Let's have a discussion on the economic effects of the current SBD bonnanza. In my view the economic value of Steem is being drained on an unprecedented scale. The daily reward pool for some days in recent weeks equated to as high as $850k. This is far above a sustainable level.
Is there anything we can do to stop the drain?
Steem is not Bitcoin
Many aspects of Steem contribute to it being different than other Cryptocurrencies. The idea that any user can earn it as they add value to the system contribute to the token Steem having a sustainable economic model. It has in fact created a self-sufficient online economic model that is global in scale.
50%:50% or 100%
The main selling point for Steem is that you “get paid” to post. You do “get paid” with a digital token that has a perceived economic value. This is not cash but a digital token which represents a share of the Steem ecosystem. This is not a share of a company but a share of a digital decentralised economy.
Aligning Interests
One of @dan's principles from the start has been to set up a system where economic and social interests incentivise behaviour. An aspect of Steem that is different from other cryptocurrencies is that it is not all liquid. When you “get paid” you can opt to get paid half in liquid rewards and half in Steem Power which is not liquid. This is a cornerstone of the system and it leads to all participants having a stake in the system. It creates an incentive to make the system work.
People are less inclined to cash out because people have a long term stake in the platform.
Democratic Evolution
Late last year the power down rules changed from 2 years (which was seen as excessive) to 13 weeks.
Powering down is the length of time it takes before you can withdraw your Steem Power.
Governance
This drastic change was seen as necessary at the time and implemented via a hardfork of the Blockchain (HF16).
Another fairly unique aspect of Steemit is its governance structure. Delegated Witnesses Implement Hardforks. For HF16 there were proposals, discussion and a democratic decision to implement the change to the rules for powering down.
In recent weeks something altogether less democratic has happened. The rules for extracting value from the system have suddenly changed without any such due process. Only time will tell if this loophole is shut down or if people continue to drain value from the system.
Lets celebrate the bonanza but lets not be complacent.
Value
Have you ever asked yourself why is cryptocurrency worth anything?
Consider Facebook for a moment...
Facebook has value because it has a unique asset, a network of users which it has created. This network can generate revenue streams from advertising and via selling valuable information about the digital footprint of its users. These revenue streams contribute to the value of that company and are reflected in the share price.
Steem has value because it also has a unique asset. It has created a network of users that add value to the system each day by writing and interacting with it.
The network is the asset in Steem’s case and as the network grows and more people wish to join to utilise the technology and connections that this network has created, the value of the system will increase.
This is the theory at least and this is why people speculate on the market price of Steem. The perceived potential that is building in the network will increase the market price of Steem as more people join and the network grows and evolves.
Nothing is Infinite
Any system has inputs and ouputs. Lets look at Steems inputs and outputs.
Inputs
Anything that grows or adds value to the network. e.g.
- Posts
- Comments
- Votes
- Applications
- Communities
Outputs
Anything that extracts or reduces the value of the network. e.g.
- Power Downs and Sale of Stake for Fiat
- Sale of Liquid Currency for Fiat
Value Extraction
It's probably a law of thermodynamics or something but as value or energy is extracted from any system the value of the system will drop.
The main method of extracting value from the Steem, until recently, was powerdowns and selling Steem for Fiat.
In November this balance suddenly shifted dramatically.
Before HF16 there was not much extraction from the system. Liquid rewards were not a major component and people were generally building the network without cashing out. Since the beginning of 2017 we have seen several large powerdowns from people and sale of stake, but worryingly in recent weeks the balance has changed and people now have found a new way to extract value from the system in the form of Liquid rewards.
SBD
A crucial feature of the Steem system is SBD, a counterparty free asset pegged to the US dollar. In theory it’s quite simple how this works
- If the price of Steem is < 1 dollar you get paid interest for holding SBD instead of Steem.
People have an incentive to hold SBD and will buy it driving up the price. - If the price of Steem > 1 dollar your post payouts become more valuable if you get paid in part with SBD.
You have an incentive to sell your dollars on the market which will drive down the price.
Why is this important
Built into the Steem system is an asset that is automatically pegged to the Dollar. If your risk averse or wish to hedge your currency risk you can, and the market should automatically handle keeping this asset in line. This allows commerce to thrive with certainty for people wishing to plan for the future or set a price that will not fluctuate wildly.
So who pays 16 dollar’s for 1 SBD?
On November 1st the Volume of SBD traded was 25m dollars according to coinmarketcap. This level was very much out of line with the daily trading volumes for the last year. Since then the price of SBD has been very high.
Was it all the people paying for Ubers with SBD at Steemfest???
Something about this doesn’t feel right and there are just two reasonable explanations for the volumes on that day
- Market Manipulation
- Other Crypto Traders who don’t know what Steem is and what SBD is trading charts.
The second possibility is unlikely as any chart for the past few months will show a stable SBD price so the likely conclusion is Market Manipulation. To put this into context if you were holding SBD and the price went up to 16 dollars you would have made 16x profit for dumping your SBD. It feels like a bubble that will burst at some stage.
So who profits from SBD being at all time highs?
We all get a bonanza for posts but there are two groups of people that are clearly profiting:
- Voting Bots
- Delegators
Where is the SBD sitting at the moment?
SBD Distribution by Account
This distribution ignores the top 3 holders. @bittrex is where most of the SBD is sitting and the only account that stands out here is @monobyte but this account isn't holding enough SBD to move the market, but I do wonder why any account has SBD. Who is buying it???
The questions this analysis leaves me with are
- Who are the top holders of SBD in bittrex.
- Why are they hodling on to it. Is it not time to sell before it reverts back to 1 dollar?
Draining the Long Term Value of the Reward Pool
I started this post with a headline figure of 850k. In the next section I will explain how I arrived at this figure but first lets take a look at the top trending post at the moment.
@haejin has written a post that is valued at 512.50 as per Steemit.com. The breakdown of the payout for this post will be 50:50 between liquid Steem and Steem Power.
- That is 256 US Dollars in Steem
- and 256 Steem Dollars worth about 7.75 Dollars or 1984 US Dollars.
@haejin has not done too badly for this post with an estimated payout of over $2000. This post consists of 3 graphs and limited text. Thanks @ranchorelaxo and @glitterfart
Implications
The reward pool is approx 46k steem a day which equates to around 100 - 140k dollars. Steem is set up to distribute this amount of value each day but half at least should be put into Steem Power. What is happening at the moment is much more in value is being paid out.
Payouts are currently 50% in Steem, 50% in SBD which may be worth up to 16 times its face value on the open market. That means the daily reward pool has jumped from 100k to 850k in value on some days.
This dramatic increase in value extraction is happening at the moment but it's not being instigated by witnesses and by the Steemit Governance Structure but by an unknown actor or group of actors. I have not seen it being discussed as a problem and if the price of Steem continues to rise it may not even be noticed but as an aspiring blogger I feel cheated by people extracting up to 8 times the daily rewards.
Combat the Pump
Is there anything we can do. The only way I can see to stop this value extraction exercise is by converting all the SBD you get to Steem and powering it up.
Have you any thought's about who is behind this pump and what it means for the economic value of Steem?
Thank you for reading this. I write on Steemit about Blockchain, Cryptocurrency, Travel and lots of random topics.
Images thanks to pixabay.com