What is Steem's value?

TL;DR: Think of the steem ecosystem as a kind of "virtual Iceland" (call it "Steemland") where STEEM is the equivalent of Iceland's currency, the krona (symbol ISK). Then teach yourself some macroeconomics to know what you can do to influence the exchange rate of your "virtual country's" currency.

Let's begin with Bitcoin

Some time ago I wrote a post titled What's Bitcoin's Value? One of the main sources of bitcoin value is its underlying "cypherpunk" ideology. Bitcoin embodies a refuge, an "exit" alternative from a financial system which appears monopolistic, captured and offering only a rough deal to the average person.

So why would anyone be tempted to exchange some of their fiat currency for Bitcoin? I listed more than 6 different reasons in my past articles but I feel the fundamental one is that Bitcoin represents "the non-financial system", the only true alternative to the financial system.

Even if one believes that our financial system is not that bad and can still be improved (as I happen to believe), it's always good to have a "hedging strategy", an alternative.

Explore more with @lishu's book

Next, look at Ethereum

Because of Bitcoin's success, most of the subsequent blockchain-based cryptocurrencies have tried to hew close to its ethos - that of "decentralization" and "censorship resistance". The second most famous crypto, Ethereum is the living illustration of how awkwardly the rugged, individualistic Bitcoin ethos combines with typical "social" functionalities such as computing.

While "decentralized" at the physical level, Ethereum is über-centralized at the logical level, as there is only one network where cryptokitties and ICOs and all other "smart contracts" compete for the same, limited computing resources. And that is before mentioning the overwhelming influence Vitalik holds over the direction of the platform.

So why would anyone exchange fiat for Ether? Mostly because of the applications, the most successful being of course the ICOs. However, the ICOs raised to meteoric popularity in 2017 and 2018 but have faded since. Whether they will ever come back in vogue is anybody's guess.

... But what about Steem?

Wisely enough, the steem blockchain chose a different path. Unlike EOS and Tezos and Tron, Steem shunned generic "smart contracts" and instead extended bitcoin in a different direction: that of larger, extensible data structures and a focus on user-friendliness and social features.

But since one of the comments to my article about Bitcoin's value asked indeed "What's STEEM's value?" I decided it's about time I drafted a tentative response.

Blockchains are complex, hairy animals. It took many years until people started mentally accepting that Bitcoin might be more than a flash in the pan. And bitcoin's design is pretty simple (think of the 9 pages of Satoshi's paper). Ethereum is more complex because of the "compute" functionality and the many possibilities it opens. Steem and its complex cryptoeconomic system is in another complexity league still.

People who bought steem until now did so not because they understood its potential but mainly for speculative reasons, expecting to be able to sell it back in the market at a higher price (to a "greater fool", as they implicitly saw it at the time).

At the same time, STEEM has strong downward price pressure built in.

The "monetary mass" (wrongly called "inflation" here) is increasing continuously without a strong link to the economic activity of the community. In the "fiat world", Central Banks control the monetary mass (switching between cash, short term deposits, bonds, i.e. altering the "velocity of money"). Inflation, in the real sense, is the decrease in the price of money (price expressed in goods and services internally, which is also reflected in a decrease in exchange rate with external currencies). In order to avoid inflation, the monetary mass in circulation has to track the quantity of goods and services. The currency of very dynamic, expanding economies, producing many goods and services, tends to appreciate with respect to other currencies. In order to maintain price stability, Central banks increase the monetary mass. In contrast, when economies are in recession and the activity decrease, there's too much money chasing fewer goods and services. The currency of countries in recession loses value with respect to foreign currencies. To maintain price stability Central Banks adjust the monetary mass accordingly. Steem has a bit of this elasticity in the SBD printing functionality but not nearly enough.
Steem has been marketed (i.e. "sold to the masses") as "create and earn". Everybody has understood this as "earn $$$", (i.e. "earn USD", "earn fiat"). Thus participants are brought in the system on the idea of "do something, earn steem, sell the steem to get fiat". It is the case for witnesses, who need to pay for computing infrastructure in fiat but are rewarded in SP ("power down, sell the steem for fiat, pay for infrastructure costs"). It is the case for investors ("buy steem with fiat, stake steem as SP, allocate the SP to an activity and get paid steem and SBD, sell those back for fiat to make a return"). And it is especially true for the content creators and curators ("put your brain to use, earn STU which are even represented with the dollar symbol $, sell those for actual USD, pay your bills").

In other words, in terms of fiat exchange rate, STEEM has to run in order to stay still! The ecosystem needs to look attractive enough for new fiat to come continuously and seek conversion into STEEM!

Is STEEM doomed?

That was not a problem for as long as enough people thought the USD value of STEEM will increase and kept buying STEEM with fiat. But that is obviously not the case anymore. And we cannot influence people's thoughts, we cannot magically make them think what we want them to think.

As the cryptowinter settled in, less and less people bought crypto in general and bitcoin, a deflationary asset saw its price plummet to $3000. Steem's price has of course been hit even harder, as it was expected.

