Is Steemit a Pyramid Scheme?

UPDATE Feb 14, 2018: As explained below by @biophil, the formula discussed in this post isn't used anymore in the reward distribution process. I have written another post about the current reward distribution formula and why it's superior than the old one discussed in this post.

Why is it profitable to run voting bots on Steemit?

There has been claims that Steemit is a Ponzi scheme and I have explained in a previous post why it is not.

TheDigitalArtist/pixabay

Yesterday, I read a comment from @dantheman about reward calculation on Steemit. If the formula given is correct, then we might end up with a pyramid scheme on Steemit. This might also explain why voting bots are profitable on Steemit.

In a pyramid scheme, participants contribute their money and sweat equity to the system. On the surface value seems to be created, but the system results in money flowing to the few at the top.

The Math

Here's the formula given in the comment.

NewPayout = (OldVotes + NewVotes)^2

To simplify, I'll use the following formula:

Payout = Votes ^ 2

Again for simplicity, let's make the following assumptions.

1. There are two users, one with 9 Steem Power Tokens (SP) and the other with 1 SP.
2. They post every day and they upvote their own content every day with full power.
3. 1 SP is awarded every year.

As a result, we will have the following weights for the payout.

• User 1: 9 ^ 2 = 81.
• User 2: 1 ^ 2 = 1.

That means

• Reward for User 1: 1 SP * 81 / 82 = 0.9878 SP
• Reward for User 2: 1 SP * 1 / 82 = 0.0122 SP

In other words, User 1 ends up with the 99% of the rewards even though they only paid 90% of the reward pool. User 2 ends up with the 1% of the rewards even though they paid 10% of the reward pool.

If you are wondering, why low quality posts are getting high payouts while your high quality posts don't receive any payout at all, then this might be the explanation.

In an ideal system, bots shouldn't be working at all. It is the payout formula that enables this flaw in this system.

What's the Solution?

Distribute the rewards linearly. That is the payout is linearly proportional to the votes. Then you have a system where everybody gets their fair share and voting bots won't be profitable in the first place.

Payout = Votes

What are your thoughts? Am I missing something here?