Is Steem a ponzi scheme?
In a typical joint stock company, investors buy shares and the money they pay is given to workers as pay to conduct the company's business. It takes time for most businesses to become profitable, but if the business becomes successful it will be able to stop raising money through investment and either begin to pay dividends to shareholders or reinvest the profits in growth so that the shares appreciate in value.
A Ponzi scheme distorts this dynamic: there's never any profit, or any real attempt to generate any. Stake in the supposed venture is still sold, but instead of using investor's money to pay workers to serve customers, the investors' money is paid directly to other investors as dividends to make it appear that the business is turning a profit. This appearance of success is used to attract more investors while the miscreants running the show siphon off as much as they can before people catch on to what's happening.
What makes Steem special is that it operates as a stakeholder owned cooperative. The stakeholders are also the workers. This makes it difficult for many people to tell whether it looks more like a productive joint stock company or a Ponzi scheme, because the rewards given to the workers/stakeholders could either be the pay for their work, or the dividends giving the false appearance of profitability. It all depends on how the stakeholders vote. If they vote to reward those who build the community and create value, then Steem will become profitable, but if they vote simply to pay themselves and other stakeholders without any connection to productivity it will fall apart as certainly as any other Ponzi scheme.
At present, the stakeholders are split between these two sides. The community is growing rapidly and there's a great deal of productivity, but there's also a growing part of the community that seeks only to vote themselves dividends while they can. Steem isn't a Ponzi scheme, but if the stakeholders it attracts can't tell the difference it will soon become one.
If you found this post interesting, you may also be interested in @bethwheatcraft's video on the subject: https://steemit.com/dtube/@bethwheatcraft/32b3kyon
@troglodactyl,
I am sad I missed the opportunity to upvote and resteem this post. You make some very sobering point and Steem is long overdue for a wake up call about them.
I don't think that Steem itself is a Ponzi scheme but it most definitely has Ponzi elements that have been tolerated, nay, encouraged. One such Ponzi element is the bid bot.
We have fought vote farming together and I have come to the conclusion that vote selling is merely the other side of the same coin. When I flagged a vote farmer today and was asked the question "What about upvote bots?", this made me stop and really think about it.
I cannot really make a meaningful distinction between the two. They both divert effective curation. I don't know if this will ever change...
Not a problem at all. I agree that the upvote bots are a reckless use of SP. The point of the vesting schedule is that the owner of SP is supposed to suffer the long term consequences of how the stake is used, and people's willingness to rent out their SP through vote bots confirm to me that we need either a much longer vesting schedule or a lot more education about the relevant economics (maybe both).
It's conceivable that bid bots could be used by charitable people to amplify the SP with which they upvote quality content and grow the network, but the economic incentives involved strongly favor abusive use instead.
I also certainly agree that Steem is not inherently a Ponzi scheme, and that it isn't currently a Ponzi scheme in practice. I just think people should recognize that all it would take for it to become one is for people to vote predominately for dividends rather than wages/reinvestment.
I see, so it very much is so that Steemit does have the potential to fall into becoming a Ponzi scheme if the current atmosphere of circle-jerking continues? I really don't want that to happen, but I also don't know what more the minnows can do to prevent it, other than the fair use of upvote bots, and even then, they are no match for someone like @haejin. (That and I am just kind of morally opposed to them, which probably sounds dumb.) I just want to build this awesome utopian idea of people getting paid for their time, but what Libertarians and utopian idealists fail to grasp in these dreams of the future, is that we can try to change the power dynamic, but the people behind it are still people. The same people that have been coerced, convinced, bribed and bamboozled for millennia. I think it's far too idealistic to expect such a dynamic change from humanity in asking those who have lots of power and money to "share" or to "build". As much as I love this platform, and am willing to give it my all, I can see it easily collapsing due to the impact of merely humans existing as themselves. We can't have anything nice and the world is a toilet. (I am also finding that pain meds make me extremely nihilist and incapable of holding back. Surry bout that.) Thanks for the upvote. It's been a rough week.
Yes, there's a very real chance it could degenerate into a Ponzi scheme and collapse on itself. If it does a lot of whales will lose a lot of money, and everyone will lose what could otherwise grow as a great community.
