Introduction to Steemit

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Introduction

Steemit is a new social media which pay its users for posting, upvoting, commenting on the content. Wikipedia explains "Steemit is a social news service which runs a blogging and social networking website on top of a blockchain database, known as Steem. The service produces STEEM and Steem Dollars which are tradeable tokens users obtain for posting, discovering, and commenting on interesting content"

The project was founded in early 2016 by Ned Scott dan Daniel Larimer. Ned was a student in Bates College and between 2012 and 2015 a Business Operations and Financial Analyst at Gellert Global Group, The Gellert Global Group consists of many of the leading North American food importing companies, and has been involved in importing food products for over 100 years.

Dan Larimer is the co-founder of Steemit, Inc and its CTO until march 2017. He's also the CEO of Cryptonomex, Inc. which is a blockchain technology consulting company. He also founded Bitshares and Invictus Innocations. Dan's stated mission in life is "to find free market solutions to secure life, liberty, and property for all."

The Concept

The general concept is similar to other blogging websites or social news websites like Reddit, but the text content is saved in a blockchain. Using a blockchain enables rewarding comments and posts with secure tokens of value. Images can be uploaded and hosted on Steemit. Other multimedia content must be embedded from other web hosts. For formatting, there is a WYSIWYG editor. Users can also opt to use Markdown formatting with HTML elements.

User accounts can upvote posts and comments, and the authors who get upvoted can receive a monetary reward in a cryptocurrency token named STEEM and US dollar-pegged tokens called Steem Dollars. People are also rewarded for curating (discovering) popular content. Curating involves voting comments and post submissions. Vote strength and curation rewards are influenced by the amount of STEEM Power held by the voter.

Steemit has a reputation system, where new accounts start with a reputation of 25. An account's received votes can influence its reputation up and down, incentivizing online etiquette and interaction with the community.
The Steem blockchain has two tokens: STEEM and Steem Dollars. There is also a vested or stored interest known as Steem Power. Steem Power is strictly for internal use in the Steem community, while the tokens are used for stored value and trading.

Steem began with a highly inflationary supply model, doubling roughly every year.[4] However due to community demand, on December 6th, 2016 the inflation rate of Steem was changed to 9.5% per year, reducing by 0.5% per year.Source

Ways to Contribute (cite: Steemit whitepaper)

This section outlines the ideas behind Steem and its rewards for people who provide meaningful and measurable​ ​contributions ​ ​to ​ ​the ​ ​Steem ​ ​community.

Capital​ ​Contributions

There are two items a community can offer to attract capital: debt and ownership. Those who buy ownership profit when the community grows but lose if the community shrinks. Those who buy debt are guaranteed a certain amount of interest but do not get to participate in any profits realized by the growth of the community. Both types of capital contributions are valuable to the growth of the community and value of its currency. Additionally there are two ways ownership can be held: liquid and vesting. Vesting ownership​ ​makes ​ ​a ​ ​long-term ​ ​commitment ​ ​and ​ ​cannot ​ ​be ​ ​sold ​ ​for ​ ​a ​ ​minimum ​ ​period ​ ​of ​ ​time.

The Steem network calls these different asset classes Steem (STEEM), Steem Power (SP), and Steem Dollars​ ​(SBD).

Steem​ ​(STEEM)

Steem is the fundamental unit of account on the Steem blockchain. All other tokens derive their value from the value of STEEM. STEEM is a liquid currency, and therefore can be bought or sold on exchanges,​ ​as ​ ​well ​ ​as ​ ​transferred ​ ​to ​ ​other ​ ​users ​ ​as ​ ​a ​ ​form ​ ​of ​ ​payment.

Steem​ ​Power ​ ​(SP)

Start up companies require long-term capital commitment. Those who invest their money in a startup expect to wait years before they can sell their shares and realize their profits. Without long-term commitment, a startup seeking to raise additional capital through the sale of additional shares would be competing with existing shareholders looking to exit. Savvy investors want their capital contributions to grow​ ​the ​ ​company, ​ ​but ​ ​growth ​ ​cannot ​ ​happen ​ ​if ​ ​the ​ ​new ​ ​capital ​ ​is ​ ​given ​ ​away ​ ​to ​ ​those ​ ​looking ​ ​to ​ ​exit.

