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SteemIt Is A Ponzi Scheme But So Was Facebook

Posted in Cryptos

The following article covers a token or element in the cryptosphere. The cryptosphere is new and exciting, but changes rapidly and often in ways that do not benefit users. By the time this article is published, changes may have already occurred. Most tokens in the cryptosphere are complete scams that are get-rich-quick-schemes for insiders. Often, we cannot know this beforehand and only later discover this. A person should only trade with money that they’re willing to lose because losses are guaranteed. If you choose to participate in purchasing a token in the cryptosphere, you should do so with the full expectation of a loss and you should also expect it to change in a manner that does not benefit you. There are very few good ideas in the cryptosphere. Finally, by reading this post, you agree that you’ve read our disclosure.


SteemIt has proposed changes to Steem, Steem Power and a few other items. Dan and Ned have made a very good proposal here, so I will keep my eye on this. Smart witnesses will support this – this is a great move by Dan and Ned. What this means for this article is that it no longer applies to SteemIt if these changes are accepted – for instance, Steem will no longer have 100% inflation a year. One of our later articles looks at SteemIt’s Steem Backed Dollars from the angle of Austrian Economics and GDP measurements, while also covering some of the changes in the interest rate.

While we understand that new readers may be confused about this post, since the current SteemIt is different than what we described here, we want to caution these readers that cryptocurrencies that change frequently can sometimes be to the detriment of users.


Two young men come into your office and offer you – a venture capitalist – the investment of a lifetime. They own a social network that millions of users around the world use by sharing information with friends, family and strangers. People on this network share intimate details with everyone they know, holding nothing back, and these young men have unlimited access to all these data that people willingly share. More users also want to join and the potential for growth seems unlimited. You’re impressed. There is only one catch: they don’t make any money. Yet.

That story mirrors Facebook’s humble beginnings as one of the world’s largest social media companies – it made no money in the beginning and solely relied on user growth. Facebook still exists and it is a growing company that now does make money. In many ways Steem may be similar.

The Numbers Behind the Ponzi Scheme: Original Design

The currency Steem doubles every year, or for the finance types, there is 100% inflation per year, with a reverse 1:10 split around every three years. Steem Power works a little different: of the new Steem that is issued, 90% are issued to those holding Steem Power. We’ll look at an example in a second, but this essentially amounts of an annual inflation rate of 5%. Steem encourages saving through rewarding those holding SteemPower (you can power up if you have Steem) with a lower inflation rate. Unfortunately, this doesn’t mean that your currency is becoming more valuable.

Let’s look at an example of this:

Steem currently has a supply of 10000 Steem. In a year, the supply of Steem will be 20000. If we had one user who held all the Steem – let’s call him Steve – when Steem began and he powered up, that means that all the new Steem that’s issued – 9000 Steem over the course of the year – would go to him, since he’s the sole user. He would go from 10000 Steem Power to 19000 Steem Power. It sounds like he’s seen growth, but we have to remember that the money supply grew from 10000 Steem to 20000 Steem. Even though he diligently saved, he would have experienced 5% inflation.

Some may point out correctly that if more users joined – enough to offset the 5% growth – then the value of Steem Power would rise since there would be more users even with the new currency amount being issued the same. This is true, and it relies on more and more growth, like Facebook in its early days. This means that the current business model for SteemIt is we must have more users in the future. That cannot and will not be sustained in the long run. For now it works and smart readers might think, “Hey, 5% growth is easily doable, especially since SteemIt is new.”

As for Steem Dollars, these are almost always below the value of $1, despite Steem’s claim (see above image) and even if they were, they would be subject to the Federal Reserve’s inflation rate. To look at some hard numbers here: in the past four months, Steem Dollars have been below the value of exactly $1 95% of the time and as we’ve recently seen, even with them subtracting the money supply, Steem Dollars are struggling to stay at just $0.80 to the dollar. How is this a peg?

SteemIt claims to pay interest on Steem Dollars similar to a bank, and this is incorrect. It’s debatable whether the interest rate (which should be measured in APY, not APR) is accurate, but let’s assume that it is. In order to obtain this interest, activity must be made. Savings’ accounts do not require this; you could earn interest on your savings without activity, so these work differently than a standard savings’ account (or else this is a bug). So let’s review:

  1. Steem has 100% inflation per year forever, unless they change this. Update: they’ve now done this.
  2. Steem Power has 5% inflation per year forever, unless they change this. Update: they’ve now done this.
  3. Steem Dollars have the inflation rate of the Federal Reserve, if they stay fixed to the US Dollar.

Nothing about any of those is sustainable in the long run; the effects of Steem having 100% inflation will debase the currency within a decade. The good news is that these don’t have to always be the case.

