I've heard both thrown around far more often than the platform deserves and I'd like to shed some light on the topic. The founders @dantheman and @ned have addressed this issue several times but the noise from the outside still persists.
For one... anyone calling Steemit a Ponzi Scheme doesn't really know the correct definition of a Ponzi scheme.
What is a Ponzi Scheme exactly?
Ponzi-Scheme defined:
A Ponzi Scheme is a fraudulent investing scam promising high rates of return with little risk to its investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier investors. For both Ponzi schemes and pyramid schemes, eventually there isn't enough money to go around, and the schemes unravel. New money must keep coming in to pay the old money. (http://www.investopedia.com/terms/p/ponzischeme.asp)
Origins of the Ponzi Scheme:
The first well known Ponzi Scheme, and whom the schemed was named after, was perpetrated in 1919 by a man named Charles Ponzi. What first started as an arbitrage company whereby Charles Ponzi would buy cheap international reply coupons in other countries and then he would exchange those coupons for stamps that were more expensive than the coupons were originally purchased for, thus creating his profit spread. However, he soon became greedy and started advertising returns of 50% plus returns in a matter of months in order to attract investors. When the money started pouring in, Ponzi just redistributed the money to older investors and told the investors they had made a profit. New money paid off the old money to keep the cycle going. The scheme lasted for less than a year when an SEC investigation took place and discovered the fraud.
That was not the end of Ponzi Schemes, but merely the beginning. The most well known one would come in 2008 when Bernard Madoff falsified his trading records to attract massive amounts of investment capital. When the recession hit in 2008 and investors wanted their investments back the entire scheme unraveled as there was no investment income. Just new money coming in to pay the old money...
Most Ponzi Schemes carry several key characteristics:
1. There is a guarantee of above market returns with very little or no risk
2. The investment income is guaranteed regardless of market fluctuations (that is a big tell)
3. Most are not registered with the SEC
4. The investment strategies are described as too complex to explain
5. Clients are not allowed to view paperwork on their investment, and if they are, it is falsified
6. There is great difficulty in getting your investment back should you chose to withdraw your funds
What is Steemit.com exactly?
Steemit.com is an incentivized, blockchain-based social media platform. It is a website that rewards the work of it's users monetarily. It is an economic system that pays its users contributions in cryptocurrency. The preceeding shows that is very similar to any economic system where work is rewarded. IE, work is put in to the system and then money is rewarded for said work which can be exchanged for other goods and services. Below is the Abstract from the company's white pages:
"Steem is a blockchain database that supports community building and social interaction with cryptocurrency rewards. Steem combines concepts from social media with lessons learned from building cryptocurrencies and their communities. An important key to inspiring participation in any community, currency or free market economy is a fair accounting system that consistently reflects each person's contribution. Steem is the first cryptocurrency that attempts to accurately and transparently reward an unbounded number of individuals who make subjective contributions to its community."
The money paid in the case of Steemit, is called Steem. It is slightly different than conventional currency because the dilution rate is set at a fixed number. That number is 100% per year. The reason for the high inflation rate is to incentivize users to contribute and stay with the platform, not just use it for a quick cash grab. It also penalizes long term holders who do not contribute to Steemit or do not commit to Steemit for the long haul. However, if most users Power Up then most of this "doubling of steem" (100% dilution per year) is effectively a split which does not transfer ownership.
How is Steemit different than a Ponzi scheme?
The most fundamental difference is that there is no centralized leadership who can steal from users and enrich themselves. The entire system is a Blockchain and the beauty of a Blockchain is that the entire system is transparent with everyone playing by the same rules.
Also, there is no solicitation for an initial investment. Anyone can join the site for free if the like. Ponzi's require new money coming in to keep the cycle going. There is no requirement for new money on Steemit.
Steemit rewards users directly for the time put in. Monetary rewards for time and effort spent is called work not a Ponzi Scheme.
None of these things are characteristics of a Ponzi Scheme. In fact, one could argue that central banks around the world have more Ponzi like features than Steemit does. However, not many people are calling global governments scams or Ponzi Schemes. Maybe they should start...
Why are people calling it a Ponzi Scheme?
The label seems to come from people seeing users getting something for free (or a small initial investment) and then selling it to someone who joins the platform later on. However, those myths are easily debunked as Steem itself is not free and it is attached to the work put in by each individual.
Lets take a look at the main points of that last sentence a little more closely...
Work:
Steem is a representation of work in the same way that any fiat currency is a representation of work. Steem is paid out as a reward in exchange for content creation and content curation. Users essentially donate their work to Steemit in exchange for payment in Steem. The economics of the website are very similar to the real world. The more time and work you put in, the more rewards you receive...
Rewards (Steem):
Users receive rewards for the content they produce and for helping better content be seen by the community. Every action on Steemit is essentially "work", for which users get rewarded for. This is a fundamental reason why Steemit is not a Ponzi Scheme, the value is not in the investment itself but in a decentralized platform that is a summation of all the work being put in by its community members.
What is Steemit.com most similar too?
It seems most similar to me to that of a start up company that pays its employees in IOUs or promissory notes, or even restricted stock. All the employees do work and the share allocation is then based on a democratic voting process with better "work" being rewarded. The creators of content receive 50% of their rewards in Steem Dollars and 50% in Steem Power. The steem dollars can be converted immediately to a fiat currency through a conversion process and the Steem Power must be held for a period of 2 yeas before it can be paid out fully. Steem Power is protected from dilution and provides an incentive for investors to hold long term which is what the founders of any start up would like. None of this sounds like a Ponzi in the least...
Steemit currency, Steem:
As mentioned in the abstract, @dantheman and @ned are trying to create the first stable cryptocurrency. Steemit.com has been set up in a way to encourage circulation of its currency. This is key. The faster you can get a currency traveling through as many people as possible, the faster said currency will stabilize. The velocity of steem is key in creating a stable cryptocurrency.
Liquidity of investment:
In a Ponzi scheme, there is no liquidity as that would cause the entire scheme to unravel. The funds are controlled by a central authority who makes all the decisions. Steemit is as liquid as you make it. Users can decided to tie up funds for the long haul or they can cash out at any time, it is their choice.
Decentralization:
Every user on a blockchain operates under the same set of rules. That is another fundamental difference between operating a Ponzi Scheme and operating on a blockchain. The founders have the same rules as the newest person to sign up on the platform.
Conclusion:
Steemit.com is not a Ponzi Scheme for the reasons mentioned above. This piece just touched on a few of the reasons why, but there are numerous reasons if one were to feel inclined to dig further into the topic. People that are confused on the topic simply need to be educated on how exactly Steemit.com works.
Have a nice day!
Sources:
1. http://www.investopedia.com/terms/p/ponzischeme.asp
2. https://steem.io/SteemWhitePaper.pdf
Image Sources:
1. http://www.diffen.com/difference/Ponzi_Scheme_vs_Social_Security
2. https://darrenyancy.com/2011/09/17/a-ponzi-scheme-by-any-other-name-is-social-security/
3. https://www.protiprudu.org/boj-o-zachranu-systemu-fiat-penazi-uz-davno-zacal/
Follow: @jrcornel