Steemit has some learning curve for its new users. Many people who join Steemit are not even aware of the cryptocurrency. With Steemit becoming popular globally, it is now becoming a gateway into the crypto world. This serves as a complete research paper on how Steemit reward system works, so that the learning curve can be significantly reduced and important information can be immediately passed to people joining the network.

Newbies have many questions related to reward system of Steemit and there's a lot that needs to be clarified. Here are some common questions.

How does Steemit reward its users?
Where does the money for the rewards come from?
How do I earn a share of that money?
What are Steem, Steem Dollar and Steem Power?
My posts show a $ sign. What does the amount with $ sign mean?
How much money will I get?

There are many confusions regarding Steemit and with this post, I am trying to remove majority of them. I am sure this post will help current Steemians, and future generations of Steemit users to understand Steemit better and benefit from that understanding.

Currencies of Steemit

There are three currencies in your Steemit wallet; Steem, Steem Power and Steem Dollars. Let's see what they are.

STEEM: It is a cryptocurrency token, similar to Bitcoin. Steemit is based on Steem blockchain (like Bitcoin has its own blockchain). Steem token is the cryptocurrency of Steem blockchain. On Steemit, it can be powered up into Steem Power, traded for Steem Dollars, and transferred to other accounts. On exchanges like Bittrex and Poloniex, it can be traded just like any other coin.
STEEM POWER (SP): Abbreviated SP, Steem Power is basically, what I prefer to call it, frozen Steem. It is Steem that is vested into the platform and does not remain liquid (immediately trade-able) once vested. It is the standard measurement of how much influence a user has in the Steem network. The more Steem Power a user holds, the more they can influence the value of posts and comments they upvote. The more value their upvote has, the more curation rewards are also earned.
STEEM DOLLAR (SBD): Steem Dollars is abbreviated SBD (Steem Blockchain Dollar). It isl liquid, stable-value currency tokens designed to be pegged to $1 USD. SBD is basically a token value of which is deigned to remain equal to one USD of Steem value (explained later). Steem Dollars can be traded with Steem, and transferred to other accounts for commerce or exchange.

If you want to know more about these currencies, this video by @andrarchy will help you.

To study the role of Steem Dollars, this post by @dragosroua will definitely help. Some accounting knowledge may be prerequisite to understand the whole concept. I did not fully understand initially but now I get it.

Why Does Steemit Reward Its Users?

Let's talk about Bitcoin. Bitcoin is created and stored by its blockchain. It is created when powerful computers solve complex mathematical problems. The process is called mining and the concept of earning Bitcoin through mining is called Proof of Work.

Image Source: Pixabay

So, mining is work. When this work is done, Bitcoin is earned. Let's come to Steem now. Steem is earned through Proof of Brain. Although the whole process is explained in detail later, there are two ways of earning Steem using your brain, which are briefly mentioned below.

Author Rewards: When you publish a post or a comment and other users upvote it, you earn author rewards.
Curation Rewards: When another author publishes a post or comment and you determine it to be valuable enough to upvote it, you get rewarded a share of the value of your upvote as curation reward.

Creating content and upvoting content based on its quality both are activities done using the brain, hence Proof of Brain. So, Steemit rewards the use of brain (and I personally love the concept!). So, Steemit rewards use of brain!

Source

Contrary to Bitcoin and other blockchains, which store only the currency they produce, Steem blockchain stores content too. All the content published on Steemit is permanently stored on the blockchain. It is immutable, meaning you cannot delete it. Whenever you create or upvote content, you actually are doing a transaction on the Steem blockchain and that transaction is permanently stored.

The immutability means total freedom from censorship.
The upvote system means decentralization and power in your hands.
Proof of Brain means you can mine Steem with your brain.

Due to the unique reward system and censorship proof social media platform characteristics, Steemit Inc. holds an edge to become the world's most attractive social media / micro blogging website. Despite having been around for more than a year, the website is still in beta and improvements are being made frequently.

To answer the "why" question in the heading, let me give conclusive answers and move forward to the next part.

Steemit rewards its users to incentivize content creation and curation.
The use of Steem as the incentive currency and token of influence on the website increases its value; thus making multi-million dollars for the founders and share holders of Steemit.
Rewarding users attracts more users to the website, thus making Steemit popular.
Steemit has the potential to cross Reddit and Facebook in popularity and become the face of internet. By incentivizing use of brain and intellectual activity, Steemit is helping itself become great.

These are some of the main reasons I wrote from my perspective. I know you can be a lot more creative so do suggest more uses in the comments. Meanwhile, we move ahead.

It would be useful for you to read Steem's bluepaper.

Where Does The Money Come From?

This is one of the most frequently asked questions. I hope to clarify this matter once and for all. As we know that the cryptocurrency of Steem blockchain is Steem. Where does Steem come from?

