steemit

One currency, two smart contracts

Part of the confusion with Steemit lies in the different ways that the currency is presented to users.

At the root is the currency Steem, which is the typical transferrable, fungible, freely moveable token akin to bitcoin, ethereum or any other cryptocurrency. But that same Steem can be put into two different types of smart contracts depending on the particular utility an individual wants.

The first is called Steem Power, which provides utility and leverage. Steem Power is the backbone of an account's voting-potential. In other words, the more Steem Power an individual has, the stronger their vote is on Steemit.

Scott explained that the team wanted to provide a mechanism by which individuals could take a long-term interest in the project, while allowing others to continue with their speculation. In the white paper, Steem Power is compared to long-term capital commitments, similar to what a venture capitalist might do.

While users can invest their money instantly, there is an expectation that it will take time to see a return on that investment.

In the case of Steem Power, should a user want to convert back to the base currency of Steem, it will need to occur in 104 weekly conversions.

The second smart contract is called Steem Dollars. This is a debt-like instrument that promises to distribute $1 worth of Steem to the token holder at some point in the future.

This seven-day conversion process is meant to minimize the ability to create arbitrage attacks by market timers. If the Steem Dollars were convertible to Steem immediately, a user could take advantage of a difference in price, convert their Steem Dollars into regular Steem and earn more than the $1 worth the smart contract intended for it.

Because it is a stable debt instrument, users who hold Steem Dollars miss out on any Steem price increases. If Steem is worth $1 and this conversion took place, the individual would receive 1 Steem for every Steem Dollar they owned. If Steem rose to $2, the individual would receive 0.5 Steem for every Steem Dollar they owned.

To compensate for the locked value, Steem Dollars accrue interest. At time of story, users that hold Steem Dollars will earn 10% a year in interest, paid out in Steem Dollars.