There is significant value to having long-term commitment because it enables communities to make long-term plans. Long term commitment of stakeholders also causes them to vote for long-term growth rather​ ​than ​ ​short-term ​ ​pumps.

In the cryptocurrency space, speculators jump from cryptocurrency to cryptocurrency based mostly on which one is expected to have short-term growth. Steem wants to build a community that is mostly owned and​ ​entirely ​ ​controlled ​ ​by ​ ​those ​ ​with ​ ​a ​ ​long-term ​ ​perspective.

Users are able to commit their STEEM to a thirteen week vesting schedule, providing them with additional benefits within the platform. STEEM that has been committed to a thirteen week vesting schedule is called Steem Power (SP). SP balances are non-transferrable and non-divisible except via the automatically recurring conversion requests. This means that SP cannot be easily traded on cryptocurrency​ ​exchanges.

When users vote on content, their influence over the distribution of the rewards pool is directly proportional to the amount of SP that they have. Users with more SP have more influence on the distribution of rewards. This means that SP is an access token that grants its holders exclusive powers within​ ​the ​ ​Steem ​ ​platform. SP holders are also paid interest on the balance of SP that remains vested. 15% of the yearly inflation is paid to SP holders as interest. The amount of the interest that they receive is directly proportional to the amount​ ​of ​ ​SP ​ ​they ​ ​hold ​ ​relative ​ ​to ​ ​the ​ ​total ​ ​amount ​ ​of ​ ​vested ​ ​SP ​ ​across ​ ​all ​ ​users.

Transferring from STEEM to SP is referred to as “powering up”, while transferring from SP to STEEM is referred to as “powering down.” SP that is powered down is returned to the user over a period of thirteen weeks,​ ​via ​ ​13 ​ ​equal ​ ​weekly ​ ​payments, ​ ​starting ​ ​one ​ ​week ​ ​after ​ ​the ​ ​power ​ ​down ​ ​is ​ ​initiated.

Steem​ ​Dollars ​ ​(SBD)

Stability is an important feature of successful global economies. Without stability, individuals across the world could not have low cognitive costs while engaging in commerce and savings. Because stability is an important feature of successful economies, Steem Dollars were designed as an attempt to bring stability​ ​to ​ ​the ​ ​world ​ ​of ​ ​cryptocurrency ​ ​and ​ ​to ​ ​the ​ ​individuals ​ ​who ​ ​use ​ ​the ​ ​Steem ​ ​network.

Steem Dollars are created by a mechanism similar to convertible notes, which are often used to fund startups. In the startup world, convertible notes are short-term debt instruments that can be converted to ownership at a rate determined in the future, typically during a future funding round. 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.

Steem Dollars are referred to with the symbol SBD, an acronym for Steem Blockchain Dollars. Creating SBD requires a combination of a reliable price feed, and rules to prevent abuse. Providing a reliable price feed involves three factors: minimizing the impact of an incorrect feed, maximizing the cost of producing an​ ​incorrect ​ ​feed, ​ ​and ​ ​minimizing ​ ​the ​ ​importance ​ ​of ​ ​timing.

Minimizing​ ​Fraudulent Feeds

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.

Given a set of trusted and elected feed producers, the actual price used for conversions can be derived as the median of the feeds. In this way if any minority of individual feed producers produce outliers they have​ ​minimal ​ ​impact ​ ​on ​ ​the ​ ​actual ​ ​median ​ ​while ​ ​still ​ ​having ​ ​the ​ ​ability ​ ​impact ​ ​their ​ ​reputation.

Even if all feed producers are honest, it is possible for the majority of feed producers to be impacted by events beyond their control. The Steem network is designed to tolerate short-term corruption of the median price feed while the community actively works to correct the issue. One example of an issue that may take some time to correct is short-term market manipulation. Market manipulation is difficult and expensive to maintain for long periods of time. Another example would be the failure of a centralized exchange​ ​or ​ ​the ​ ​corruption ​ ​of ​ ​the ​ ​data ​ ​published ​ ​by ​ ​the ​ ​exchange.