Steem is not mined. It was mine-able initially but the mining was stopped. All the Steem in circulation or supply is premined except a small percentage which is created through inflation. I know you may be struggling to understand it so far but let me briefly explain where Steem comes from.

The Steem that is already available on exchanges and Steemit is premined. It means that it was created by Steem blockchain and exists already. Total supply of Steem right now is 263,382,513 tokens of Steem. These Steem tokens can be bought from popular exchanges like Bittrex and Poloniex. Steem is traded on these crypto exchanges just like other altcoins.
However, the already existing Steem are not given to Steemit authors and curators. Steemit users are rewarded tokens from Reward Pool which is a result annual inflation. Starting from December 2016, every year a percentage of Steem tokens are created (a process called inflation) and allotted to the reward pool. Current inflation rate is 9.5 % and an annual decrease of approx 0.5 % is planned annually until the inflation rate drops to just 0.95 % in about 20 years time.

We can deduce two things from the above information. One is that the rewards we get from the reward pool are result of annual inflation. The second thing, and the more prominent one, is that there always will be a reward pool, no matter how small.

We Get Steem From Inflation But Where Does the SBD Come From?

Steem Dollars are part, and not the whole, of the author payouts for the posts and comments (content). However, curation rewards are paid only in SP. The system is explained later. But author payouts is where SBD comes into play and also in the wallet where it is stored after the payout is finalized.

Why is Steem Dollar even on Steemit?
Why not only Steem?
What is the purpose and use of Steem Dollars?
Where does it come from?

Steem's blue paper on Steem.io website pretty much sums up why Steem Dollars were needed on Steemit. Why was SBD needed as a currency on Steemit? Here's the answer.

In order to help bridge the gap between more traditional fiat money systems which mainstream users are used to, and the cryptocurrency tokens which they are awarded through the platform, a new currency called Steem Blockchain Dollars (SBD) was created.

And this part explains the purpose of Steem Dollars.

SBD tokens are designed to be pegged closely to one USD, so that users who receive them can know approximately how much they are worth in “real dollar” terms. SBD tokens also offer a relatively stable currency for users to hold if they are looking to preserve their account value relative to USD.

Steem's technical whitepaper speaks at length about the purpose of introducing SBD on Steemit.

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.

And about creation of Steem Dollars, the Steem whitepapers maintains anonymity.

The blockchain decides how and when to create SBD and who should get it. This keeps the rate of SBD creation stable and removes most avenues of abuse.

We can say that the SBD was created to bring stability to the platform, alongwith giving its users a sense of what USD (due to its popularity) value their content is earning for them because SBD is pegged to 1 USD.

For detailed study, read the Steem technical whitepaper.

How Are Steemit Rewards Distributed?

Before going into the details of the actual distribution, there are three things about the rewards that you need to know. All of them are briefly discussed below.

1. Rewards are Shown in One Currency Only

This is simple. All the rewards on your posts and comments are shown with an amount preceded by $ sign. This $ does not mean US dollars (USD) and is mentioned only for the sake of ease, probably because of the reason mentioned in SBDs explanation above.

The amount mentioned with $ sign is actually Steem Dollars (SBD), not US dollars. You will not be paid out in just SBD though. Your rewards will be converted to Steem Power (SP) and Steem Dollars (SBD) depending on whether you want both or just the SP.

2. Rewards are Paid in Two Currencies

This is where things get a little complicated for innocent minnows and new fishes. The rewards, which are shown in Steem Dollars, are paid (sent to your wallet) in two currencies; Steem dollars (SBD) and Steem Power (SP). How this division is done will be explained a little later in this post.

3. Rewards Can be Converted to All Three Currencies

Things get way complicated here but it's basically pretty simple. You get SBD and SP as reward from posts, comments and curation (the upvotes you do on others' posts). The only currency that remains is Steem.

Well, you can buy Steem directly from the internal market against SBD. You pay in SBD and get Steem in your wallet.
To convert SP into SBD or Steem, you'll have to go through a process called Powering Down. It is so named because powering down decreases your influence and value of your upvotes.
When you start power down, SP is converted to Steem in 13 equal installments over a period of 13 weeks, starting one week from the time the operation starts. It can be cancelled any time.
To convert SP into SBD, first you'll have to power down to Steem and then sell Steem for SBD in the market.

This broader understanding of Steem, Steem Dollar and Steem Power will help you understand the next part where exact distribution of these rewards is explained.

The Actual Distribution - Amounts & Percentages

If you think you had enough twisting already, think again. You're in for another round of clarifying your doubts about rewards. Let's get over with this reward thing once and for all.

Rewards are Shared Between Authors and Curators

The amount in $ that you seen on your posts and comments is divided as follows.

