Having trouble getting your head around Steemit? I was too!

I am new to the Steemit community and for the last two weeks I have been trying to get my head around this multi-faceted ecosystem. There are plenty of posts that provide valuable information about the various parts. But I understand things much better when I can see the big picture view. And it is through the dynamic relationship between the parts that the true character of a system emerges. Systems Thinking provides some tools for understanding systems, so I decided to map the "stocks" and "flows" of the Steemit ecosystem to aid my own learning process. I’m sharing it in the hope that it helps others accelerate their understanding of Steemit.

The diagram at the top of this post represents my best attempt at depicting the entire Steemit ecosystem in one image. It may seem a bit intimidating at first, so I will walk through it bit by bit. Once you have completed the tour, I hope you will find it to be a handy and concise reference.

How to Use this Diagram

This diagram is aimed at helping you quickly find answers to the following types of questions:
1. What are all of the effects of a given action (e.g., upvoting a post, powering down, etc.)?
2. What are all the actions that add to or diminish a resource (e.g., My Steem Power, My Voting Power, My Reputation)?

I will provide a number of examples in this post.

DISCLAIMER: I have made a serious effort to find and consult definitive sources and to depict the information accurately. I would greatly appreciate feedback from Steemit experts to either confirm the accuracy of this diagram or point out errors so that I may correct them.

Overview

Some people approach Steemit through the lens of cryptocurrency trading performance. Which cryptocurrency should I buy? Is Steem going to soar relative to Bitcoin, or Ethereum, or Ripple, or ...? But if you only look at Steemit through this lens, you miss the crux of what Steemit is really all about. In fact, Steemit is an entire ecosystem whose mission, as stated in the Steemit Bluepaper, is to be the "first publicly accessible database for immutably stored content in the form of plain text, along with an in-built incentivization mechanism. This makes Steem a public publishing platform from which any Internet application may pull and share data while rewarding those who contribute the most valuable content." (emphasis added)

The Steem currencies play an important role in the ecosystem, but they are secondary to the overall mission. This post tries to help you visualize this ecosystem.

Before getting into the meat of the content, I will briefly explain the notation used in the diagram and share some of the key sources I found valuable in understanding the Steemit ecosystem. Then we will take a tour of each of the four sub-systems:

1. Mining / Currency Creation
2. Content Management
3. Currency Trading
4. Governance

Key to the Notation

The key in the lower right of the diagram explains the basic notation. The green rounded rectangles represent sub-systems. The blue ovals represent stocks of resources, that is, things like Steem or Steem Power or Reputation -- that you can have more or less of over time. Unenclosed text is used to designate actions (like Upvoting a Post or Powering Up Steem). Arrows are used to depict the impact that actions have on resources. If the action may cause a decrease in the stock of a resource, the arrow will point at a red minus-circle for that resource. If the action may cause an increase in the stock of a resource, the arrow will point to a green plus-circle for that resource. Smaller italicized text is used to annotate the diagram with useful information. In some cases, the impact an action has on a resource may be delayed. For example, payout of curation awards is delayed for 7 days. Such delays are depicted by double-lines intersecting the line from the action to the resource.

It is important to note that an arrow from an action to a resource depicts what impact the action may have on the resource. This doesn’t mean it always will have that effect. For example, upvoting a post may earn you curation awards, but not every upvote does so. In fact, the algorithm for determining curation awards is quite complex. Information on how the impact is determined is beyond the scope of this diagram.

Don't be concerned if this all seems rather abstract and opaque at this point. As we walk through the examples, it will become easier and easier to follow.

Sources

To create this diagram, I have relied on the following key sources:

• Steem whitepaper by @steemitblog
• Steem blue paper by @blockrush
• How Does Steemit Reward System Work? Complete Research Paper on Steemit Economy and Reward System! by @ilyastarar

Mining and Currency Creation Sub-System

Here is an excerpt from the full diagram that focuses on the Mining and Currency Creation Sub-system:

Like most, but not all, crypto-currencies, the Steem ecosystem is based on blockchain technology (see my previous post for a more detailed comparison of Bitcoin and Steem).

All currency creation happens as a result of block production. Transactions are aggregated into blocks and blocks are added to the global blockchain every 3 seconds. This means that new Steem Power comes into existence every 3 seconds. The amount of Steem Power created depends upon (only!) two factors:

1. the total amount of Steem previously created (virtual supply)
2. the annual Steem Inflation Rate

It is worth noting that the Chair of the Federal Reserve Bank (or any other bank) has NO INFLUENCE on the rate of Steem Power creation!

