Where does all the money come from on Steemit fully answered -- Can it continue? -- Absolutely yes!

Good news Stemians my research has been concluded and Steem is here to stay! We are not a house under water and never will be!

Three days ago I posted an article which garnered much attention. The thesis of this article asked two simple questions: Where does all the money come from? And how long can it continue? Seeing these huge payouts each and everyday, many of us, including myself were finding it difficult to answer these questions which caused that nagging pull that something is just not right or if looks too good too be true, then it probably is. I had done preliminary research on this and really did not find the answers to help comfort me, so I posted the previous article seeking the answers from the community.

Well I have now spent three more days going over every piece of information I could find and re-reading multiple comments, blogs and articles to ensure I have the whole story and all the facts and ...

The really great news is that Steemit is so incredibly designed, so ingenious, so evolutionary that when I fully understood ALL of the concepts that make it work today, I then understood why it will work tomorrow!

Folks we are here to stay and the future looks amazing!

To truly explain Steemit is going to require a great deal of text, which I'm going to present in pretty fine detail. But for many, just the bullet points are sufficient. So this article is presented in summary and detail simultaneously, the basic principles of what makes it churn and how it will continue are in bold, followed up by the details for all those who are interested. Just reading the bold may answer these two questions sufficiently for you.

Question #1 - Where does the money come from?

Steemit is a platform built on a blockchain (similar to Bitcoin, Ethereum, Lightcoin etc.) where new blocks are created at regular intervals.

Each of these blocks contain information and transaction (financial) data. In the case of bitcoin, these blocks are created about every 10 minutes or so and contain mostly only transaction data with very little textual information. Other tokens and blockchains may contain more information and be created at a more frequent intervals.

On the Steem blockchain, a new block is created every 3 seconds!

Steem is the primary liquid token created by and managed via the Steem blockchain. This token can be traded freely on the market via exchanges which gives it "value" in relation to fiat currencies as well as other coins.

In a very similar manner employed by most all blockchain networks, new coins are created at regular intervals.

In the case of Bitcoin, each time a block is created, the miner that "closed" the block gets paid 12.5 BTC which at today's price of (sadly) $8,000, nets $100,000 + transaction fees to the miner (or mining pool) that wins the block. So in a single day, the Bitcoin network generally creates 1800 new bitcoins worth $14,400,000! Yes that is over 14 million USD of newly created wealth! (This is assuming a steady price, but in reality, the new wealth created is very volatile.)

For Steem, new blocks are created every 3 seconds! But unlike Bitcoin the number of coins created (or destroyed) in a single block is variable and based on a multitude of factors which I plan to discuss in a follow up article.

The annual rate that Steem tokens are created is currently set at an inflation rate of 9.5% which will decrease over time.

Starting with the network's 16th hard fork in December 2016, Steem began creating new tokens at a yearly inflation rate of 9.5%. The inflation rate decreases at a rate of 0.01% every 250,000 blocks, or about 0.5% per year. The inflation will continue decreasing at this pace until the overall inflation rate reaches 0.95%. This will take about 20.5 years from the time hard fork 16 went into effect. 75% of the new tokens that are generated go to fund the reward pool, which is split between authors and curators. 15% of the new tokens are awarded to holders of SP. The remaining 10% pays for the witnesses to power the blockchain.

These newly created tokens are the primary resource that are used to "pay the bills".

Even though Steem token(s) are potentially created every 3 seconds, its inflationary rate is a fraction of that of most other cryptocurrency networks.

This rate of inflation was believed by the developers to be sufficient to reward the authors, curators and network operators with sufficient revenue, yet not be so dilutional as to cause the tokens to become worthless. I concur!

A block chain needs to be secured and verified constantly in an authoritative manner.

Every blockchain must employ some means to ensure that the information going into it is both immutable (cannot be later changed) and is also rate limited. New blocks must be created within a range of time and data parameters that meets the design goal of the network. There are multiple other factors that must be considered in regards to maintaining the blockchain, but they are outside of the scope of this article.

There are many ways to ensure these Security and Timing requirements.