At least 75 % of the amount goes to the author i.e. you.
At most 25 % of the amount is distributed among the curators; the people who upvoted on it.

To exemplify the above distribution, let me show you the final payout distribution on one of my recent posts. In the screenshot below, the final payout on this post is shown.

You can clearly see how the reward has been distributed between author and curators. Let's do some math to verify the percentages.

Total Amount = $11.79 (Amount is the Total No of SBD the post would have earned if 100 % reward was paid in SBD)
Author Share = $8.74 (Doing the math, 8.74 is almost 75 % of 11.79)
Curators Share = $3.05 (Which is about 25 % of the payout amount)

Clear till here? The final thing you need is the final disbursement of author and curators rewards to the respective wallets. The process needs some serious mathematics and may not be as simple as getting 75 % of the post payout.

But after enhancing your knowledge about the final disbursement of rewards into your wallet, you will be able to decide what options you want to choose for you and it will help you calculate your profits from the popular voting bots like @minnowbooster, @buildawhale, @bellyrub, @discordia, @booster, @appreciator and a lot more of them.

PS: I will do a detailed post on voting bots soon and will give you deep analysis on their uses and benefits, other than describing how they work and earn.

How The Share of Authors is Paid?

There are two important facts that we established till now about rewards.

Steemit rewards are paid in two currencies; SBD and SP.
75 % reward from the posts or comments goes to the author.

Keep these in mind. They are useful for further discussion.

How Author's Share Translates to SBD and SP?

When you write a post, you may have noticed a small option with the name of Rewards. After it is a box normally saying 'Default (50 %/50 %). When you click the box, some options come up. See the image below.

The default option is most common as it distributes the whole reward into SBD and SP. Let's start doing maths now.

Suppose (just like in all those math books), one of your post shows $100 reward. Now, if you're using default option, the distribution will be as follows.
Reward gets divided into authors and curators in 75 % / 25 % ratio. You have $75 left as author reward. This $75 will be paid out as Steem Dollars and Steem Power. The process is explained later.

Now, if you're using default option, your $75 will be divided in to two equal parts; in SBD and SP. Let's study each of them.

SBD: Default option means you'll get 37.5 SBD (50 % of $75) in your wallet. So, your payout will be 37.5 SBD, other than the SP. Let's look at SP now.
SP: The other $37.5 will be converted into SP. SP isn't equal in value to SBD so you won't get 37.5 SP straight away. As per the current price on the Steemit currency market (prone to frequent volatility), 1 SBD = 0.928503 Steem.

We know that the other 50 % (37.5 SBD) will be converted into SP. We also know that SP is basically vested Steem. Therefore, 37.5 SBD = 37.5 x 0.928503 = 34.819 SP.
So, your final wallet earnings from a $100 post payout will be 37.5 SBD and 34.819 SP as per above calculations.

Let me now show you the author reward I finally got from the post I showed in the screenhot above. Out of the $8.74 author share, I got 50 % SBD (4.37) and the other 50 % was converted to SP at market rate and paid in my wallet.

Choosing Payout Options

If you use 'Power Up 100 %' option, all your post payout will be paid out as Steem Power as per the formula given above (in this example, 75 x 0.928503 = 69.638 SP) . Payout will still be distributed between author and curators (75/25 % ratio).

If you choose Decline Payout option, your post will not receive any payout. Nothing will be added to your wallet. The amount corresponding to upvotes will still be shown in payouts but with a strike. Steemit official accounts and witnesses often use this option to keep the reward pool for their users and not take money out of it.

See the screenshot of a recent post by @ned for example. When I took the screenshot from his blog, I found an active post by @steemitblog which has declined payout. It shows a strike. Ned's post payout has been finalized therefore its shows $0.00 despite 332 upvotes. I remember this post having more than ~~$800~~ showing.

I hope that you can decide what's best for you to use. I prefer 50/50 payout because SBD gives me flexibility to trade it with Steem in the internal market, making profit in the process. Read this post for example and see what I am talking about. I sold Steem at 1.35 and bought back at 1.10 in the internal market. It was 22.7 % profit for me.

Getting More than 75 % Share in Author Rewards?

If you see that the value of SBD and SP is more than 75 % of final payout, it is because you must have received a portion of curation reward as well. Curation rewards are discussed right below. Your share, however, will never be less than 75 % until policies are changed.

How is Curation Reward Paid?

There needs to be a detailed post about how curation works (and there is) but here are some points pertaining to this blog post.

Curation reward is paid in SP only. 25 % of payout amount goes to curators. But there are algorithms monitoring curation reward and they are more complex than author payout algorithm.
If a post receives upvotes immediately after posting, nearly 100 % curation reward goes to the author; you.
If it is upvoted 30 minutes after publishing, 100 % curation reward goes to the curator.

