Off the bat, I would like the apologize for the lateness of this much needed article. I completed all the research work needed to write this post over a month ago and all the tweets associated with it can be found on this Timeline. My quest to expose Steemit as a scam started by criticizing the project in the following video after only spending 10 minutes reading about what it was. I also immediately tweeted out the following picture on July 19th:
This led to an unbelievable number of comments calling me an idiot and demanding I read the White Paper on their revolutionary new idea. I took the challenge and after an extended time researching, it turns out that Steemit is a lot worse than all the bad things I’ve ever said about in a speculative mater back in July. In addition, I have done several debates on the concept of Steemit that readers might find interesting, one against a writer named Blake Miles and the other against Jeff Berwick.
The PDF of the peer reviewed White Paper of Steem referenced in pictures throughout this article can be found here:
Let’s start at the beginning, the very first page of the White Paper should send a serious chill through people’s spine. The first name on the document is Daniel Larimer who I have already considered a serial scammer due to his prior project BitShares, but some around the web have mentioned that he is actually on his forth scam that convinces unqualified investors to buy into a project with 0 chance of success. Mr. Larimer has also been famous in the Bitcoin circles for a long time due to his misunderstanding of what a blockchain is and why 10 minute confirmations are not problematic leading the famous quote from Satoshi: “If you don’t believe me or don’t get it, I don’t have time to explain it to you, sorry”.
Now let’s talk about how the Steemit token launched back in March of 2016. It is barely talked about in the Steemit White Paper but various links on the web provide a better story of the shananagans that went on to pre/insta mine the tokens. In the White Paper on page 23, all that is mentioned is “After the first month” but that is when the biggest part of the scam took place:
[It might be hard to read the small text above, please download the PDF linked at the top of the post]
So after numerous promises by the architects of Steemit of NO Pre-Mine, Instamine or IPO, you can see how the people that were interested in mining this token at block one were complaining that the code was manipulated to give the architects all the advantage. On top of that, they still messed up and didn’t get as many coins as they expected on those first few days, so they re-launched the process twice, rendering all coins mined by others who were interested void. This mining period only lasted for 30 days and took place at a time when very few people knew Steem existed. At this point many like to compare this to Bitcoin were Satoshi and a select few people only mined during the first month as well, but the difference is that over a year later anyone still could have joined in on the mining while in the case of Steem, not even those interested on day one were able to do so fairly. Additional threads on the pre-mine scam of Steemit can be found here:
Now that we got the major problem that kicked off the project out of the way, let’s talk about why the architects of this scheme needed to pre-mine all those coins as quickly as possible. After the first month the system becomes PoS which means the more Steem you have, the more Steem you will earn for doing almost nothing and certainly not for contributing any investment or risk. This part is disguised in language as a hybrid because there is a PoW mining component still in play but the work part is only responsible for about 0.05% of all steem creation after that first month. This point needs a lot of explanation but pages of the White Paper that are needed to understand this concept are 9, 22 & 23. They explain that one of 21 blocks is PoW while the rest are P0S with the top 19 holders of Steem having all the advantage. The biggest issue however is the fact that 9x the amount of Steem is created on top of the 21 block creation and they are being created out of thin air and handed out to current Steem holders proportionally.
[Again please download the PDF at the top for additional commentary of every page of the Steem White Paper]
What people need to keep in mind is that it is only the Steem created from the 21 blocks that makes it to the content creators (and even partially as some goes to curators) while the majority of additional coins (about 90%) is mostly going to those insiders that unfairly mined during that fist month.
It’s hard to pick the next most problematic part of this project but let’s attempt to discuss the three types of tokens. This is generally described on pages 8-10 with an important point mentioned about the price of Steem Dollars on page 14. This is a very convoluted system pretending to be economic theory designed to confuse the unqualified investors. The Steem we have been talking about up to this point is actually Steem Power which can only be liquidated over a 2 yr period. This gives an enormous advantage to early adopters who have been predictably cashing out the moment Steemit became known to the general public, while new investors are locking up their value in an asset with incredible inflation (more on that later). This trap to lock up your funds is actually the major reason Steemit price went to about $4 in early July and it should have been obvious how it would go back down to under 10 cents where it should be by end of year. In the White Paper on page 38 it states that 98.5% of all Steem was in the form of Steem Power on May 1, and the charts clearly show that volume was none existent as high inflation made those same Steem Power holders much richer in terms of SP just by holding them. So when the news of Steem hit, there was demand but NO supply. This drove the price to unrealistic levels and as people were now able to slowly power down, after about a month supply begins to outpace demand. Because of insane inflation (more on this later) the supply will perpetually outpace demand going forward.
Before we get into the problem with inflation, let’s briefly talk about the other two types of tokens. One of them is STEEM which seems to be the ideal token to hold if you think the value of the system will rise but you are discouraged from holding it at a rate of 0.19% per day penalty. The paper does not explain where this value goes. The final type of token in this system is STEEM Dollar (SMD) and this concept has been a failure from the start. It is only there to complicate the economic concepts which we will not get into in this post but the promise of stability between 0.99 and 1.01 as stated on page 14 has not even come close with price swings of over 20% in each direction. This idea of price stability in a token has many comparisons to the PayCoin White Paper from 2014:
Now let’s talk about inflation. On pages 8, 36 and 37 it references that STEEM is created at a rate of 100% per year, while on page 16, it is described how these tokens are allocated. At this point I would like to apologize for mis-interpreting one aspect of the White Paper. I have incorrectly attributed the Metcalfe’s n^2 formula to currency creation while in fact the creation of steem is constant while only the allocation follows the formula of n^2. While this does slightly lower my personal expectation of currency inflation, 100% a year is still unreasonable when there is no financial investment on the line to earn the value and comparisons to Bitcoin having a similar rate in early days are invalid because by the time Bitcoin was known to the world in the way steem was in July, about half of all bitcoins were already in circulation. The other important point to keep in mind is that there is research on something called Transaction Cost Theory which attempts to explain why the average piece of content on the internet has a negative value and not everyone can be Shakespeare.
This rate of inflation is a major problem but what is the worst part about it is that it goes to those who already have coins. Only the 10% of newly created steam gets allocated under the Metcalf’s Law rule while the rest goes to miners from March.
Another major problem with Steem is censorship. Because the more Steem Power you have the more influence you have. This means that the original miners have all the influence over content in addition to making close to 90% of all new Steem. This created a crazy incentive from the start where all profitable content creators had to either write something that a few influential people will like (which usually involved steem promotion articles) or they were bloggers with a following that insiders new would promote the platform that would bring in buyers of the token for them to cash out. Needless to say, Steemit might actually be the MOST censored content site on the web.
Another aspect of censorship seldom talked about is the fact that while they claim there is a blockchain making sure everything is immutable, the website Steemit.com is not. That means website admis can dispay or not display what ever they like. The site is supposed to show all Steem transactions including how much each user is cashing out yet there are links on line that have found some of the transactions of the founders being hiden from users view.
There are other problems with steemit but we should end the article here. Lets leave it with some quotes from the paper that show the blatant incompetence at work: