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Are you sure? I don't think they do. Steemit doesn't provide any server space for files, which is the reason we need the external links in the first place. Would be kind of strange if they still stored the images and videos. I believe Steemit only saves the links, so if the image hosting site dies, so will the images in Steemit posts.

Yes I know they do.

Browsing through the older posts, I saw a post that has embedded a video except that it is blank (I assume it was hosted on Youtube and was taken down). Is this because the post was an old post in the early days of Steemit and that is no longer the case?

I don't know. The link may have stopped working if the video went offline but it is hard to say without checking the actual video.