For Bitcoin, Proof of Work (POW) is used. This involves miners which are now highly specialized ASIC computers that "hash" out cryptographic algorithms. This computing takes time (which is constantly adjusted if it gets t0o fast or slow) and massive amounts of energy to complete which is primary rate limiter for the BTC network. During this hashing, the miners also insure that the data in the block is not corrupted and that the block before it has not changed. This process of mining both secures the network and gives it a pretty stable block time.

Some chains use Proof of Stake (POS) to achieve these same results. Proof of stake works on the concept that those who hold the most coins are allowed to carry a higher voting weight when confirming that a block is not corrupt and the block before it has not changed. Miners are replaced by vast array of clients that use their wallet software (or similar) to simply monitor the network and keep an eye on it. The concept is pretty simple, the more you own, the more you want the network to work properly so the network and your coins can appreciate in value.

Steem is revolutionary in that is uses a modified POS called "Proof of Brain" along with a network of witnesses.
This concept is complex -- so let me just paste a portion of the whitepaper here to start with.

Consensus in Steem

With Steem, block production is done in rounds. Each round 21 witnesses are selected to create and sign blocks of transactions. Twenty (20) of these witnesses are selected by approval voting and one is timeshared by every witness that didn’t make it into the top 20 proportional to their total votes. The 21 active witnesses are shuffled every round to prevent any one witness from constantly ignoring blocks produced by the same witness placed before. ...

Because the active witnesses are known in advance, Steem is able to schedule witnesses to produce blocks every 3 seconds. Witnesses synchronize their block production via the NTP protocol. A variation of this algorithm has been in use by the BitShares network for over a year where it has been proven to be reliable.

So, we have a network which is constantly monitored and secured by 21 "witnesses". These witnesses can be voted on by anyone having "Steem Power" (SP) in their account, each vote is weighted by the amount of SP owned.

The more SP you have the more you want the network to succeed.

Via a process of "Powering up" Steem can be converted to Steem Power (SP), additionally SP can be earned via authoring new content on the Steem platform.

The more SP you have, the more influence you have in voting on articles, comments and witnesses. This process adds IMMENSE value to the network as quality articles are created, discovered, filtered and sorted. This process can only be done effectively by a human brain.

Articles that are created and curated could not possibly be done by a computer alone. Not all articles are of equal value. Those that are of better quality are upvoted by the members (I plan on writing an article on voting abuse later), allowing quality to rise to the top. Quality articles are paid for by the network (not voters) using the newly created Steem tokens and "Steem blockchain dollars" (More detail later).

This voting and curating simply spreads the newly created coins to those who have created value, it does not actually create coins nor does it alter the rate that coins are created at, but only to whom they are dispersed.

In a nutshell, the inflation rate of the coin creation is preset and is far below many other coins. This is where the money comes from and how! These coins are distributed to those adding value (more on this below) to the network and then disbursed and witnessed by 21 computers and indirectly approved by over 700,000 Stemians.

Question #2 - How can it be sustained?

As mentioned above, the system of creation and curating of articles (knowledge) adds IMMENSE value to the network.

A database of knowledge, that is filtered, rated and sorted on nearly every subject known to humankind is of incredible value. This information is of value in MANY ways. I'm only going to discuss a few here.

This value is the key to how it can be sustained. Remember, it was shown that the inflation rate of the coin creation is constantly reduced until there is no inflation at all. This means each year there are less coins created, so there is less revenue to pay the authors, curators, stake holders and witnesses. So we need to have a revenue source other than coin creation (inflation).

2/2/18 -- Update and correction to above paragraph. The inflation rate will not decrease to zero, but instead stay consistent at 1% (18 years from now.) Please see this Update for the complete run down on the inflation rate of Steem.

There are two primary and existing sources of revenue now.

1. The desire and need to power up which allows authors and curators to have more influence on the network. The more SP you have the more your vote counts. The more influence you have, the more others tend to flock to your blog and read and comment on your articles. SP gives you clout that is handsomely rewarded both directly and also through vesting (more on this later.) Most Steemians have or will likely learn, that the more SP they have, the more SP and Steem they can potentially earn. Simply put, SP purchases by both new and existing Steemian's are likely to continue and very possibly accelerate as the platform begins to show its true wealth (a database of knowledge and link-able connections between people and concepts). These knowledge assets and connections are what gives Reddit or Facebook such value. There is no difference for Steemit. With the major exceptions being, on Steemit, the creators of this knowledge are paid and there is no advertisement intruding on the content. Where would you rather post?

