steemit-decentralized-social-network

What is Steemit? The Decentralized Social Network That Is Challenging Facebook Business Model

Steemit is a platform that combines blockchain technology, social media, and cryptocurrency for the creation of user-generated content and community building. The social community helps to produce content and curate it, while it gets rewarded with two main cryptocurrencies: 50% in Steem Power and 50% in Steem Dollars.

As we will see throughout the guide, Steemit uses financial tools similar to those used by startups. With the main difference, those rely on the blockchain technology and cryptocurrency, rather than on a few venture capital investments and equity ownership.

A little caveat: I'll use the term Steemit and Steem to mean the same thing.

How did Steem start? A brief history of Steemit

The company was co-founded by Ned Scott, CEO, and Daniel Larimer, CTO in January 2016. 

Both Ned Scott and Daniel Larimer were looking at ways to put into action the blockchain technologies for practical problems. The more they thought about it the more it made sense for them to use the blockchain to build up a community. In fact, as Ned Scott affirmed in an interview for coinreport.net:

When the idea of Steem and Steemit really began to form we had been exploring several different blockchain-based business models. We were looking at micro insurance on the blockchain and a few other ideas, but ultimately, we kept coming back to the idea that the most useful and powerful thing to leverage around a cryptocurrency is a community. 

And it went on:

Steem was born out of ideas about insurance and mutual aid: it was the idea that people would be able to help each other peer-to-peer if they were struggling to solve problems or needed assistance. It quickly grew into a much larger vision and Steemit was born as a place where individuals get rewarded by a community for posting and voting on content. That was back in January of this year.

We were in May 2016. In April 2016 Steemit had launched an alpha testing, helped by more than 150 early adopters. As specified by Ned Scott in the same interview, the uniqueness of Steemit stands on the fact that everything that is done on the platform (posts, comments and voted) sit directly on the blockchain.

Why is this important? This not only allows to manage things with a distributed system, where there is no central authority. It also should put an end to the old paradigm that took over the web in the last two decades, of a few tech giants that take over the world thanks to the data users give away for free.

What are the key principles behind Seemit? The three founding principles of Steem

Where platforms like Facebook, Twitter, and Reddit get most of their value from the data created by its users without rewarding them. Steemit (also called Steem) instead tries to build its platform based on a few fundamental principles:

  • everyone who contributes to a venture should receive pro-rata ownership, payment or debt from the venture
  • all forms of capital are equally valuable: in short, either people of the community put cash or devote their time to grow the platform, they're both considered as capital
  • the community produces products to serve its members

What does the Steem community do?

According to Steem White Paper, there are five primary values provided by its community:

1. A source of curated news and commentary.

2. A means to get high-quality answers to personalized questions.

3. A stable cryptocurrency pegged to the U.S. dollar.

4. Free payments.

5. Jobs providing above services to other members.

Steemit as an alternative business model compared to the hidden revenue model

Where companies like Facebook have been able to create huge wealth for its shareholders. Their business model is also mainly based on advertising. In fact, companies like Facebook, Twitter, and Google use a hidden revenue business model, which gives free services in exchange for users' data. In this panorama, users seem to be the winner as they get incredible services for free.

However, this isn't always the case. Users might get something for free, but they're giving up something way more valuable: their data. In fact, Companies like Facebook and Google as of 2017 make dozens of billion dollars in profits without sharing any of those with its users.

Read how those business models work:

https://fourweekmba.com/facebook-business-model/

https://fourweekmba.com/google-business-model/

Instead, the Steem community starts from the assumption that with the incentives created by cryptocurrencies it is possible to bootstrap a social media platform like Steemit.

In other words, the combination between cryptocurrency and social media is so powerful to be able to create a multi-billion platform that rewards its users. In fact, as affirmed within the Steem White Paper (pg. 13):

The vast majority of people have more free time than they do spare cash. Imagine the goal of bootstrapping a currency in a poor community with no actual cash but plenty of time. If people can earn money by working for one another then they will bootstrap value through mutual exchange facilitated by a fair accounting/currency system.

Another interesting comes up by reading Steem's white paper. Where modern tech giants like Facebook and Google have been built and grown by engineers with blind faith and belief in computers' algorithms; In the white paper it is evidenced how this approach might be insufficient:

The tasks that can be entirely evaluated by an objective computer algorithm are limited in nature and generally speaking have limited positive external benefits...

...In order to give everyone an equal opportunity to get involved and earn the currency people must be given an opportunity to work. The challenge is how to judge the relative quality and quantity of work that individuals provide and to do so in a way that efficiently allocates rewards to millions of users. This requires the introduction of a scalable voting process. In particular it requires that authority to allocate funds must be as distributed and decentralized as possible.

This is the opposite view and approaches modern tech giants had had.

Has this assumption proved correct? We can check that by looking at how successful the Steem cryptocurrency is as of the time of this writing.

