STEEM #1 Dilution of STEEM & How to Break Even

First a quick note: I do not take into account fluctuation in the trading value of STEEM to any external currency. Although this value will have great impact on your investment in STEEM, it does not have any effect on the internal functions I am about to describe. As long as all rewarded SBD is converted into SP without considerable delay.

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New STEEM tokens are created every year, and this have a diminishing effect on the STEEM tokens value. This post will show you how to compensate for this continuous loss in value. Since I will include some basic information, please define yourself among the following three categories in order to skip to a suited segment:

• You are new to Steem/Steemit, want to know what is required, but not interested in why; skip to CONCLUSION

• You know the basic, and wish to see the numbers; skip to “THE MATH”

• You are new to Steem/Steemit, want to know what is required, and the reasons why; continue reading.

THE BASIC
One of the first things you will notice after signing up a Steem-account is its three currencies and tokens; STEEM, STEEM POWER (SP) and STEEM BACKED DOLLAR (SBD). I will not go into details explaining these. There is plenty of good descriptions around already. If you are here to stay a while (3 months or more), the quick answer on what to stack is SP. In addition to giving your votes more value, it also help reducing losses due to the continuous dilution of STEEM.

The amount of STEEM available is steadily being increased by the creation of new blocks on the blockchain. The creation of this new STEEM is the reason we can give away free $-rewards by simply voting. Well, this is not completely true. We do pay for it through the dilution of STEEM.

If you’ve already tried to search for this information, or even read the Steem Whitepaper you might have read that the STEEM supply is doubled every year. I did, and it freaked me out a little bit.

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“STEEM is constantly increasing in supply by 100% per year due to non-SMD incentives. Someone who holds STEEM without converting it to SP is diluted by approximately 0.19% per day.” - Steem Whitepaper, page 8

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This would mean that, if no new outside investments was made to STEEM for a year, the value of STEEM would drop to half its initial value over one year. This was true until Hardfork 16. After Hardfork 16 the dilution rate was reduced to 9,5%. (Scources: Hardfork 16 Notes & Steemitblog’s Review)

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• Inflate at 9.5% APR narrowing to 0.95% APR by 0.01% every 250,000 blocks (Roughly 0.5% per year).
• Witnesses receive 10% of inflation
• 75% of inflation goes to authors and curators
• 15% of inflation is allocated to Steem Power
  Source: Steemitblog’s Review

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Hardfork 16 was released 9 months ago, on this very day. Therefore, today (the posting date of this article) the inflation rate should be approximately 9.13%. I do not know if the current inflation rate is available somewhere. If it is, I wouldn’t be surprised if it is hiding on this page, which I have mentioned in this series introduction post.

THE MATH
Now you know the magic number. As the total STEEM and SP supplies is increased by a rae of 9,13% per year, also you must increase your stock of STEEM and SP by the rate of 9.13% per year - only to break even. Otherwise you will lose some of your marked share.

You may have read that there is an interest on SP, and therefore you are safe if you convert everything to SP. While converting to SP reduces the loss, it only covers a small portion of it.

Table 1: Showing the distribution rates of the inflation pool.

I must assume all witnesses already is aware of the content in this article. Therefore, I will not address the possible income from that slice of the pool. It would also depend on how many blocks they “witnessed”.

By Powering Up your STEEM to SP you gain a 1.369% passive “interest”. In other words, you slow down the dilution of your STEEM from 9.13% to 7.756%. The remaining dilution you must cover through author and curation rewards.

How much each one of you will earn on your own posts is impossible for me to speculate on. Therefore, I will focus on how many votes you will have to send out to cover the remaining dilution loss.

Based on observing my own upvotes this is the percent return of my own vote value for the different voting scenarios:

• An early upvote on a moderately popular post: 30-50% return
• A late upvote on a popular post: 10%
• Only upvoter on a comment: 25%

During a day, I would say I may get the following distribution ratio of votes: 2 early upvotes, the equivalent of 1 full upvote on comments (I do many smaller upvotes), and 2 late upvotes. The average return of all my votes in this case is 25%. In the further calculations, I will therefor use 25% return per vote. Your return may differ some.

Now let’s imagine an account with 6 500SP. 7.756% of 6 500SP gives 504.156SP worth of loss to dilution per year, which equals 1.381SP per day. A 100% upvote from this account would be worth 1 SBD. 1 SBD at this moment equal 0.777SP (1 STEEM=1.27$, 1 SBD=0.9787$). 25% of one vote is then 0.194SP – the account-owners return per full upvote on average.

1.381SP/0.194SP=7,1 votes per day to break even

If you were a robot you could cast 10 evenly distributed 100% up-votes per 24 hours sustainably. As a human sleeping 8 hour, and voting evenly over the 16 wake hours, the 7,1 votes per day is possible to do sustainable. However, just barely. When you are less efficient then this you will fall below the required limit.

For comparison; if you were to upvote your own post, this is how many votes you would need:

1.381SP/0.777SP=1,78 self-upvotes per day to break even

If you were to post 1 article per day, and self-upvote it, then you only would have to cast 3,1 additional votes to break even. This is what you would need to do to break even if you received 0 upvotes from other people, which is unrealistic.

In table 2; “DAILY DILUTION” show how much you must earn on author and curation rewards combined on average per day to overcome the dilution losses.

Table 2: Examples of account size. There is a linear correlation - you can stipulate the daily dilution for your own account using the examples. Or you can ask me to make the calculations for your account in the comments below.

CONCLUSION
To compensate for the 9.13% annual dilution of STEEM and SP, my suggestion for new members would be to convert your STEEM and SBD to SP. Make one post per day and self-upvote it. Then make the equivalent of 3-4 100% upvotes to other posts or comments daily. By doing this you would be “guaranteed” to cover the dilution loss. Any upvotes your posts or comments get in addition to this will increase your net profit.

When your posts or comments start earning enough rewards from other upvotes, this will likely more than cover the dilution losses. You may then want to consider spending your votes differently. See the pre-calculated daily requirements in table 2 above for an indication of where your limit is, or ask me in the comments.

You can also choose to ignore the losses entirely and focus on making good posts. When they start to catch on, your previous losses will be eaten up quickly. This is especially if you have not invested large amount of external currencies into STEEM. If you have made big investments, I urge you to read and understand what is written above. You cannot stack everything into SP and leave the account inactive, without losing some of your market share in STEEM.

This post grew longer than ever intended. Still I hope some of you found it useful. Feel free to share your thoughts and comment below.

Thank you for stopping by!

Best regards,
warjar

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STEEM SERIES
This is a series I will use to present and discuss features of the STEEM system and its future. Please feel free to make you own contributions in the comments below.

I will do my best to update the information in these posts to keep up with future changes.