Understanding the Steem Protocol (Massively Simpified)

This article will explain the different layers of the Steem protocol as simply as possible. I’m not going into technical details here, just explaining the most important concepts. While many articles explain Steem in detail, it's hard to find a concise, bare-bones explanation of the fundamental concepts.

Note: If you don’t already know the difference between a protocol, coin, and token, you should read this article first: https://steemit.com/cryptocurrency/@dannyzen/understanding-the-difference-between-coins-tokens-and-protocols

The Steem Protocol

The Steem protocol is a base layer that applications can be built on, much like Ethereum. The protocol features include vote-based rewards, text storage (like what you’re reading right now), a currency exchange, and more. Although many see Steemit as synonymous with Steem, Steemit is just one application on the protocol.

@taskmaster4450 made the best analogy I could find, so I’ll quote them directly:

“Android Operating System

Apps:
Gmail
Chrome
Maps
Drive
YouTube
Hangouts

Steem Blockchain

Steemit
Dsound
D.Tube
DLive
Steepshot
Zappl
Dmania

While not a perfect comparison, it illustrates the point. Thinking of Steem as Steemit is akin to identifying Google as only Gmail. It is only one piece.”

Link to Original Article: https://steemit.com/steem/@taskmaster4450/steem-is-not-steemit-71-m-steem-powered-down-major-marketing-push-by-the-other-apps

Other Applications

Steem is an open protocol, which means anyone is free to build whatever they’d like on it. DTube and DSound are two popular examples. DTube is a decentralized video platform, and DSound is a decentralized audio platform.

We will eventually see multiple Steem-powered versions of every standard social media platform. If any of these are successful, it increases the value of the network and of the Steem coin.

I thought that the team at Steemit was working on applications like DSound and DTube themselves. In fact, those developers are totally unconnected to the Steemit team. They simply used the protocol to build their own projects. This makes Steem as a protocol much more interesting to me. It is the foundation of an entire open source social ecosystem and economy.

Steem does not compete with Reddit, Youtube, Soundcloud, etc. It is a platform, on top of which people can build applications that compete with Reddit, Youtube, Soundcloud, etc.

Smart Media Tokens

Smart Media Tokens (SMTs) are a new addition to the Steem protocol. Anyone will be able to create their own currency on the Steem Blockchain to reward engagement with their content. They are the Steem equivalent of ERC20 tokens built on Ethereum.

SMTs will allow anyone to easily create a sort of “cryptocurrency rewards program” with a few clicks of a button. The token creator decides who gets rewarded for what kind of action. The rewards pool might be allocated to community moderators, content creators, or other valuable members of the community. Once the token is created, the Steem blockchain runs the rewards system automatically.

If you want a real world example of community tokens, think of the JetBlue Rewards program, or supermarket loyalty programs. Each system provides you with points (similar to digital tokens) to reward you for your engagement with those companies. You can use these points for discounts, special deals, VIP access, etc.

SMTs also help publishers leverage their community to raise revenue through an ICO of their token. Some people put out extremely valuable content with a passionate following, but they struggle to make their platform profitable. SMTs would allow them to easily raise revenue and reward engagement on their platform.

There is a lot to dive into with Smart Media Tokens. Frankly, I have a lot more investigating to do myself. I will dedicate a full article to SMTs in the future.

Creation of Tokens

A set number of tokens are released at set intervals on Steem. It might seem strange that tokens are produced “from nowhere” like this. Where does all this money come from?

In fact, this is how almost every monetary system works. The US Government has a mint where new money is printed every year. Steem’s “mint” is an algorithm to produce new tokens.

Unlike government issued money, Steem’s rate of inflation decreases every year to avoid the negative impacts of excessive inflation. In 20.5 years, the inflation will settle at 0.95% per year.

Since inflation of the US dollar is typically around 1.5% per year, the value of Steem would hypothetically increase against the dollar year by year at that point.

Of the tokens created each year, 75% are allocated to rewarding users who produce valuable content, based on up votes.

Conclusion

There are a lot more details that I’m skipping for the sake of simplicity. If you’re interested in getting deeper into the details, you can read the Steem Bluepaper.

If you found this article helpful, please up vote and follow!

Disclaimer: The article above is not investment advice. I am not a financial advisor, just someone interested in blockchain technologies