How successful is the Steem cryptocurrency?

At the time of this writing the Steem is worth over $3 and has a market capitalization of almost  eight hundred million in capitalization:

steem-cryptocurrency

As numbers change quickly, you can see below the value as of now of the Steem:

The Steem token is critical for the working of Steemit. How does it work?

How does the Steem work?

As specified in Steem White Paper:

The fundamental unit of account on the Steem platform is STEEM, a crypto currency token. Steem operates on the basis of one-STEEM, one-vote. Under this model, individuals who have contributed the most to the platform, as measured by their account balance, have the most influence over how contributions are scored. Furthermore, Steem only allows members to vote with STEEM when it is committed to a vesting schedule. Under this model, members have a financial incentive to vote in a way that maximises the long term value of their STEEM.

Steem is designed around a relatively simple concept: everyone’s meaningful contribution to the community should be recognized for the value it adds. When people are recognized for their meaningful contributions, they continue contributing and the community grows. Any imbalance in the give and take within a community is unsustainable. Eventually the givers grow tired of supporting the takers and disengage from the community

What are the Steem currencies? The Steem (STEEM), Steem Power (SP) and Steem Dollars (SBD) explained

To allow Steemit community to be built on top of incentives that will enable its growth in the long-run, there are three main currencies. Each of those currencies serves a different purpose:

The Steem (STEEM): The social media cryptocurrency

The STEEM is the cryptocurrency of the social media platform. In other words, this is the unit of exchange based on the blockchain that can be easily exchanged on the market. Of course, its value can change quite quickly. Thus, volatility for a cryptocurrency is normal. For instance, on January 1st, 2017 the STEEM was worth 17 cents. It closed on December 31st, 2017 at $3.01, you can see the historical data here. This is almost a twenty-fold increase!

While cryptocurrencies are quite volatile, and this is a normal part of the growth process. The community needs a currency that allows it to bootstrap its growth by giving it enough incentives for a long-term growth plan.

The Steem Power (SP): The stock option of the Steem community

Stock options for startups are an effective tool to fuel their growth by giving ownership to employees; to create a strong incentive for growth. Fro the Steem community the equivalent of the stock options is the Steem Power currency. In fact, the users are rewarded for their activity on Steemit through Steem Power. This is a currency that follows a thirteen-week vesting schedule before. In short, those amounts cannot be easily traded on cryptocurrency exchanges.

This token is quite powerful because it improves the influence of its holders on the platform. In short, the more SP you have, the more you can influence the reward system over the platform. This might be for a couple of reasons.

First, the more you contribute to the platform the more SP you have. Second, by holding more Steem Power, you also keep more influence. In other words, you're incentivized to keep it instead of vesting the token. Thus, contributing more to the long-term growth of the platform.

This is confirmed by the fact that by holding the Steem Power currency vested 15% of the yearly inflation is paid to SP holders as interest. And it is reinforced by the language used in converting a Steem in SP and vice-versa:

  • Converting a Steem in Steem Power (SP) is called powering up. This is because you stop being a speculator and become part of the community. Thus an active participant in building up the community
  • Converting a SP in Steem is called powering down. That's because you are no longer a community member and will receive the payment of your currency in thirteen weeks. In fact, the week after you "power down" you will receive the total amount in the course of the thirteen weeks vesting schedule

As we've seen the Steem and Steem Power have two specific aims. The Steem is the cryptocurrency that has more speculative logic. The Steem Power instead is the currency with wich Steemit members are paid with. When you convert a Steem to a SP you become an active member of the community. Thus, you're "powered-up." Vice Versa by converting the SP in Steem you become a speculator, thus you're "powered-down."

There is also another critical aspect of the Steep Power. This gives as we will see the power to its holders to elect a group of people, called "witnesses" in charge of publishing price feeds.

There is another aspect, which is critical for the growth of Steem. That is stability. That is where the Steem Dollars come handy.

The Steem Dollars (SBD): The convertible notes of the Steem community

The Steem Dollars main aim is stability. In fact, the Steem dollars work as convertible notes. In fact, where startups use convertible notes as short-term debt instruments that allow startups to finance their operations by giving back ownership at a rate determined at the next funding round. The Steem Community leverages on Steem Dollars.

As specified in the Steem White Paper, the SBD:

A blockchain based token can be viewed as ownership in the community whereas a convertible note can be viewed as a debt denominated in any other commodity or currency. The terms of the convertible note allow the holder to convert to the backing token with a minimum notice at the fair market price of the token. Creating token-convertible-dollars enables blockchains to grow their network effect while maximizing the return for token holders.

In short, the Steem Dollars is the equivalent of short-term debt and also the currency for which users that create quality content (intended as content that gets updates and shares) get - in part- paid for.

