How many times have we heard this question? Usually presented in an antagonistic way against Steemit… Well, I’m no cynic, but even I would agree that money doesn’t grow on trees…

In this post, I thought I would explain exactly where the money does comes from (and why the money comes), in a simple and easily digestible way.. I am however from a financial background, so if I have used terms that you don’t understand, let me know and I would be happy to talk you through it.

First, we need to go back to basic to understand the economic system of Steem, and how ‘money’/’cryptocurrency’ flows through it..

STEEM Economic System

The White Paper is the best place to start. Here are some extracts defining each of the 3 crypto-currencies based on the Steem Blockchain.. (feel free to skip this section if you are a well read user)

What is Steem:

"Steem is the fundamental unit of account on the Steem blockchain. All other tokens derive their value from the value of STEEM. Generally speaking STEEM should be held for short periods of time when liquidity is needed. Someone looking to enter or exit the Steem platform will have to buy or sell STEEM. Once STEEM has been purchased it should be converted into SP or SMD to mitigate the impact of dilution over the long-term."

Simply: Steem is the cryptocurrency that ‘fuel’s’ the Steem Blockchain. Most similar to Bitcoin out of the three.

What is Steem Power:

"‘1 SP’ can be viewed as a share in a pool of STEEM. The network automatically adds STEEM to the pool every block. At any time users can convert their STEEM into SP at the same ratio as STEEM in the vesting pool to total SP. Converting STEEM to SP does not dilute existing holders of SP. Likewise, every time SP is converted back to STEEM it is done at the current ratio. Individuals are guaranteed to have more STEEM in the future than they have when they first convert from STEEM to SP.
SP balances are non-transferrable and non-divisible except via the automatically recurring conversion requests. This means that SP cannot be easily traded on cryptocurrency exchanges.
SP is a requirement for voting for or against content. This means that SP is an access token that grants its holders exclusive powers within the Steem platform."

Simply: Steem Power are like ‘shares’ in the Steem network, these ‘shares’ have restricted liquidity and zero transferability. In exchange for making a long term commitment, you get rewarded.

What are Steem Dollars?:

"Without stability, individuals across the world could not have low cognitive costs while engaging in commerce and savings. Because stability is an important feature of successful economies, Steem Dollars were designed as an attempt to bring stability to the world of cryptocurrency and to the individuals who use the Steem network. Steem Dollars are created by a mechanism similar to convertible notes, which are often used to fund startups. In the startup world, convertible notes are short-term debt instruments that can be converted to ownership at a rate determined in the future, typically during a future funding round. A blockchain based token can be viewed as ownership in the community whereas a convertible note can be viewed as a debt denominated in any other commodity or currency. The terms of the convertible note allow the holder to convert to the backing token with a minimum notice at the current market price of the token. Creating token-convertible-dollars enables blockchains to grow their network effect while maximizing the return for token holders."

Simply: Steem Dollars are transferable/convertible debt, you can transfer to an exchange and sell to someone else, or covert to Steem (this process will be explained).

Simple System Diagram

This is a simple graphic of how I visualise the Steem economic system (as you can see, I have made this myself, and Graphic Design is not my forte). Here are some explanation on certain aspects of this system I see questioned often;

Power Down:
You will recieve 1/104 per week of Steem from your Steem Power Balance. This continues until your balance hits zero, and you continue to receive rewards (90% of the Contribution Rewards) throughout this phase.

Covert Steem Dollars to Steem:
You can covert Steem Dollars (SBD) to Steem through selecting this option in your wallet. This will be converted at the average ’median’ price of Steem over the following 7 days of trading. This is where the Steem Dollar peg comes into play, as you will receive however many Steem Dollars you own, in the form of $USD worth of Steem. Example: You have 100SBD you select to covert them. If the Daily Median Price in $USD of STEEM goes like this over the following 7 days…

$1,$2,$3,$2,$3,$2,$3

(1+2+3+2+3+2+3)/7=$2.2857 = Day Average Median Daily Price

100SBD/$2.2857 = 43.75 STEEM

Why does STEEM have value?

I want you to consider that STEEM has a natural underlying value, in the same way that any traditional currency has;

Unit of Labour:

Steem represents a unit of labour in the same way as the US Dollar, and any other national currency. Steem is paid out as rewards in exchange for Content Creation and Content Curation. At it's simplest form, users essentially donate labour to Steemit in exchange for payment in Steem.

Steem is not free. As the old saying goes, TIME IS MONEY!

There are a numbers of ways to accumulate each currency involved in the Steem Economic Model

Steem:
Buy (with Bitcoin)
Convert from Steem Dollars
Power Down

Steem Dollars:
Buy (with Bitcoin)
Create Content on Steemit

Steem Power
Buy (with Bitcoin)
Create Content on Steemit
Curate Content on Steemit
Be a Witness (Mining)

All of which involve a transfer of labour either directly or indirectly. That is, if you view Bitcoin as a currency/commodity you brought with traditional fiat currency, for which you worked to receive.

Power:

Steem has value in the POWER it gives the holders to reward content and writers they like, and incentivise them to continue to provide this content. Some users or commentators fail to see that each action on the Steem(it) platform is an exchange of labour, for which you may be rewarded (paid) for. Imagine how valuable Steem could be if Steemit had millions of users, and large corporations decide they would like to have some ‘Power’ too.

Now, the level of underlying value that any currency holds, and the purchasing power it exerts is all down to perception. This will change over time, especially in the early years of Steem(it).

Where does the MONEY COME FROM?

Now we come on to the point in this article when some people start to shout Ponzi. But, I’m going to refrain from going off on a tangent and keep with the matter in hand (See bottom link if you want to see my views on this). The money (in terms of $USD…) comes from investors and speculators buying Steem and Steem Dollars off users who have earned them.

Why are people Investing, when others are earning it for FREE?

I would like to answer this question by considering an individual panning for Gold. The likelihood is that, a Gold investor would not consider going out and trying to ‘mine’ Gold. They either consider their time too value, or leave that to experts who are far more efficient at finding the Gold. The one thing both the Gold Panner and the Investor have in common is that, they both see value in Gold.

You could switch out Gold for Bitcoin (and many other valuable ‘commodities’) and still come to the same conclusion…

SUMMARY

Purchasers of Steem, Steem Power and Steem Dollars are ‘buying’ their way into an economic system, rather than earning their way in.

This is fine, in fact, it's more than fine, it's Great!! This makes the ‘money in the Steemit system real, and allows Content Creators and Content Curators to earn lucrative rewards for making Steemit what is is today, and what it could be in the future. It also opens up Steem as a viable currency (store of value) to investors who are some or all of the follow; Time Poor/Cash Rich/Non Social Media Types, who however see the value in a Blockchain based social media network.

The money on the Steemit platform comes from investors seeing value in the Steem(it) network.

As long as

-The User Base keeps increasing, and the network expanding
-The User Base continues to become ever more Engaged
-Content and Curation keep increasing in quality

Steem will have value, and the money will continue to come…

Sources

http://www.freepik.com
https://steem.io/SteemWhitePaper.pdf (Page 8 onwards)
@hisnameisolllie/steemit-is-not-a-ponzi-scheme-it-s-an-economic-system-just-like-the-usdusd