In December, 2016, the inflation rate was set to 9.5% with a 0.5% decrease in the inflation rate every year until it reaches 0.95% in the year 2036. As of January 29, 2018, the inflation rate was just a shade over 9% and the virtual supply of Steem was ~265M, so on that date, approximately ~2.25 Steem was being created every 3 seconds.

As the diagram shows, this new currency is allocated three ways: 75% to the Rewards Pool, 10% to the Witness who added the block (as compensation for the work required to do so), and 15% dispensed as interest to existing Steem Power holders as an incentive for them to retain Steem Power. With an inflation rate of 9%, the effective interest rate as of January 29th for Steem Power holders is roughly (.09 x .15) = ~1.35% APR.

Notice that in all three cases the payout is in non-tradable Steem Power. To see how the tradeable currencies, Steem and/or Steem Dollars, get created, we need to look at the Content Management sub-system.

Content Management

Content Management is the core mission of Steemit. I have chosen to adopt a 1st person perspective for this sub-system. That is, I focus on individual stocks of My Steem Power, My Voting Power, and My Reputation. By this, of course, I don’t mean my own personal stocks, “My” refers to whoever is looking at the diagram.

To illustrate how you can use the diagram to answer the two types of questions introduced above, the remainder of this section will use a question and answer format.

Action-Oriented Questions

We'll start with questions of the form: "What are all of the effects of a given action?"

Actually, we'll start with an action that is NOT shown in the diagram. The first step in Content Management is the creation of new content, i.e., publishing a new post. You may be wondering, then, why publish post is NOT shown in the diagram. This is because, the act of publishing a post does not actually have any effect on resources. It is only when someone upvotes my post or comment that resources are impacted.

Q: What resources are impacted when someone (which could be me or someone else) upvotes my post or comment?

With a little practice, you can learn to view the full diagram and visually filter out that parts of the diagram that aren't relevant to the specific question you may be curious about. But for now, to make it easier, I have extracted from the full diagram only that subset that zeroes in on the direct impacts of the Somone Upvotes My Post or Comment action:

A: We can see from the diagram, that this action may result in a reduction in the Global Rewards Pool. This is the pool from which all rewards are paid. I say ”may” because authors have a choice of specifying whether they want any rewards for a post or not. No rewards, no reduction in the Global Rewards Pool. If authors DO want rewards, they have a choice regarding how they want those rewards paid out: either 100% as Steem Power or split 50%/50% between Steem Power and Steem Dollars (a.k.a., Steem Blockchain Dollars or SBD). In fact, the only way that Steem Dollars come into existence is as author rewards. We’ll see later than when people buy Steem Dollars on an exchange, they are actually buying already existing Steem Dollars (that were initially created as author rewards). So, in addition to reducing the Global Rewards Pool, someone upvoting my post or comment may also result in adding to My Steem Dollars and/or My Steem Power. In effect, this action results in a flow of Steem Power from the Global Rewards pool into My Steem Dollars (after first being converted) and/or My Steem Power.

A question new Steemians often ask is, “Where does the money for the author rewards come from? And now you know the answer. It is NOT from the people who upvote the author’s post, it is from the Global Rewards Pool. And if you then go upstream and ask, “OK. But where does the money in the Global Rewards Pool come from?” The answer is, from Block Production (hint: you will need to look at the full diagram to see this).

The diagram shows there is also one more kind of resource impacted when someone upvotes my post or comment. Namely, it may increase My Reputation Score. More on this below.

Q: What resources are impacted when I upvote a post or comment?

A: Look in the diagram for the Someone upvotes my post or comment action and follow the arrows that emanate from this action.

1. Steem Power flows from the Global Resource Pool in order to pay curation rewards that increase My Steem Power. Note, unlike author rewards which can optionally be (partially) distributed in Steem Dollars, curation rewards can only be distributed as Steem Power.
2. My Voting Power is reduced by 2% per full vote. Initially, you can only make full votes. But when you reach a threshold amount of Steem Power (currently 500 SP), you are given the option to do fractional upvotes.

Q: What resources are impacted when a Reader Flags my post?

A: The only direct impact is a decrease in My Reputation Score.

Resource-Oriented Questions

These are questions of the form: "What are all the actions that can affect (i.e., add to or diminish) a resource?"

Q: What actions can affect My Reputation Score?

A: The only (direct) way to increase My Reputation Score is to have others upvote my posts or comments. The only (direct) way My Reputation Score decreases is if I am flagged by someone else. I say direct, because there are many indirect ways to improve My Reputation Score (for examples, see UPDATED - Steemit FAQ Part 3 - "Reputation" by @shenanigator or Complete Overview of Reputation Score, How it’s Calculated, and How to Increase it – Reputation Score Table Included by @sevinwilson). But these suggestions are all aimed at either increasing the likelihood of being upvoted or reducing the likelihood of being flagged. It is only by being upvoted or flagged that your reputation score is actually changed.

