This is a revision to an older post. It's an attempt to break down Steemits's three assets - STEEM, Steem Power and Steem Dollars to their simplest form.
The system has various complexities - such as the 9:1 split between Steem and Steem Power for new Steem, or the 10:1 reverse split for STEEM after around 3 years. To be completely up to date about how Steem really works, please do read up the Steem Whitepaper. This post is more about the basics that every Steemit user needs to know.
There are three main asset classes on Steemit - Steem (STEEM), Steem Power (SP) and Steem Dollars (SD/SMD/SBD).
It all starts with Steem Dollars (henceforth SD) which are pegged to the US Dollar. Under every post or reply is a $ value - this is what a Steem Dollar is and denotes the total rewards for the post. Rewards are distributed between the author of the post, the curators, and authors of the parent posts etc. Rewards are dished out in the form of SD and Steem Power (henceforth, SP). More on SP later. (I'll skip how the rewards are distributed exactly - that's for the whitepaper or a different article. But if you wrote a post, expect to be rewarded roughly half of what the post says.)
SD accumulates a rate of interest of 10% per annum. Interests are posted periodically on an annualised basis.
Steem Dollars can be converted to Steem (henceforth, STEEM). This is the highly liquid component of the asset system, and is the currency listed on exchanges. If you want to cash out quick, this is what you convert SD or SP to, and exchange to BTC or ETH. However, STEEM is constantly increasing supply at the rate of 100% every year. I.e. 100% inflation per annum. This has the potential to dilute your STEEM by approx 0.19% per day.
Note that the amount of STEEM that you receive for your SD varies according to the market's exchange rate. It is important to note that STEEM's exchange rate versus the US Dollar or Bitcoin is determined by the markets and not subject to the devaluation directly. (Although in the long term, I expect it to go down too - but trading markets are unpredictable.)
Finally, we have Steem Power (SP), the heart and soul of Steemit. This is the fixed, long term asset. STEEM can be converted to SP through a process called Power Up, and back to STEEM through Power Down. STEEM and SP have the same value at the time of conversion.
Unlike STEEM, SP cannot be cashed out quickly. In fact, converting SP to STEEM takes 2 years, across 104 equal instalments, every week. SP has potential for a high interest rate. Check out @deeprock's SP interest calculator to see the type of interests you can expect to earn.
Most importantly, SP is what affects your influence over upvotes and curating. The more your SP, the more your curation rewards as well.
In terms of exchange, STEEM = SP. SD = USD. SD and SP can only be exchanged to STEEM. STEEM can then be exchanged on the markets against other currencies.
So those are three asset classes. And here are some basic recommendations -
1. If you believe in the long term potential of Steemit and are looking at your earnings as a long term investment (years) - Convert SD earned to STEEM through the internal market. Then use the converted STEEM to Power Up to SP. Accumulate SP over the years. Meanwhile, you also gain influence over curation. This is going to pay massive dividends in the long run. Note that we are talking about several years here.
2. If you are looking for a quick buck (days) - Convert SD to STEEM, and cash out at the exchanges that support STEEM-BTC or STEEM-ETH. Poloniex and Bittrex are recommended.
3. If you are looking for medium term rewards (weeks/months), but not in a hurry to cash out - Hold on to SD earned. It doesn't have the potential to devalue like STEEM, fixed to the US Dollar and you earn a fixed 10% per annum interest. This is a low risk and stable strategy.
4. An alternative to number 3. STEEM may increase sharply in value on the exchange market versus the US Dollar, which can greatly outweigh the devaluation. This is of course a high risk strategy. But if you anticipate it, convert SD to STEEM and hold till you think STEEM has hit its peak. Then cash out at the exchanges.
I hope this helps! Please feel free to point out any errors, and of course check out the Whitepaper for more details.