So what is to be done? Is STEEM doomed?

Quite the contrary. We need to understand the mechanism of value creation first. Once we have, you'll realize that steem has what's needed to support us in capturing that value for the common benefit. It's just that we cannot count on anybody else or some fortunate, positive externalities as in the past. We, steemians, need to "mine our brains" deeper to give new reasons to the "normies" for buying STEEM with fiat.

Steemland

The best analogy I can think of is that of a small country with its own currency, say for the sake of example Iceland. Iceland has a population of about 350 000 people, not very different from that of the steem eco-system, and a floating currency, the Icelandic krona (ISK). If the economy of Iceland does well and produces many goods and services which other countries covet, the demand for the ISK will increase and consequently its price with respect to a basket of other currencies (USD, EUR, GBP, etc.) will also increase.

^{Iceland football supporters}
Because Iceland, a small island, imports a lot of things, a stronger ISK will improve the life of Icelanders because the price of imports (expressed in ISK) will decrease. Of course the Icelandic exporters will be challenged to increase their productivity or to occupy unique niches and offer products hard to substitute, or else a raising ISK will impact them negatively.

^{Icelandic Krona, ISK - the local currency}

If we look at STEEM as "our ISK", what we want is for the steem community to produce goods and services (preferably priced in STEEM) which other people covet. This is the healthiest source of demand for STEEM. If we steemians propose to the people outside the platform something which they can only get in exchange for STEEM, then there will be people offering fiat in order to get STEEM.

Gross Domestic Product

So what is Steemland uniquely equipped to produce? Well, we do have some unique games, such as Steemmonsters and Drugwars, which exert a great appeal.

But mainly we produce a lot of content ... although that content is free to consume (and rightly so). Nobody needs to pay STEEM (nor fiat) to read the articles or enjoy the photographs through Steemit.com, Busy.org, Steempeak.com or the mobile apps.

That ought to give pause because "content production" is where most of our efforts are targeted! Let me repeat that: no matter how much effort we put into producing the best quality content, this effort will not, in and by itself, lead to an increase in the value of our currency, STEEM ...

That being said, producing lots of good content is essential and of big value to our ecosystem, to Steemland!

It's just that said value accrues indirectly. How? Why, through the "attention economy" mechanisms, of course. What does that mean? A central place attracting lots of "eyeballs", a web page drawing, through the abundance, quality and variety of its content, lots of traffic is a place of interest to advertisers.

This is basically the mechanism which has given Google its roughly $775 Billion market cap and Facebook its $460 Billion. Well, if we started producing compelling content on par with say, Medium or Reddit, then Steemit.com, the web site, would have a certain value for advertisers, as I've hinted at in an earlier post. As it happens Steemit, Inc. has realised it needs the revenue this could generate and has opened up to ads.

However, a couple of things come to cloud the picture.

First, the strong libertarian ethos of the venture and of the community. Many of us would feel betrayed if suddenly Steemit Inc. would turn us into cows to milk. Conscious of the risk, Steemit seems to only display ads to guests, people who browse the site without an account. Having a steem account and logging in "protects" one from the ads ... but at the same time it severely limits the value of the platform to advertisers. Guests are indeed of much lower value than users with a login which can be better understood and targeted.
Second, while Medium is at rank 194 in Alexa, Steemit.com has dropped from a high of below 1000 in early 2018 to around 5000 now. The main culprits are the diminishing interest of the people for everything crypto and blockchain, but also the lack of improvement in the UI ... as well as the competition of the other front-ends! The latter two being linked - by choosing to not improve the Steemit.com interface, "Inc" has left the place to busy.org and steempeak.com which are now splitting the desktop traffic and driving Steemit.com's Alexa rank lower.

That being said, despite all these negatives, steemit.com remains a source of "exports" for Steemland. By bringing people to read things which they don't find elsewhere, steemit.com creates a virtual group of eyeballs which is potentially of some interest to advertisers. And even if those would pay in fiat not in STEEM, it allows Steemit Inc. to pay salaries without resorting to selling STEEM on the exchanges, which lowers the selling pressure on the token.

Steemit.com Export Gateway: the Trending page

Once we understand that economic value springs from a concentration of eyeballs, then we are well equipped to see the value of "Trending", steemit.com "landing page". Trending is to steem what the port of Reykjavik are to Iceland - the place where our "imports" enter Steemland and where "eyeballs", our main export, is loaded unto cargoes.

^{Think of the "Trending" page like this. If only ugly, run down ships call here, would you think of dismantling the port?}

In that sense, abolishing Trending, as has been proposed many times in the past, is an economic nonsense that would decrease the value of the ecosystem to the outside world.

Corollary

The well-meaning attempts of front-ends such as Steempeak and Steeve.app to offer an alternative to Steemit.com's "Trending" are actually counter-productive and are hurting the overall fiat value of the Steemland productive effort!

They are an illustration of the old saying "Cutting off your nose to spite your face"! Isn't that surprising?

