Steem provokes doubts.

While steem recently became the third-largest digital currency as measured by market capitalization, surpassing $400 million this month, some market experts are skeptical of steem and have expressed doubts about its economics.

The digital currency’s market capitalization surged in July, rising more than 2,000% from $17.9M to $411.9M between 04:14 UTC on 6th July and the same time on 20th July, CoinMarketCap figures reveal. The digital currency’s price climbed more than 1,800% during this period, increasing from $0.24 to $4.63.

For those new to the digital currency, users can obtain steem by posting content on social media platform named Steemit. When users publish popular content, as measured by upvotes, they receive steem tokens. By developing such a platform, Steemit’s creators have stated that they want to allow users to receive a reward for the content they create.

"The concept itself is interesting, it is a Reddit and Quora mashup with a strong monetary incentive to produce good quality content," Joe Lee, co-founder and CIO of digital currency trading platform Magnr, told CoinDesk. "Whether steem succeeds as a digital currency will be more a reflection of Steemit’s success as a platform as opposed to the economics of the coin itself. This is a good example of a digital currency whose value will be closely affiliated to its utilitarian value as a social networking and sharing platform."

Market Observers Skeptical

While Lee offered some positive remarks about both the digital currency and its underlying social media platform, several market observers quickly voiced their doubts. “I’m skeptical about 'appcoins'/'appchains,' and Steem is very much one,” stated algorithmic trader Jacob Eliosoff.

"It’s great to set up a site that rewards upvoted content," he noted. However, doing so is "borderline illegal" unless it is done very carefully. Past that, he asked why the platform needs a new currency, instead of using an existing digital currency like bitcoin or ether.

Eliosoff also expressed concerns about steem’s use of a dollar peg, which ARK Invest’s Chris Burniske described as being made possible through the use of a decentralized marketplace which sets interest rates that in turn "keep steem dollars properly pegged to the U.S. dollar."

"Real dollar pegs are very expensive," said Eliosoff, adding that "to my knowledge no (or next to no) cryptocoins have pulled one off."

Potential Scam

Some market observers expressed their concerns that steem in and of itself might be either a pump and dump scam or a Ponzi scheme.

"My first impression is that it is a 'pump and dump' crypto where accumulators (founders, early adopters) will be looking to cash out on a major pump in price (distribution),” stated Petar Zivkovski, director of operations for full-service bitcoin trading platform Whaleclub. "Whether it survives longer term remains to be proven."

Kong Gao, overseas marketing manager for bitcoin trader Richfund, provided similar concerns about steem. "Most of the articles on Steemit are promoting steem, which makes it seem like a variation of a Ponzi [scheme]. Furthermore, it is the same group of people behind Bitshares." As a result, "I don’t think it is sustainable and I don't take it seriously. I've also spoken with a couple of serious altcoin traders in China” and they have their doubts as well.

Eliosoff reiterated Gao's point that steem might be a Ponzi scheme, predicting that the digital currency "will grow and grow until there are no fresh users to suck in and then quickly collapse," a situation he described as being "the Ponzi way."

Steem Power

The creators of Steemit have responded to criticisms like these, emphasizing that they have built certain safeguards into the system to provide users with greater incentive to hold on to their steem tokens. One such feature is Steem Power.

"Because Steem wants to encourage long-term growth, it is hardwired to allocate nine steem to Steem Power (SP) stakeholders for every one steem it creates to fund growth through contribution incentives," the steem whitepaper stated. "Over time this drives the ratio of the total Steem value of Steem Power balances to the total of steem balances toward nine-to-one."

"Long-term holders are almost completely protected from the dilution used to fund growth" as a result of this setup, the white paper continues. Past that, the "Steem power can only be converted back to steem over two years via 104 equal payments."

Burniske spoke to the benefits of Steem Power, telling CoinDesk it could help provide the digital currency with the stability it needs.

"Locking people into Steem Power for 2 years is a good way to secure long term capital commitment that will help the platform retain a steady base, hopefully giving it the runway it needs to establish sustainable user and developer network effects," he stated. "This is an interesting neutralizer to the 'burn fast, burn bright' that we often see with new cryptocurrency platforms."

While steem’s innovative approach has helped it rise above the vast majority of crytocurrencies and become the third-largest in terms of market capitalization, only time will tell whether its business model will be sustainable. Until that point, the digital currency will probably not lack for attention, as many market observers will be taking a closer look at steem to see whether its approach is sustainable.