Steem factors out short-term price fluctuations by using the median price over a period of three and a half days.​ ​The ​ ​median ​ ​published ​ ​feed ​ ​is ​ ​sampled ​ ​every ​ ​hour ​ ​on ​ ​the ​ ​hour.

As long as the price feed corruption lasts for less than half the moving median time window it will have minimal impact on the conversion price. In the event the feed does get corrupted, network participants will have an opportunity to vote-out corrupt feed producers before the corrupted feed can impact the actual conversion price. Perhaps more importantly, it gives feed producers an opportunity to detect and correct​ ​issues ​ ​before ​ ​their ​ ​feeds ​ ​start ​ ​impacting ​ ​the ​ ​price.

With a three and a half day window, community members have approximately one and a half days to respond​ ​to ​ ​any ​ ​issues ​ ​that ​ ​come ​ ​up.

Mitigating Timing Attacks

Market participants have access to information faster than the blockchain’s three and a half day moving median conversion price can react. This information could be used to benefit of traders at the expense of the community. If there is a sudden increase in the value of STEEM traders could request conversion of their SBD at the old, lower price, and then sell the STEEM they receive a the new higher price with minimal​ ​risk.

Steem levels the playing field by requiring all conversion requests to be delayed for three and a half days. This means that neither the traders nor the blockchain has any information advantage regarding the price at​ ​the ​ ​time ​ ​the ​ ​conversion ​ ​is ​ ​executed.

Minimizing Abuse of Conversions

If people could freely convert in both directions then traders could take advantage of the blockchains conversion rates by trading large volumes without changing the price. Traders who see a massive run up in price would convert to SBD at the high price (when it is most risky) and then convert back after the correction. The Steem protocol protects the community from this kind of abuse by only allowing people to​ ​convert ​ ​from ​ ​SBD ​ ​to ​ ​STEEM ​ ​and ​ ​not ​ ​the ​ ​other ​ ​way ​ ​around.

The blockchain decides how and when to create SBD and who should get it. This keeps the rate of SBD creation​ ​stable ​ ​and ​ ​removes ​ ​most ​ ​avenues ​ ​of ​ ​abuse.

Sustainable Debt to Ownership Ratios

If a token is viewed as ownership in the whole supply of tokens, then a token-convertible-dollar can be viewed as debt. If the debt to ownership ratio gets too high the entire currency can become unstable. Debt conversions can dramatically increase the token supply, which in turn is sold on the market suppressing the price. Subsequent conversions require the issuance of even more tokens. Left unchecked the system can collapse leaving worthless ownership backing a mountain of debt. The higher the debt to ownership ratio​ ​becomes ​ ​the ​ ​less ​ ​willing ​ ​new ​ ​investors ​ ​are ​ ​to ​ ​bring ​ ​capital ​ ​to ​ ​the ​ ​table.

A rapid change in the value of STEEM can dramatically change the debt-to-ownership ratio. The blockchain prevents the debt-to-ownership ratio from getting too high, by reducing the amount of STEEM awarded through SBD conversions 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.

The percentage floors used to compute STEEM creation are based on the supply including the STEEM value​ ​of ​ ​all ​ ​outstanding ​ ​SBD ​ ​and ​ ​SP ​ ​(as ​ ​determined ​ ​by ​ ​the ​ ​current ​ ​rate ​ ​/ ​ ​feed).

Interest

SBD pays holders interest. The interest rate is set by the same people who publish the price feed so that it can adapt to changing market conditions. All debt carries risk to the lender. Someone who holds SBD without redeeming it is effectively lending the community the value of a dollar. They are trusting that at some point in the future someone will be willing to buy the SBD from them for a dollar or that there will be​ ​speculators ​ ​and ​ ​investors ​ ​willing ​ ​to ​ ​buy ​ ​the ​ ​STEEM ​ ​they ​ ​convert ​ ​it ​ ​into.