You can earn curation reward from others' posts as others can earn it from your posts. I haven't touched curation much due to the fact that @calamus056 has explained curation rewards in great detail. You must go through the post as it is one of the best resources on curation reward system.

With the major portion of this research paper on Steemit reward system, I will share some useful information about reward system before concluding.

Additional But Important Information About Steemit Reward System

There are some things you should know and understand to make the best out of Steemit. Some of them are crucial.

Post Payout is Finalized in 7 Days

Every post or comment has exactly 6 days and 12 hours to get upvoted. It can be upvoted after that too but you won't get anything. After this period, post payout is calculated and then finalized upon completion of 7 days and rewards are sent to your wallet. Put your marketing efforts during these 7 days only.

Value of Upvotes Comes from Steem Power

No matter how much Steem or SBD you have in your wallet, it will not have any effect on the value of your upvote. The value of your upvote is determined by your stake in the platform, for which you have to power up (convert Steem to Steem Power or earn SP from author/curation rewards).

Value of Upvote Depends on Voting Power

If you have not voted for a single time, you have 100 % voting power left. With each full vote (100 % vote), your voting power reduces by 2 %. It means if you give 10 full votes per day, your end balance would be 80 % voting power. But at 80 % VP, the value of your upvote in terms of $ would also be 80 % of what it was when you had 100 % VP.

Note:- Voting Power keeps regenerating and it will go from 0 % to 100 % in 5 complete days (if not consumed through voting). So, as you vote the VP goes down but at the same time your VP also regenerates daily (20 % per day) so there's nothing to worry about unless you are voting too many times.

Use SteemNow.com to See Your and Others' Vote Value & VP

SteemNow is a wonderful tool designed by @penguinpablo. I primarily used it to know my Reputation score but it is very useful for viewing yours and others' voting power and vote value. Here's my screenshot at the moment. I had delegated 100 SP to @minnowbooster to see what I gain but undelegated yesterday and will have it back in 6 days. My SP and vote value will increase accordingly.

Relation Between Reward System and Reputation Score

This is extremely important to know. Your reputation score tells you and others where you stand on Steemit. It is a good indicator of how hard you have worked, how much success you got and how much you have earned.

Your reputation score increases only when you receive an upvote having some value the increase in the reputation, which happens immediately, is directly proportional to the value of the upvote your post or comment receives.

Also know that going from number n to n+1 (i.e 35 to 36 for example) is more difficult than going from n-1 to n (34 to 36). To the point that going from 56 to 57 was more difficult for me to than going from 25 to 49 (which happened in less than a week for me).

How is Your Account Value in USD Calculated?

If you look at your wallet, there's an amount called Estimated Account Value. It is calculated based on what you own in the wallet. Whatever amount of Steem, SP and SBD you have in the account adds towards the total value. However, SP delegated to you or delegated by you is not added or subtracted.

The value is not based on current price of Steem and SBD but the average price of last 7 days. So, the actual value of your holdings can be more or less than what is shown.

Things You Can Do with Steemit Rewards

I compiled a list of 9 things you can do with Steemit rewards. People found it useful when I published it and I am sure you will find it useful too. I have since gained more insight and will publish an updated version of the things that can be done with Steemit rewards.

Steemit Rewards FAQ

I am including the Rewards FAQ post by @dragosroua, who simply answered the most frequently asked questions. Newbies should definitely read it up.

Where Do The 25 % Inflation Tokens Go?

We know that 75 % of inflation tokens come to reward pool. But where do the other 25 % go? Let's see.

15 % tokens (of the remaining 25 %) are distributed to SP holders as an incentive to hold Steem in form of SP, which keeps the Steem supply limited and helps keep the token price up (demand and supply dynamics).
10 % tokens are distributed among Witnesses (people chosen by Steemians' vote to produce blocks of Steem blockchain, process Steem data and make important decisions pertaining to the blockchain).

Note:- I genuinely support @ausbitbank, @steemgigs (@surpassinggoogle), @good-karma, @aggroed, @dragosroua and @sircork for Steem witness votes. I already voted for them. You can too if you want.

Conclusion

That's all about Steemit rewards. I hope this research paper helps you understand the reward system better and use the information to your maximum benefit. This detailed analysis is part of my mission to leverage my brain to make Steemit the platform we all want it to be. Proof of brain, remember?

I've put a lot of effort and brain into this research paper to solve the mystery of rewards for the community. If you have any question, do share it in the comments. It would be kind of you to support this post through your valuable upvotes and resteems. Helping this post with upvotes will not only benefit the community at large, but also will encourage me to put more effort into educating Steemians to create a better ecosystem on Steemit.

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How Does Steemit Reward System Work? Complete Research Paper on Steemit Economy and Reward System!