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91. Steemit (Published: 12th Feb, 2018)

General Intro:
Steemit is a the first blogging and social networking platform based on a blockchain database. It was founded by Daniel Larimer who invented the Graphene structure blockchain, a blockchain structure that BTS and Steemit are built on. The platform realizes it’s beta version in early 2016 and on the 4th of June 2016, first 13,000 Steem tokens were distributed to Steemit content providers. Daniel Larimer left Steemit to work on EOS in March 2017 and currently the maintenance of Steemit is mainly relying on the community according to their github commits. In this analysis, we will analyze three aspects of this project. The consensus algorithm, namely Graphene blockchain and DPoS; the governance, namely the relation of three currencies and rewarding algorithm; and the current network status such as token/voting-power distribution, popular contents and potential problems.

The Consensus Algorithm
The ultimate goal of a consensus algorithm is essentially to solve the Byzantine general problems: how to reach consensus in a group of people whose behaviors are completely random. Most people are very familiar with PoS and PoW where node is ‘able’ to participate in the block producing process only that some nodes have a probabilistic advantage because their special abilities.

Such design has a few problems that has been keeping the network volume low. Firstly, since block needs to propagate through a network of tens of thousands of nodes, network latency start to play a significant rule. Bitcoin take the conservative route that sets the block time to be long enough (10 minutes) that the latency problem can be negligible. The tradeoff for setting a shorter block time will be that the chain will contain a large number of orphan blocks. For PoW, these orphan blocks can cause significant loss in computational power, however, for PoS, these orphan blocks are of less important concern. As a result, we usually see that PoS blockchain has sub 1 minute block time.

The incentive for DPoS (delegated proof of stake) is to further shorten the block time so that more than 1000 transactions can be processed per second. To make a comparison, Reddit in has on average 23 comments per second when it has around 10 million users. The number of users of Steemit is recently approaching to 1 million.

The first thing to do to realize this is to decrease the number of block providers. In DPoS, only a set of delegated nodes also known as witnesses (less than 100) have the ability to submit new blocks to the network. These nodes are voted by every other user. For Steemit in particular, the nodes are voted for their posts. In short, a steemit node can get reward only if it 1. Provides enough high quality content so that it has enough upvotes to be ranked top 100 and 2. Stay connected to the internet to update new blocks.

Image Source: Steemit

Meanwhile, these nodes must provide blocks in a predetermined order so that no one cannot maliciously make a very long block to disguise the main chain. For Steemit in particular, the block size is 3 seconds and the order for 100 witnesses to provide block is changed every complete round, i.e, 3s*100 = 5 minutes.

Here is a more detailed breakdown of how DPoS solve the consensus crisis that might crash the system.

Token economics
Before going into details of the token economics of Steemit, let’s have a general view of how the system works. Essentially Steemit is a voting system where readers vote for their favorite posts. Users’ votes are reusable but are subjected to a decrease in voting right after frequent votings (the first few votes will have more power than your later votes in a short period of time). The authors with high votes are rewarded, together with their voters (also known as curators) at a 3:1 ratio. The rewards originates from two sources, there is new Steem generated and there is Steem paid when someone is using Steem to buy Equity (explained in Steem Power).

If you take a screenshot of an ordinary Steemit wallet, you can see three distinguish units of accounting in the Steemit system namely Steem, Steem Power (SP) and Steem Dollars (SBD). The whitepaper somehow explained them in a complicated way, in fact, they are very similar to the cash, equity and bonds in the traditional financial system.

Image Source: Steemit Wallet

Steem is the cash, it is a simply an exchangeable unit like US dollar and bitcoin. Within the Steemit system it can be received and spent. Users can get Steem by providing high quality content that got upvoted by other users as a reward, or redeem their Steem Power. Users can spend Steem by purchasing Steem Power.

Out of the Steemit system, Steem is the most liquid token in exchange for external goods such as USD, Bitcoin and physical goods.

Steem Power (SP) can be thought as vested equity. The number of Steem Power indicates the voting power of a Steemit account. Storing Steem in the form of Steem Power has many benefits.

It can be used to upvote posts. Upvoting posts is the most crucial step in the entire eco-system of Steemit. Posts with the most Steem Power voted for them share the reward of the day. More than 75% percent of the reward goes to the author of the post, and at most 25% of the reward goes to the voters of the post and this 25% is distributed in a very complicated way. In short, the voting reward is proportional to a multiplication of two factors. Factor one is related to the number of votes before you (the fewer the better), and factor two is related to the time your vote is away from the posting time (the longer the better).

Steem Power can be purchased using Steem in a process called power up. Power up can be done instantaneously. More important, Steem Power is the only way to fight against inflation of Steem. As mentioned in the the first paragraph of this session, there is new asset generated in the market, in fact, the inflation rate is somewhere around 100% to 200%. 90% of the inflation is generated in the form of Steem Power. In another word, your Steem is getting diluted by half every year if you do not convert it into Steem Power.

Above are the good aspects of Steem Power over Steem. However, there are drawbacks as well. Firstly, your Steem Power is vested for 2 years (you can only power down 1% per week for your entire Steem Power). Secondly, you cannot avoid inflation by simply sitting on your Steem Power! You will need to Post or upvote.

Steem Dollar (SBD) is like bonds in the Steemit ecosystem. When someone is powering down (selling SP into Steem), the system need to guarantee that they are paid in the right amount. Steem Dollar is distributed as rewards to the authors of popular posts.

Here is another good post on this topic:

Current Network Status
The Steem distribution is very concentrated comparing to Bitcoin and Ethereum (much better than most of the altcoins). The biggest whale in this market is Steemit developing team who promised to slowly redistribute the Steem to the general users. Other big whales are exchanges like Bittrex, Poloniex and Binance. These exchanges are not converting Steem into SP so that they are not really participating in the ecosystem.

Currently, two kinds of posts are getting most rewards. They are posts that related to cryptocurrencies (related to Steemit in particular) and posts that are already popular in non-crypto social networks. The most popular ones are getting more than 300 dollars worth of Steem per post.

One of the common practices that Steemers do it that they post their posts in Medium and Youtube and share the Steemit link there. The problem Steemit solve here is that for a full time blogger/vlogger, the payment of current social media platforms are too low. They will need to seek for either advertisement or they need to draw their viewers into a private blog page to get some extra clicks. With Steemit, this process can be greatly simplified.

There are several key factors that might influence the price of Steem. One is the number of users, currently there are a little over half a million registered accounts in the system. However, the number of account that has enough SP to participate in the network is actually much smaller than that. Every new account will get 0.5 SP which is a negligible amount for free.

As stated above, the network is currently highly concentrated. Even though there are evidences that the distribution of SP is gradually smoothing out, this problem will not be resolved in a short amount of time.

The text content of the posts are stored on the blockchain and distributed over the network. However, for graphs videos, only the url are stored and the actual content is stored in a centralized server.

The UI and searching engine is not as sophisticated as centralized content sharing platforms.

Steemit is one of few (if not the only) working applications of blockchain and is frequently used worldwide. It still has huge growth potential because the number of users are still small comparing to existing giants.

However, it is not one of the coins that is going to spike in a short amount of time. There are two reasons for this. Firstly, the more solid application value a coin has, the less speculation value it has which is the key driving power of cryptocurrency price right now. Secondly, holding Steem on an exchange suffers the 100% inflation rate.

In terms of long term investment, it is a great bet because of the convincing business model and huge potential market. However, you are recommended to switch it into SP AND actively vote to get the rewards.

Unfinished contents
1. Introducing the best strategy to get rewards.
2. A more detailed research on how Steemit team will re-distribute their Steem Power.

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