Q: What actions can affect My Steem Power?

A: If you look at the full diagram carefully, you will see there are five arrows coming into the plus-circles associated with My Steem Power and one arrow coming into the minus-circle. To make this easier, here is another excerpt from the full diagram that narrows the focus to just those actions that can affect My Steem Power.

This means there are five different kinds of actions that can result in an increase in My Steem_Power: (1) Author Rewards, (2) Curation Rewards, (3) interest on My Steem Power from Block Production, (4) Powering Up, which converts Steem to Steem Power, and (5) borrowing Steem Power (e.g., from @blocktrades). Borrowing SP can be particularly important when you are new to Steemit, because it gives you some social influence at a time when you have not yet had the opportunity to build Steem Power on your own.

There are actually some additional ways to increase your Steem Power if you are in the small subset of Steemians engaged in Block Mining. We already saw this in the Mining / Currency Creation sub-system with the witness rewards. I don’t elaborate those in the diagram because the majority of Steemians are not directly involved in Block Production.

There is only one way to diminish My Steem Power and that is by Powering it Down. This action converts Steem Power into Steem. In fact, people Powering Down their Steem Power is the only way Steem comes into existence. Basically, it is a way to exchange social influence for tradeable currency.

Q: What actions can impact My Voting Power?

A: The primary determinant of My Voting Power is My Steem Power. This is not a flow, per se, because My Steem Power is not converted into My Voting Power. Instead, the algorithm used to calculate My Voting Power is based on My Steem Power. The more SP, the higher My Voting Power. We have already seen that each time I vote, it reduces My Voting Power by 2%. My Voting Power is gradually restored at the rate of 20% per day, to a maximum of 100%.

These rules are not arbitrary and reflect considerable forethought on the part of @dantheman, the designer of Steemit. My Voting Power determines the magnitude of the impact my upvotes have on the curation rewards for the posts or comments that I upvote. If it cost me Steem Power to upvote, it would create an incentive for me to be very stingy with my votes – because each vote would cost me social influence and, indirectly, money (by lessening the SP I have available to power down). On the other hand, if it didn’t cost me anything to vote, I could vote indiscriminately – which undermines the very purpose of Steemit to reward quality content. The 2% reduction in My Voting Power every time I vote, coupled with the daily restoration of My Voting Power creates a beautiful tension. It encourages me to vote generously, but judiciously. This dynamic is what gives upvotes meaning. It forces me to consider how and where I want to use my social influence. But within a win-win dynamic.

In fact, this is just one of many illustrations of the principle of what I would call “ecosystem by design.” It is part of the explosion of creative innovation that I referred to in my previous post, Bitcoin is Dead! Long Live Crypto-Economies. I intend to elaborate on this principle in subsequent posts.

Currency Trading Sub-System

This sub-system is devoted to exchanging currencies – whether within the Steemit ecosystem (e.g., exchanging Steem for Steem Power) or to/from currencies external to the Steemit ecosystem. The actions in this sub-system are pretty simple and self-explanatory.

Action-Oriented Questions

Q: What resources are impacted when I Power Up?

A: Powering Up reduces My Steem by converting it into (and thus increasing) My Steem Power. Note that no value is changing hands. I am just changing the form of my wealth from a tradeable form to a form that enables me to increase the impact of my upvotes (by increasing My Voting Power). It is also worth noting that there is no fee for this exchange.

Q: What resources are impacted when I Power Down?

A: Powering Down reduces My Steem Power by converting it into (and thus increasing) My Steem. As its name implies, this is simply the inverse of Powering Up. There is, however, a delay built into the conversion process in this direction. Specifically, Steem Power may only be converted into Steem at a rate of 7.7% per week. So, it takes 13 weeks to fully convert. The rationale behind this delay goes back to the core mission of the Steemit ecosystem – to be a public publishing platform. To serve this goal, requires that people use their investment in the Steemit ecosystem to reward valuable content through curation – only possible if they keep that investment in the form of Steem Power. The Power Down delay encourages people to retain their Steemit wealth in the form of Steem Power (which is also the intent of the interest paid to SP holders via Block Production). This delay also discourages currency speculators from jumping back and forth between Steem and Steem Power to exploit arbitrage opportunities (which add no value to the publishing goals).

Q: What resources are impacted when I buy Steem (or Steem Dollars) via an exchange?

A: As you might expect, this action increases My Steem (or My Steem Dollars) by converting some non-Steem currency (e.g., USD, BTC, ETH, etc.) into Steem (or Steem Dollars). The forms of non-Steem currency and whether or not fees are charged depends upon the exchange.

Q: What resources are impacted when I sell Steem (or Steem Dollars) via an exchange?