The Steem Dollars also pay interests that are set by time to time by people who publish the price feed. This opens up a question:

The Price Feed, the witnesses and the anti-fraud mechanism of the Steem community

The price feed is the mechanism that allows a group of elected people to set the price of the Steem Dollars. In fact, to maintain parity with the dollar, it cannot be left free to fluctuations, but interest payments need to be made and withdrawn accordingly. As specified in the White Paper:

SP holders elect individuals, called witnesses, to publish price feeds. The elected witnesses are presumably trusted by those who have a vested interest in the quality of the feed. By paying those who are elected, Steem creates market competition to earn the right to produce feeds. The more the feed producers are paid the more they have to lose by publishing false information.

As defined in the White Paper:

The primary concern of Steem feed producers is to maintain a stable one-to-one conversion between SBD and the U.S. Dollar (USD). Any time SBD is consistently trading above $1.00 USD interest payments must be stopped.

In a market where 0% interest on debt still demands a premium, it is safe to say the market is willing to extend more credit than the debt the community is willing to take on. If this happens a SBD will be valued at more than $1.00 and there is little the community can do without charging negative interest rates

The interests payments will be set up by looking aòsp at the debt to ownership ratio. In fact, this is a good metric to look at to assess the health of Steem over time. Thus, the feed producers assert an important control over the platform. However, they have also monetary incentives to avoid manipulating the feed price as they would get demoted. In other words, while dishonest witnesses might be able to distort the Price Feed in the short-term those should be wiped out in the long run.

How to assess the health of Steemit? The Debt to Ownership Ratio for the Steem currency

Since the SBD currency works as a sort of short-term debt. As for any startup or company, too much short-term debt might mean bankruptcy.

That is why there is a safety net to avoid that the debt goes out of hand. As specified in the Steem White Paper:

If the debt level were to exceed 10%. If the amount of SBD debt ever exceeds 10% of the total STEEM market cap, the blockchain will automatically reduce the amount of STEEM generated through conversions to a maximum of 10% of the market cap. This ensures that the blockchain will never have higher than a 10% debt-to-ownership ratio.

For instance, as of the time of this writing, the SBD market cap is over $36 million, compared to a STEEM market cap of $793 million. This is is roughly a 4.5% debt to ownership ratio.

How does Steemit Payout work?

When you produce content that gets upvotes and shares, you will automatically accumulate rewards. Those rewards will be paid out as it follows:

  • 50% SBD
  • 50% SP

The Steem Power (SP) currency can be converted in Steem (power down). If kept this gives its holder increasing voting power and influence over the platform. The Steem Dollars (SBD) give its holders an immediate and more stable currency that can be exchanged on the market.

However when you post something you have three options:

  1. Power up 100%: you will only get rewarded with Steem Power currency
  2. Default 50%/50%: you would get paid half in SP and half in SBD
  3. Decline payout: in this scenario, your payout will be distributed to users

Steemit leverages on Zipf’s Law. That is, "if there are a million items, then the most popular 100 will contribute a third of the total value, the next 10,000 another third, and the remaining 989,900 the final third. The payout distribution is to offer large bounties for good content while still rewarding smaller players for their long-tail contribution."

Why?

As specified in the White Paper:

The economic effect of this is similar to a lottery where people overestimate their probability of getting votes and thus do more work than the expected value of their reward and thereby maximize the total amount of work performed in service of the community. The fact that everyone “wins something” plays on the same psychology that casinos use to keep people gambling. In other words, small rewards help reinforce the idea that it is possible to earn bigger rewards.

Zipf’s-Law-steemit

Source: https://steem.io/SteemWhitePaper.pdf

Will Steemit succeed?

Blockchain technologies have proved to be quite effective to manage decentralized systems. If as of now, companies like Facebook, Amazon, and Google have been able to leverage on centralized, opaque and asymmetric business models, this might have been justified by the lack of an alternative and effective way to organize those companies.

However, those companies now have to face the entrance on the internet of decentralized startups that are willing to take the challenge. Would they attempt to scale up successfully, then the tech giants that conquered the internet in the last decade or two might have to revise their strategy if they don't want to risk the extinction. As of now, the battle is still open. This battle is good because it opens up new possibilities. It also shows that there is an alternative business model to what we've seen taking over the web.

As we've seen corporations are neither good or bad. In addition, also Steemit uses a reward system, like that of casinos that gives small payouts to the long-tail just to keep them coming back. Of course, we might argue this is used for good. Yet if we start asking what "good" means we get into a too complicated philosophical discussion.

Instead, there are two critical aspects.

Whether or not Steemit will succeed in the long term, that doesn't really matter as soon as those tech giants that have dominated the market feel threatened and know they have to experiment with new business models if they want to survive.

In addition, what is compelling about decentralized systems is the fact that by having them managed by a collective rather than a few, they are less prone to screw-ups.

Last but not least, through the blockchain, it is possible to build up complex systems that still work effectively also if managed by a larger and larger number of individuals.

 

Published by

Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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