The title is a bit of a mouthful, but bear with me. I was talking to @wingz the other day who questioned whether the dilution of Steem Control when holding Steem Power would be zero if the amount of Steem held in Steem Power hit 90% of the overall supply.
The answer is Yes. It is worth digging a little deeper into this aspect of the Steem system, as there is a little more to this story than first appears.
What is the Current % of Steem Held in Steem Power?
For anyone who wants to get access to this information visit this website and pull the following information;
Total Vesting Fund Steem = Steem Power
Current Supply = Total Steem Supply
132,532,278 / 138,073.345 = 0.9599 = 95.99%
Is it Changing?
Yes, you see by data here this metric is steadily declining from 97.16% just 4 weeks ago. This is declining because users are Powering Down and Converting Steem Dollars quicker than other users are Powering Up.
Contribution Rewards on Steemit
Currently, Steem Power Holders Receive 90% of all new Steem created, the other 10% go towards various Contribution Rewards. Steem Supply is set to increase by 312.23% over the next 12 months, before settling down to around 100% in 15months time. You can find more information in this here
So, how much are Steem Power Holders being Diluted..
Here is a small extract from the Whitepaper..
Creating new STEEM to pay an incentive to a particular user or group has a negative effect on every other user’s balance in terms of their percentage of the STEEM supply. If exactly 90% of the STEEM supply is held in SP, then the negative effect of Contribution Incentives on SP holders’ balances is exactly balanced by the positive effect of Power Incentives; SP holders get more STEEM (in nominal terms) but their percentage of the chain (in terms of fraction of the total supply) is unchanged.
If less (more) than 90% of the STEEM supply is held as SP, the two effects still point in opposite directions, but the positive (negative) effect becomes greater and the sum of these two effects will tend to pull the SP balance toward 90%. This “pull” does not mean that the SP value must hold at 90% over the long term, because incentive recipients will (and in some cases must) put their STEEM in SP, which means the “pull” towards 90% is not the only force on the percentage of STEEM supply held as SP.
What does this mean…
Why Steem Power will tend to 90% of Steem Supply…
What I initially didn’t consider is that, the 90% is not a relative figure. Steem Power holders receive 90% of Gross New Steem Created. So, if 90% of Steem is held in Steem Power, then these users will experience Zero Dilution, as they will be receiving 90% of the new Steem that is created.
It doesn’t end there…
IF there is less than 90% of Steem held in Steem Power, Steem Power Holders would experience Accretion. Essentially, Steem Power holders would receive a real return on their holdings. This would incentives Steem holders to power up, alongside the fact that Steem Power holder would be naturally acurring Steem Control as time passes.
For instance if 80% of Steem was held in Steem Power, those users would be sharing 90% of the new Steem being created.
WHEN there is more than 90% of Steem Powered Up (like there is now), the Steem Power holders are experiencing dilution. This is because Steem power holders are sharing 90% of the new steem created, amongst more than 90% of the Steem in circulation. This provides an incentive for users to Power Down, as they are losing Steem Control in real terms over time. This is one of the reasons we see many users Powering Down at the moment.
The Push and Pull Factor - Summary
Both of the above scenario’s push and pull the ‘% Steem Power to Steem’ towards 90%, because this is the equilibrium at which no gain or loss is incurred in real terms from holding Steem Power. There are of coarse other factors at play here, but like the Steem Dollar, I expect to see ‘% Steem Power to Steem Supply’ in and around the 'equilibrium' (90%) once the Steem Economic System has had time to mature.
Let me know what you think...
So clear, thanks for posting. This is very interesting. That is a great built in incentive to consider after the distribution phase is done . Power down over 90 and power up under 90!
I'm not necessarily advocating that
I was saying that there is an incentive to do so. I am personally staying powered up, because in Gross terms I will have 312% more Steem Power in one year, and I don't believe the price will be 70% lower... Thanks for the reply @dennygalindo
Yes this is a rule for after the distribution phase. But there is no use swimming against the tide. This is interest rate parity for Steem. ( where the interest rates suggest currencies will go)
You just made a great point most do not understand. If you were to power up at current market prices at $1 and bought 1000 SP, you'd have approx. $3 next year or about 3000 SP if price stayed around $1. This is without curation rewards and posting.
The distinction to make is that when there's above 90% of Steem in Steem Power (the actual number is a little lower) then the 9/10 Steem awarded to SP holders will be shared with more people so there will be an effective negative rate of return holding Steem Power.
For simplicity, lets say we have 95% vested in SP, the 9/10 reward will be relatively smaller as there's an extra 5% of holders to pay.
If we have 85% in vested SP then those SP holders get a larger proportion of the 9/10 reward.
On top of that SP holders are essentially taxed by the 1/10 rewarded for content if they are completely inactive.
Once we see the overall vested SP tend towards 90% ish - we'll see different behaviours with regard to powering up and down.
I still dont get it. Pardon me for my ignorance.
No problem @tjpezlo I probably could have simplified more... DM me sometime if you want me to explain anything specific..
What do you think is optimum for an individual? To hold 90% of their Steem in Power and 10% in dollars?
Your own personal preference. This post was a discussion of the overall effect of the difference between liquid Steem and Steem Power.
I don't have an opinion on that to be honest @daoine-sidhe
Interesting. Thanks for going over this more in depth!
No problem @jrcornel
Sounds like a "market failure" waiting to happen. So everyone collectively sees the ratio is under 90% so they powerup, which they bring the ratio over 90% so they collectively start powering down, but it takes a long time to power down so STEEM POWER holders are losing out.
Does STEEM DOLLARS count as holding STEEM? If it does, that is an interesting dynamic. If the value of STEEM drops, that means STEEM DOLLARS held will increase nonPOWER STEEM held by more than 10%. POWER STEEM becomes more attractive, causing people to want to power up.
Rather than I market failure, I think this is a clever design. All users will not follow suit like you suggest, some will value liquidity over returns, and visa versa. This aspect ensures that, around 90% of Steem will remain Powered Up, moving forward. This protects the Steem Economy from a Dump Culture that we see so much in other Cryptocurrencies.
Steem Dollars do not count as Steem..
What makes something a market failure is the lack of coordination of who does what, and when an event simultaneously affects the self interest of individuals in a group and the group responds without coordination. It's not necessarily that they all react to the event, but it also occurs that they all don't respond/react expecting others to do it for them instead. Without some coordinating factor, we will always have some less than ideal outcome. But that may be okay...
I'm going to go further and suggest that STEEM POWER will tend to always be above 90% rather than equalizing at 90%, this is because it's value is more than just in getting a bigger cut of the supply increase, it also allows for control over rewards. So long as that has value to people, then they will 'pay' for it by accepting some amount of dilution.
I'm still wondering though, why would anyone hold powerless STEEM? I mean early in STEEM there is going to be a lot of growth, new users and injection of capital, people powering up, but this will hit market saturation and at that point increasing supply will simply decrease value.
Thank you for taking the time to dig into the numbers to discover and communicate the why of the fundamentals, rather than speculate and editorialize. We need more analysis like this. I have upvoted this blog and will feature it on my daily hidden gems blog post. Great content I am following and looking forward to more.
Good info, thanks!
The market is ruled by greed and fear. It's brutal and naked. You cannot control it by promoting idealistic stategies. People want STEEM to profit. There are buyers, there are sellers and they create the price. It's going down so there are more sellers. The supply of STEEM is bigger than demand. It's a fact. Why? First of all, STEEM is "printed" faster than other popular coins. It does matter. Scarcity is one of the key features of Bitcoin.
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