2. When you are first get approved to be a Steemer, you are given a small amount of SP. This SP allows you to have some (not much) voting power, so you can fully participate in the creation and curating process. But there is a small problem. If you want to be pretty active, you may run into the problem of insufficient bandwidth. To insure the network is not spammed and also not overloaded, a system was required to prevent people with little at stake in the platform from attacking the network with a barrage of nonsense that could potentially cripple the network or make article discovery very difficult. The process employed by Steemit to guard against overload and spam is to reduce the amount of transactions any user can create in specific time period to a ratio of how much SP they have. The amount of SP required to transact is increased during times (averaged out somewhat) of heavy network traffic.

The result of this bandwidth throttling causes Steemers to have to power up if they want to post more than a few times per week or during times of higher network activity.

To summarize, the constant desire and need to power up will ALWAYS remain as long as the wealth of knowledge and usefulness of the network remains steady or grows with or without new coin created.

This is pretty easy to understand. Billions post on Facebook, some for many hours per week, yet get paid nothing for their contribution and are very likely to stay there. (Until they find out about Steemit.)

On Steemit, you get paid and there is the hope someday you'll get paid very well. As long as there is hope of a large payout, there is a very large incentive to pay to play (like a lottery or casino). For those who are not interested in the big payout, the requirement to maintain a SP balance of sufficient size to be truly active requires an investment into the network, either through reinvestment of rewards or via direct financial investment.

The future source of revenue that is currently in progress.

Steemit is not only a place to create articles you are passionate about on a personal basis, it WILL become a major platform for businesses, both brick and mortar and internet, virtual and real, to create a "space" and virtual community to both advertise products and communicate with their customer base!

These businesses are only now starting to find Steemit. Once they do, the number of business level accounts will rise dramatically. This of course means more SP has to be purchased. But there is a huge difference between business and a personal motivations on Steemit.

Businesses may not care at all that they get paid to produce content, they may in fact PAY others the rewards they receive or even offer SP in return for reviews, contests, loyalty programs or discount coupons, etc..
A business account is very likely to purchase more and more SP to get their products noticed and to keep the channels of communication growing.

This business activity is not the same as sidebar or pop-up advertisement obscuring most other platforms or websites. This activity is something you can fully participate in or pretty much fully ignore.

The more reaching and diverse the knowledge base of Steemit becomes, the more important it will be to the business sector, who will gladly purchase SP as well as invest directly in the tokens to ensure their message is broadcast and sustained.

Sustainability is not an issue and advertisements are never going to be required to maintain the network and to pay for quality creation and curation. Steemit is growing and will continue to grow as long as the quality of content is maintained. Quality and quantity are both factors, but quantity is of no value if it has no quality.

As long we are adding quality to the network, we are adding value that can be monetized and sustained!

Lastly (for this article anyway) is the fact that the Steem network has NO TRANSACTION FEES and has a 3 second settlement time. This alone, without considering anything else that Steem has to offer, allows it to be a huge contender in the cryptocurrency space. No fees allows Steem to be transferred anywhere in the world in 3 seconds for any amount, even a few cents, to anyone that has as a Steemit account or an address on an exchange. Entry into the cryptocurrency market is hugely simplified and is now available to all demographics and technical skill sets!!

At this point, I have not discussed the newest hot topic for the Steem blockchain called Smart Media Tokens (SMT).

This article is plenty long as it is, but I do want to offer a very quick opinion of SMT. At this juncture, I am very hesitant to adopt such a mechanism, as it is simply not required to achieve sustainability or growth of the Steem ecosystem. If employed it will change the dynamics of what we have now dramatically and there will be no going back or rewinding. Once employed, like taxes, it cannot be undone. The rewards may certainly be arguable, but the risk at this early phase of our platform is huge.

So there it is in 5000 words or less! Steemit is here to stay, it is not a Ponzi scheme, it is fully sustainable and it is FUN and exciting --- Welcome to the future!

Please comment and let me know if I have left anything out that really should have been mentioned here or if there are any corrections that are needed.

@byColeman
https://ColemanAir.us

Craig