The best chance I see to avoid that is to educate people, particularly those who have the most to lose. We need the whales to unite to save their investments, and by doing so save the community.
I think in the long run we'll need both education and some protocol changes, but we can't get the protocol changes approved without the education anyway, so education is the place to start. Everyone needs to know that this doesn't have to be a Ponzi scheme, but that with enough shortsighted voting that's exactly what it becomes.
I decided to make an easy to understand video about ponzi schemes and the danger that Steemit is in! You are right, education is the way to go! I will do my best to reach out to my followers and beyond and try to get the attention of some whales! :)
Very interesting point of view, to be honest I have never thought of it like this. Sure, I had some shady thoughts that "wealth distribution" isn't actually a wealth distribution, when 10-20 whales are just upvoting themselvs and their inner circle with huge voting power.
What is somewhat neglected in our community is the fact that the Steemit community can destroy itself. We already have a great number of issues and the abusive practics used by the biggest stakeholders are only making it worse. If you think about some of the members in our community (who consider themselves deffenders of the future and their values are in line with decentralization) there is not much that differentiates them from the bankers they so desperately dislike. What is difference between paying yourself and your friends 1000$ per post, whilst keeping things off the ground, paying good content creators 5-10$. Bankers do the same with bonuses.
I think one of the possible solutions is for people like you to actually use their voting power to incentivize minnows, who create good content to continue doing it, until they themselves reach a certain amount of SP. The ideal case would be, if individuals adopt the moral and behaviour of the "good whales and dolphins".
I would like if you can give suggestions, what can we do to improve the community.
I'm certainly trying to use my voting power to incentivize good content and to deter the Ponzis, and also trying to spread awareness of the potential destruction and consensus about how to prevent it. That's what this post is about. If you think I'm right, please resteem or (even better) write your own post addressing the issue from your own perspective.
For Steem to survive and thrive we need its stakeholders to understand these elements of its economics and vote based on that understanding, so spread the word.
I also have some suggestions for how to refine the protocol to better incentivize good voting and make it harder to profit from abuse, but the protocol is just a tool for the community to use. As they say, 'a bad worker can never find a good tool'. If the community doesn't understand what they're doing then the protocol can't fix that, but if they do understand they can compensate for a lot of flaws in the protocol.
Excuse me for the late reply ! Of course I will re-steem your post, I was going to do it in the first place ! The problem was that I was going to miss your article, if I didn't look closely. So would like to suggest, if it is okay for you to add a picutre or something, because it really catches the attention of the reader. And also boosts visibility :) Just a friendly tip.
Proudly Re-Steemed ! I will also try to write something in the same lines, but todays article took me too much time, so I guess another day. I would be glad if you check out my new article - Blockchain Related ETF Trading On NYSE / Actively Managed ETF vs Passively Managed ETF I would really appreciate feedback :) I am open to suggestions, sir !
Thanks, I do need to work on my presentation/marketing. Done.
Thats the easier part. You have the writing skills, so I think it will be smooth sailing for you :)
You bring up some very valid points. IMHO, it is still too early to tell, however if we continue to get large stakeholders circle jerking each other for the benefit of draining rewards then there will not be much left down the line.
It depends on how much damage the large users cause to the platform, and how many personalities clash because of the nature of the money and payout - and how people (because they will) try to drain the reward pool, but I do think that Steem despite the shenanigans that will happen, will still be a viable platform in the future.
I'm at a loss on how to react to the large stakeholders.
It's not just the large stakeholders, but yes. There's a sizable slice of everyone from whale to plankton that are just here to spam and buy votes to harvest whatever rewards they can.
I think we'd benefit greatly from some changes to the rewards system and vesting schedule, but we also need to develop the culture here and get people (especially whales, but again this applies to everyone) to understand the economics of the system enough to avoid sabotaging their investment with shortsighted voting.
Very interesting view thanks.
I would like to generalize for the whole blockchain community. Every chain is dominated by a few big whales and they are blocking the future of these chains.
And for me the problems of Steem are the ones whole humanity faces. It could be great but people are too selfish.
I'm also upvoting my own comment because it feels stupid not to do it but deep down I know I'm ruining the whole concept by doing this...