STEEM and SP holders gain leverage when members of the community are willing to hold SBD. This leverage amplifies the gains from growth while also contributing to growth. STEEM holders do suffer from increased dilution if the price falls. Cryptocurrency projects have shown that the gains from increasing the user base willing to trust the network with capital ultimately add more value to the network than​ ​any ​ ​dilution ​ ​that ​ ​may ​ ​occur ​ ​during ​ ​a ​ ​downturn.

Setting​ ​​Price ​ ​Feeds

Astute readers will recognize that an interest bearing asset of limited supply may trade higher or lower than the underlying asset depending upon other opportunities to earn interest on the same asset. With a high interest rate paid on an asset pegged to the US dollar many people will bid up the limited supply of Steem Dollars until they are no longer valued at $1. In economics there is a principle known as the 4 Impossible​ ​Trinity ​ ​which ​ ​states ​ ​that ​ ​it ​ ​is ​ ​impossible ​ ​to ​ ​have ​ ​all ​ ​three ​ ​of ​ ​the ​ ​following ​ ​at ​ ​the ​ ​same ​ ​time:

1. A stable exchange rate
2. Free capital movement
3. An independent monetary policy

If Steem feed producers aim to have an independent monetary policy allowing it to create and destroy Steem Dollars while simultaneously having full control over the interest rate then they will encounter problems. The Impossible Trinity says that Steem Dollars either need to restrict capital movement, have an​ ​unstable ​ ​exchange ​ ​rate ​ ​with ​ ​the ​ ​dollar, ​ ​or ​ ​have ​ ​limited ​ ​control ​ ​over ​ ​the ​ ​interest ​ ​rate.

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.

If the debt-to-ownership ratio is low and SBD is trading for less than $1.00, then the interest rate should be​ ​increased. ​ ​This ​ ​will ​ ​encourage ​ ​more ​ ​people ​ ​to ​ ​hold ​ ​their ​ ​SBD ​ ​and ​ ​support ​ ​the ​ ​price.

If SBD trades for less than $1.00 USD and the debt-to-ownership ratio is high, then the feeds should be adjusted upward give more STEEM per SBD. This will increase demand for SBD while also reducing the debt-to-ownership​ ​ratio ​ ​and ​ ​returning ​ ​SBD ​ ​to ​ ​parity ​ ​with ​ ​USD.

Assuming the value of STEEM is growing faster than Steem is creating new SBD, the debt-to-ownership ratio should remain under the target ratio and the interest offered benefits everyone. If the value of the network​ ​is ​ ​flat ​ ​or ​ ​falling, ​ ​then ​ ​any ​ ​interest ​ ​offered ​ ​will ​ ​only ​ ​make ​ ​the ​ ​debt-to-ownership ​ ​ratio ​ ​worse.

In effect, feed producers are entrusted with the responsibility of setting monetary policy for the purpose of maintaining a stable peg to the USD. Abuse of this power can harm the value of STEEM so SP holders are wise to vote for witnesses that can be counted on to adjust the price feed and interest rates according to​ ​the ​ ​rules ​ ​outlined ​ ​above.

If the debt-to-ownership ratio gets dangerously high and market participants choose to avoid conversion requests,​ ​then ​ ​the ​ ​feed ​ ​should ​ ​be ​ ​adjusted ​ ​to ​ ​increase ​ ​the ​ ​rate ​ ​at ​ ​which ​ ​STEEM ​ ​paid ​ ​for ​ ​converting ​ ​SBD.

Changes to the interest rate policy and/or any premiums/discounts on the STEEM/SBD conversion rate should be a slow and measured response to long-term average deviations rather than attempting to respond​ ​to ​ ​short-term ​ ​market ​ ​conditions.

It is our belief that these rules will give market participants confidence that they are unlikely lose money by holding SBD purchased at a price of $1.00. We fully expect there to be a narrow trading range between $0.95​ ​and ​ ​$1.05 ​ ​for ​ ​SBD ​ ​under ​ ​normal ​ ​market ​ ​conditions.

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How come this didn't get any comments? This is pretty quality content...sorry I only found it so late!