Yes, you'll say, but "what to do with all the shitposts which land regularly on Trending because of the bots!?" They are giving a bad name to our beloved Steemland and must be hurting us too!?

Bots as a target for FPI

A fair question. But first, let us take a closer look at bots. We established that being high in "Trending" has advertising value which can potentially be monetized. Well, there is one thing I understood first empirically by growing up in communist Romania and then by reading Game Theory - the concepts of Nash equilibrium and of Strategic dominance.

People respond to incentives. If you create a system which allows people to make money by breaking a (written or unwritten) rule, then people will find clever ways to break that rule and abuse the system. If bidding bots and vote buying make sense economically (especially on a platform which has been from the ground up advertised as a monetization platform), they will appear naturally. And if being on Trending makes sense economically (this is where the eyeballs are, remember), then bidding bots and vote buying will be used to reach Trending.

But let's wind back a bit. Why is it that bidding bots and vote buying make economic sense in the first place? Well, because they are the equivalent of lending opportunities. They are enacting and harnessing steem's capability of extending credit, of playing the role of a bank. To an investor, with much money and little time, bots and vote selling offer a way to generate passive income! They are therefore very attractive!

Remember, we want "normies" to use their fiat to buy STEEM and stake it as SP! Well then the ability to generate passive income from that steem-converted-fiat is a very attractive value proposition!. To come back to the Iceland analogy, it's the equivalent of investing in Iceland's economy by lending to local entrepreneurs!.

It's called "Foreign Portfolio Investment" or FPI

^{Invest in Iceland? There's tourism, fishing and geothermal energy}

In short, bid bots and vote-selling markets are another reason for people outside the platform to invest, buy steem with fiat because they offer an opportunity for passive income in exchange for "currency risk".

If you can stomach the plunge in the STEEM exchange rate from $5 to $0.3 (because you are invested long-term and only invested what you can afford to lose), then your investment is producing more steem for you at an eye-watering rate. And this "steem generation" is not, as in most other cryptocurrencies, simple "money printing" but is backed by real economic activity: the quest for a spot on the Trending page!

Thus "Trending" is doubly important:

to advertisers for the "normy world" who get a place where they can expect a concentration of eyeballs
to investors who can take FPI positions in steem and finance the craving of the Steemians to feature on the Trending page!

Corollary

Destroying "Trending" is thus doubly damaging. If anything, if we want the value of STEEM to increase, we should focus on making Trending even more of a focal point for the platform!

Conclusion

Implicitly, attracting more people to Steemit.com is also helpful - so for Steemit Inc, investing in the UI to catch up with the competition of Medium, Quora and Reddit also makes sense - even more sense than investing in upgrading the blockchain. Yes, SMTs would be nice, but improving Steemit.com is Pareto efficient.

One quick improvement inspired by 2017 Nobel Prize-winning economist Richard Thaler and Cass Sunstein with their "Nudge" book: replace the "$" symbol in the Steemit.com interface with something else! Steempeak for instance has done it! It changes people perception of the platform - they are not being subliminally told "your are here for a quick $" but instead invites them to understand what the "§§§" symbol means ...

Bad Trending content is bad, but if we want to fight bad content on trending then

abolishing Trending is the equivalent of "throwing the baby with the bath water"
deploring the influence of bots is about as effective as "marching against climate change" (i.e. not effective at all)
downvoting and flagging as certain "socialist" presidential hopefuls are doing can have serious negative consequences if not done with utmost care, because it fractures the social bonds of the community. Icelanders too were much less productive when, following the financial crisis, they were dealing with internal strife

^{A prize of 1000 STEEM to whoever spots our dear Bernie in the crowd}

That basically leaves one alternative and kinda' justifies what I am doing (are you suprised?). My advice for driving out bad content from Trending is to "fight fire with fire", i.e. ...

use bots with abandon to flood Trending with GOOD, original, outstanding, unique content!

If you want STEEM to exert attraction over people who look for financial opportunities then, by all means, create great games on the steem blockchain and develop other businesses such as the "document notarization" business of Proof.ink and the "Memory Extension" one I outlined in a previous post. The more unique economic activities are available, the greater the attraction for Steemland, and the higher the Steemland GDP and its suitability as a destination for both FPI and "Foreign Direct Investment' or FDI

But when it comes to the "attention economy", then strive to bring as many well defined eyeballs to its "Schelling Point", the steemit.com Trending page by working and spending to make sure they will find there excellent content!

If you know what witnesses are and agree that people commited to keeping this blockchain ticking play an important role ...

(by simply clicking on the picture - thanks to SteemConnect)

How I learned to stop worrying and love the Bid Bots

What is Steem's value?

Let's begin with Bitcoin

Next, look at Ethereum

... But what about Steem?

Is STEEM doomed?

Steemland

Gross Domestic Product

Steemit.com Export Gateway: the Trending page

Corollary

Bots as a target for FPI

Corollary

Conclusion

Related posts

Other posts you might enjoy:

Steem ecosystem

Blockchain, Crypto and Society

Blockchain and Europe