of funds outside of the network, Steemit does not need advertising deals nor service charges. Instead, compensation on the newly issued currency is shouldered by everybody who holds that currency (creating capital by issuing currency is called seigniorage).
This is similar to how central banks of countries use monetary easing policies to invigorate the economy. By pumping a certain amount of cash into the market, economic activities are subsidized, and the supported economic entities become economically active, leading to the revitalization of the real economy and the creation of a virtuous cycle. Here, currency issuing is used as a method to fuel the economy.
However, pumping out tokens without consideration of monetary demand could lead to some devastating consequences. Historic hyperinflation cases substantiates this point.
Germany’s hyperinflation after WWI caused by mass printing to procure reparation money and to jumpstart the economy and the Zimbabwean government’s policy failure in the late 2000s which led to excessive currency printing clearly show the daunting aftermath of mindless printing without considering currency demand.
As a lesson learned from the Germany and Zimbabwe cases, there has to be thorough contemplation on whether the demand for currency can support the new issuance before printing. This is the same for cryptocurrency as well.
The demand for token is dictated by where the token will ultimately be used. Nobody will hold on to tokens that cannot be used anywhere.
Usage of Steem
Then where can we use Steem?
The key usage of Steem is to get Steem Power. Steem Power is another name for your Steem that is exists in Steemit. By depositing Steem into the Steemit network, the liquidity on the the network can be limited. Limiting liquidity helps stabilizing the token’s value (we will address this matter in detail in future articles).
There are mainly three things you can do with Steem Power.
First, you can exercise more influence on the Steemit network. On Steemit, the size of the reward given to content creators is determined by votes. People holding more Steem Power can take more compensation by voting on contents. Users can vote on their own posts and can team up with other users who have more Steem Power to vote on each other’s posts. And of course, users can reward actually good content.
Second, you can use the bandwidth of the Steem blockchain. There is no separate fee to perform a transaction on the Steem blockchain, but you are allowed to use a bandwidth size proportional to that of the amount of Steem you possess.
Simply put, if a person holding 1,000 STEEM and a person holding 500 STEEM simultaneously perform a transaction, the person with 1,000 STEEM is given priority. With more Steem, you can use the network more smoothly. With too few Steem, it could take you longer to post replies.
Third, you will be given interest for holding Steem Power. 10% of newly issued tokens will be given in proportion to how much Steem Power you hold. Just having more Steem Power earns you more Steem Power.
Steem and Ponzi scheme
Besides the right to use bandwidth (you can participate actively on Steemit with just very few Steem), ultimately, most of steem’s utility is to earn more steem.
Being active on the network with considerable Steem Power will earn you more Steem Power. The Steem Power you earn will allow you to gain more Steem Power. Users can convert their hard earned Steem Power into Steem and sell them at a cryptocurrency exchange for fiat currency.
Such circular structure is based on the premise that you can convert Steem into cash on a cryptocurrency exchange. This means that there are people who want to buy Steem. Yet, such demand for Steem is also based on the demand to earn more Steem with Steem and later cashing out.
Because of this structure, some consider Steem a Ponzi scheme. It resembles a Ponzi scheme in that the people’s pockets are filled with the money of the next person.
Simply providing rewards for posting, liking and replying is not sustainable for the token’s long-term economic value if there is no definite separate usage of the token. Ponzi schemes cannot persist forever for the same reason. What steem lacks is real and distinct usage of steem token.
New usage for Steem — SMT
The Steem foundation also realize such structural limit of Steem. As a result of consistent contemplation to find a solution, a platform called SMT was created.
SMT, like Steemit, is a platform that allows you to easily build content rewarding blockchain projects. With just a few twerks you can create a compensation system similar to Steemit.
Steem can be used to participate in ICOs through SMT. SMT based ICOs are basically funded by Steem tokens. More SMT based ICOs means an increase in demand for Steem.
Also, the bandwidth of SMT based projects are also distributed in proportion to how many Steem tokens a user owns. To have smooth operation of a SMT based community, you need to hold a certain amount of Steem.
Lastly, Steem holders can wield the strong influence they have in SMT based communities as well. Their influence scope will be expanded into other communities outside of Steemit.
Nevertheless, if SMT based tokens adopt the same system as Steemit, they also inherit the issue of how to create token value.
Is it good to be like Steemit?
Truth be told, the question you should have before ‘how can i become something like Steemit?’ is ‘should I become something like Steemit?’ Is it really necessary to build a project similar to Steemit? To answer this, we need to look into the limitations of Steemit.
First, the content quality and reward amount on Steemit are not coupled. Steemit’s structure does not guarantee that creators of good contents receive reward, but rather, those who appeal power players within Steemit reap the profits.
Steemit rewards are not dependent on content quality. The reward standard does not incorporate factors like how many people share the point and gained benefits.
Steemit rewards are defined by how many users with substantial Steem Power have up-voted a post. The decision-making power of the rich outweigh that of the poor. If the post does not appeal to the whales, even Dostoevskii’s novels will be rewarded with less tokens than a random picture posted by a whale.
Then who are the whales that hold all the power of Steem? In the beginning, the Steemit developers took over 80% of all the Steem issued by instamining. While it claims to be a proponent of decentralized economy, they entered the game after building a framework advantageous for them.
In addition, there was a time when mining was temporarily stopped because there was a problem with the developer’s mining tool in the early phase when Steem was launched. While the developer’s share dropped because other miners continued mining, the Steemit developer re-launched Steem and re-took most of the supply. From the beginning, Steem whales held most of the power.
In truth, Steemit is not so much an ideal space where good contents are rewarded, but rather a platform that most resembles reality, a space where people are compensated by being recognized by the rich. (Steemit sees this problem and is working on a solution, such as changing the reward rule in which the reward was square of Steem Power into one in which reward is proportional to Steem Power compensated following a square of of Steem Power into proportional reward . However, the fact remains that there is still room for system abusing to occur.)
Second, the growth of the Steemit community is not reflected in the growth of token value.
Steem’s value is decided by the supply and demand. Steem’s supply is current set at an annual inflation rate of 9.5%. Steem’s demand is generated by the authority to give rewards, bandwidth, and interest.
Steemit will hold value as a community when good posts are uploaded and may people can have meaningful discussions based on those posts. However, observing the factors that comprise Steem’s demand, the reality has no direct connection with content production and consumption.
Writing, viewing, and discussing good contents on Steemit do not require Steem, and robust participation of people may not lead to the promotion of Steem’s value. Steem’s value will increase in proportion with the increase of the number of people who want to earn money by Steem. To earn money with Steem, you need to have Steem.
In conclusion, utilizing Steemit’s model of creating a community and giving rewards for staying active can lead to success. Yet, there are a few things you have to consider.
- You have to think whether the token has usage before issuing and distributing them.
- Before assuring that there will be active participation by issuing tokens, you need to think about where people can use the token. People may be moved by incentives. But you need to distinguish if the incentive is real and not just a good job sticker your teacher gives you on your homework.
- You have to come up with an appropriate incentive structure that meets the community’s purpose.
- Without a proper incentive structure following the network’s purpose, the network could grow in a different direction. You need to devise a incentive structure that goes along with the network’s purpose and have a cryptoeconomic design that solves problems such as system abusing
- You need to contemplate about how to link the demand for the network and the demand for the token.
- Growth of the network does not automatically mean rise of token value. You need to plan for a structure that allows the token’s value to rise as the network is actively used according to its original purpose, When the token’s value is connected to the network’s growth, the network’s members will work towards the network’s growth.
We looked into the consideration points of starting a project pursuing the Steemit model. We hope this article helps many who are preparing for an ICO 🙂