A: This action reduces My Steem (or My Steem Dollars) by converting it into some non-Steem currency (e.g., USD, BTC, ETH, etc). The allowed forms of non-Steem currency and whether or not fees are charged depends upon the exchange.

Q: What resources are impacted when I Trade SBD for Steem?

A: As you might expect, this _ reduces_ My Steem Dollars by converting it into (and thus increasing) My Steem. There is a built-in 3.5 day delay for trades in this direction.

Q: What resources are impacted when I Trade Steem for SBD?

A: This reduces My Steem by converting it into (and thus increasing) My SBD. There is no built-in delay for trades in this direction.

Resource-Oriented Questions

Q: What actions can affect My (SBD) Steem Dollars?

A: My Steem Dollars can be increased by:

1. Receiving it as a payout of Author Rewards. In fact, as noted previously, this is the ONLY way that new SBD are created.
2. By buying Steem Dollars via an exchange (e.g., by converting Bitcoin to Steem Dollars). This does not actually put new Steem Dollars into circulation. What you are buying are Steem Dollars that originally paid to someone as an Author Reward and which were subsequently sold on an exchange.
3. Trading Steem for Steem Dollars

My Steem Dollars can be decreased by:

1. By selling Steem Dollars via an exchange (e.g., by converting Steem Dollars to ETH, BTC, etc).
2. Trading Steem Dollars for Steem (with a 3.5 day delay).

Q: What actions can affect My Steem?

A: My Steem can be increased by:

1. Receiving it as a payout of author rewards.
2. Buying Steem via an exchange (e.g., by converting Bitcoin to Steem).
3. By powering down My Steem Power. Powering down is the only way the Steem comes into existence. Also, as noted above, there is a delay built into the conversion process. It takes 13 weeks ( 7.7% per week) to fully convert Steem Power into Steem.
4. Trading Steem Dollars for Steem (with a 3.5 day delay)

My Steem can be decreased by:

1. By selling Steem via an exchange (e.g., by converting Steem to ETH, BTC, etc).
2. Trading Steem for Steem Dollars
3. By powering up, which converts My Steem into My Steem Power

Governance

One can think of Steemit as a live social experiment in decentralized publishing. As has been noted, there are a number of design and operational decisions that influence how value flows throughout the ecosystem. In a complex system with independent actors, just because the ecosystem is designed to exhibit characteristics, does not mean it will exhibit those characteristics. As Steemit grows, everyone has a chance to see whether the actual behaviors in the eco-system are aligned with the Steemit goals. All this learning would be for naught if there were no way to change the rules by which the ecosystem operates.

The purpose of the Governance sub-system is to allow stable operation of the ecosystem and a process for managing the on-going evolution of the ecosystem rules. The Governance sub-system in Steemit works like a representative democracy. Steemians elect representatives, known as Witnesses, to represent them. From a typical Steemian's point of view, the only governance actions at their disposal are to vote for Witnesses. Each Steemian has 30 votes to distribute across 30 candidates. The weight of each of their votes is proportional to their Steem Power. In other words, the votes of those with a greater vested interest in Steemit carry a greater weight in the election. _Witnesses_Votes can be made or changed at any time. At the beginning of every round of block production (each round is ~63 seconds), the top 19 vote getters, plus one additional Witness chosen at random from other vote getters, plus 1 miner are selected to be Witnesses for that round.

Witnesses play a variety of important roles within the Steemit ecosystem:

1. Ensuring the timely production of blocks on the Steemit blockchain
2. Make Operational decisions. related to monetary policy for the ecosystem by publishing price feeds (which determine the conversion rates for Steem to Steem Dollars) and setting interest rates.
3. Make Upgrade decisions. Witnesses determine when/if to uptake new versions of the Steemit software (that may encode changes to the rules by which Steemit operates).

As a Steemian citizen, your votes for Witnesses give you a voice in the on-going evolution of the Steemit eco-system.

Conclusion

That completes our tour of the Steemian ecosystem. By now, I hope you have become comfortable with the notation used in the diagram, so that you can refer to the full diagram itself for quick answers to a variety of questions about the Steemit ecosystem. Please let me know (via comments) whether I have succeeded in aiding your understanding or, if not, where I've left you confused. Also, if you think I have depicted something incorrectly, please let me know so I can fix it. This diagram is only valuable to the community if it is accurate.

If there is interest, I may follow this up with additional posts aimed at helping understand the Steemit ecosystem. For example, I am discovering the need for an even bigger picture view -- one that encompasses the various applications around Steemit -- steemd, SteemNow, steemchat, Dtube, Dmania (and dozens of other SteemTools), discord, group accounts (like ocd, and minnowsunite) and more.

Steem on!