I don't have a problem with self-upvoting as long as it's legitimate content and not just upvoting spam for payouts. There's a shortage of curators, you're always the first person to see your posts and comments, and if you didn't think it was worthwhile you wouldn't have posted it in the first place.
I generally don't upvote my own comments because a lot of other people don't seem to agree with that position and I don't want to distract them from the points I'm trying to make by arguing about voting.
For me its kind of tricky to upvote yourself. You are always biased towards your own opinion. On the other hand an opinion is biased anyway therefore it's an opinion :)
Upvoting whatever can indeed be classified as steem farming (or something:)) and should not be allowed...
New money needs to come in daily in order to sustain the price as new steem is created every single day. In that regard it's a ponzi regardless any voting behavior in my view. I don't see it as a ponzi scam as everything is very open and transparant though.
The main issue I see right now is that payouts in general are just way to high not to be abused. 9.5% yearly inflation + SBD at 6.7x the price they were intended to be.
Every currency and asset requires continued buying pressure to prevent its price from collapsing. Does that mean gold is a scam because it keeps being mined and if people stopped buying it then its price would collapse? The value comes from the consensus of a market of people believing that it's useful/desirable, and preserving that consensus depends on the asset actually facilitating sustainable productivity.
I agree there should be some technical updates to the system to reduce abuse, but getting support for those will take time and without educating the voters they won't be enough to save it anyway.
There are people who keep devising ways of raping the reward pool, some of them are whales, really big whales, and they have become untouchable, and a law to themselves... What can one do to such rapists? Flags and downvotes wont work on them... They have too much steem power. If these bigwigs can be humbled to do what is right here on steemit... Then steemit can really attain the great heights you and i envisage for it.
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I think we need a combination of education to build consensus about voting and protocol changes to fix the incentives for curation so that it's more profitable to vote in healthy and sustainable ways. I'll be talking more about the changes I think should be made in the future, but the education is most important.
Though i agree with you on the education aspect, however it does not make the problem go away... Educational talks even if they shed light on how things should effectively run, if they are without implementation of proper regulatory frameworks that treat all steemit accounts fairly and equally with no preferential treatments to larger stakeholders (a feature steemit lacks), am afraid it will be all in vain. Any action plan must be targeted at curbing the excesses of errant steemit whales, or the heart of the problem will still remain.
Thanks for your upvote. Big ups!
It's also cyclical. Without the education we'll never get the necessary support for the protocol changes that need to happen. I strongly disagree about giving all accounts equal voting weight. That would result in on onslaught of shills and vote bot accounts and would make the situation much worse. It's appropriate for those with the most invested in the community to have the must influence, as they most bear the consequences of success or failure. We need changes, but not that one.
Thank you for this fascinating article. The question you pose has crossed my mind several times and I am new to Steemit. I already feel a little disillusioned. I like the free exchange of view and opinions which benefits the whole community.
I used to be a professional historian and still write articles now as a hobby but am wondering if it is worth the effort writing articles exclusively for Steemit which get one or two views. I still see my job as passing on what knowledge I have which may benefit other people. Is Steemit the forum for this? I am not sure.
I understand the discouragement. It can take a while to build relationships in any new community and Steem is no different. I hope you to stick around. If it feels lonely then try to bring your friends along.
Despite my concerns, I hope it was clear from my post that I'm still quite optimistic about this community. There are serious challenges to overcome and serious work to be done, but this is still the best way I know to onboard mainstream people into cryptocurrency, and that's worth fighting for.
I read your post. Interesting spin on this mess. This has been an ongoing problem on the platform, perhaps potentiated by the fact that the value of Steem and SBDs have risen in recent months. There are more eyes on the site and more attention being paid to the blockchain itself.
The recent addition of Steem and SBDs to some large crypto exchanges in South Korea, such as UpBit, will likely sustain the underlying liquidity spurring their demand for the foreseeable future. However, one must realize that the scrutiny of the mechanics of the blockchain itself will grow with increased publicity. It seems that the CEO of Steemit Inc. is fine with the negative publicity of the whale wars and isn't really concerned about its underlying causes, which are the evidently exploitable deficiencies of the platform itself. This is troubling, to say the least.