The 1:10 reverse split is misunderstood by many in that it lowers the nominal amount of Steem, but does not change one’s value held. If you held 10% of all Steem before the reverse split, you would end up with the same ratio provided that you continued earning Steem at the same rate (improbable over longer periods of time). In other words, the reverse split does not lower the inflation rate of Steem at all, it just changes the nominal amount of Steem in the supply – you will still be devalued at a rate of 100% inflation a year.

As a humorous note to this – we warned SteemIt users about the high inflation rate of Steem and made it clear that we wouldn’t hold something that had 100% inflation. The currency has done exactly what we warned – crashed over 95% in value since that warning. An inflationary currency will not be a long term store of value no matter how it’s spun. It’s possible that Dan and Ned try another technique to change Steem and Steem Power from being inflationary, but as long as they are, I caution you that this won’t be the long term store of value you think.

Can SteemIt Become Profitable?

Possibly. Among many options that Steem has later when it begins to have enough users, here are some easy options to increase profits and stop with the infinite inflation:

  1. Allow users to borrow Steem from each other and stop issuing new Steem, so that the supply of Steem rotates among the user base rather than everyone being devalued into oblivion by inflation.
  2. As more content is generated on Steem, generate revenue through advertising. Update: they’re now in the process of trying this.
  3. Charge users Steem for promoting posts. Update: they’ve now done this.
  4. Use data from posts to market products, or to share with companies to market products on related posts.
  5. A multitude of ideas for promoting posts, events, etc. Update: they’ve now done this.
  6. Charge Steem users for unpopular content; if Steem side-steps censorship, but decides to charge users when they write something unpopular, or steal a post, they can rely on people doing this to move currency from the bad users to the good users.

Steem has a multitude of options to become a legitimate business and it can do this later in its business cycle and this doesn’t mean Steem will fail or succeed.. I fully expect other competitor platforms, like YOURs, to come up with other economic models. I remember very clearly that MySpace was light years ahead of Facebook at one point; yet that meant little in the long run.

But be careful with SteemIt! There’s debate about insiders in SteemIt being insiders in BitShares – which at the time of this writing has crashed over 70% in value. SteemIt may work as a platform in the long run, like BitShares could always work in the long run for investors, but there’s good reason to be skeptical. These ideas share a pattern of highly inflationary systems that benefit people who are at the top. Both BitShares and SteemIt have followed in this pattern. In addition, quite a few critical voices on SteemIt have experienced downvotes after bringing up very valid points against it.

Don’t get involved with SteemIt if you’re unwilling to lose money or time … There are great cryptocurrencies that are not Ponzi schemes and do have fixed supplies – bitcoin is one of them.

Steem Is Winning Google … For Now

Based on some of my research, Steem is doing well with Google, similar to how Facebook won several strategic matches with other social networks. Google could kill Steem though, and might if Google sees Steem as an abusive network, just like it killed people who abused its algorithms with Panda. One could argue that Steem over the long run is worth considering from a social media angle, especially since it involves a minimum start-up amount of time for those of us with existing websites. If it wins in the long run, I’ll win big too. If it doesn’t, does it matter? Like having a Twitter account, it will be another way that all of us can promote content, meet new and awesome people, and learn ideas from people all over the world.

Still concerns exist with SteemIt; we’ve recommended some action steps that we think are absolute musts – if one chooses SteemIt for social media:

  1. Keep your regular platforms; blogs, social media, sites, etc.
  2. Point everything to your “main” site – not SteemIt.
  3. Do not use SteemItfor your sole source of income. For most people financially, SteemIt is going to be a poor use of time.
  4. Time setting up your account by setting up the account when Steem is low priced and when they offer a high US Dollar amount of Steem for setting up the account – such as signing up for an account when they’re offering $5 in Steem and the Steem price is $0.10 (so you would start with 50 Steem).

We were the first people to write this (on Steem) and so far, we’ve been correct. The good news is that you read us and we’ll stay on top of this for you. This post is neither all good about SteemIt or all bad and we think that you should know the possible risks and rewards. We have a tendency of saying, “I told you so” so I’d suggest really thinking about our points here before taking action either way.

Still, you may build a few readers from Steem and there may be some rewards from searches in the long run because of Steem. This is all theory, so consider the time-cost and the payout; if it’s low, then commit to it only with a small fraction of your time. In general, beneficial and precise content on SteemIt is not rewarded.

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Overall Assessment

SteemIt might become a profitable business model that benefits its users in the long run. This may not occur and there are risks with SteemIt – even with the “low risk” method of time, one must be incredibly disciplined to avoid distractions or time-sinks with SteemIt. I remain skeptical of SteemIt and I can find many arguments against it. If it does succeed in the long run – which remains a possibility – it will have to address many of the concerns we highlighted, among other concerns brought by community members. While we were laughed at by some when we wrote this post, the Steem currency crashed over 95% in value, and the SteemIt community have looked at changing the economic model. This was one of several concerns and they’re investigating it.

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