I have a small stake here as I was intrigued by the concept when first introduced to it last summer. However, I am disappointed in the lackadaisical execution. Like you, I fear that by the time the power brokers around here finally wake up to the fatal flaws inherent to the rewards system itself, the money flow will have dried up as the broader market wakes up to the flaws as well and the value of Steem will consequently collapse. This recently happened with Bitconnect. I don't want to see it happen here, but it could eventually transpire if substantive improvements aren't made as soon as possible.
And if changes aren't made? Well, a more quality platform will be developed, and the lessons learned from this experiment will be applied to that community and its foundational blockchain. As the Steem White Paper forewarned: "Any imbalance in the give and take within a community is unsustainable. Eventually the givers grow tired of supporting the takers and disengage from the community."
I think the amount of centralized influence Steemit has over Steem is going to be a significant problem in itself. There were some altered plans that made that a much bigger issue than it was supposed to be originally. They may have the foresight to counter that, but if they don't it may be a dramatic mess to struggle through. We shouldn't all be looking at @Ned and @steemit to solve these issues, but there's a risk of learned helplessness when one organization controls so much of the voting power.
The organization controls much of the voting power and the origination of the blockchain coincides with Steemit's launch, so to me they are inextricably tied, even if the claim is made that the blockchain itself a decentralized global protocol while Steemit is a centralized website on it.
The recent court filing against Bitconnect and its prominent affiliates (some of which are exploiting Steemit itself) is telling.
On the third page of the filing it says, "BITCONNECT guaranteed investors up to a forty percent (40%) total return on their investments...regardless of market performance or the fluctuating price of cryptocurrency."
This statement stood out to me because it speaks to something that I have been wrestling with regarding the Steem blockchain pertaining to the characterization of SBDs. Its white paper states, "The primary concern of steem feed producers is to maintain a stable one-to-one conversion between SBD and the U.S. dollar."
The SMT White Paper, itself credited to Steemit Inc, reaffirms that SBDs are "...an experimental asset on Steem that relate to the US dollar, originating with Steem's launch in 2016."
Market performance has consistently demonstrated that supply and demand forces do not allow for SBDs to be pegged to $1 USD. Dan Larimer himself recently conceded in an interview that SBDs are to be considered as any other crypto currency, suspectible to fluctuations in value.
Yet some of the Steem Witnesses still debate this subject as if they themselves can set the price. This is madness, to put it frankly. And my concern is that it is a consequence of a long disproved experiment set forth by the Steem White Paper itself that has not been formally repudiated by Steemit Inc or the Witnesses.
In light of the increased oversight of the crypto space, as is evident by the Bitconnect fall out and the ongoing questions regarding Tether's claims of being pegged to the USD, I would advise the following: the next hard fork of the Steem blockchain should remove any and all "mechanisms" that the Witnesses have at their disposal to insinuate the notion that they can guarantee a minimal $1 USD value for SBDs. The claimed interest rate functionality that the Witnesses can set on the "Steem Dollars" and "Savings" accounts in user wallets here on Steemit should also be removed.
Addressing the centralized Steem distribution is phase 2 or 3 in my #fight4steem mental roadmap. Originally that massive stake Steemit got was supposed to be dispersed to new users as part of the account creation process until it was gone, but they changed course and started using temporary SP delegation instead of permanent distribution to launch new accounts. That's a major red flag.
SBDs are certainly broken, and it could make sense to just remove them completely to reduce confusion. Pegged assets can work (as demonstrated on BitShares), just not unconditionally. SBDs were cloned from BitShares but they altered the model to allow them to be issued by the network rather than by individuals, and in doing that they broke the economics of the pegging mechanism. On BitShares the pegged assets are collateralized with BTS provided by individual private investors who effectively want to short sell the peg's target asset. The minimum collateral ratio thus defines the maximum drop in the BTS price that the asset can be guaranteed to protect against. It's likely to protect against larger drops as new investors buy out positions and recollateralize them, but it can't be guaranteed. Steem is targeting average social media users rather than finance and economics geeks, so they tried to dumb down the model and make it more accessible and killed it.
I look forward to reading your continued insights in the next phases of the #fight4steem initiative. The blockchain's transaction and rewards distribution system is certainly broken. Dan himself admitted so. And the lackadaisical attitude about addressing from the powers that be around here is certainly concerning.