Steem is a cryptocurrency for a social blogging platform. The Steem blockchain hosts blog posts and comments posted by users, and users curate content through upvoting and downvoting posts. Upvotes are not only used to curate content, they also generate income for the author and the upvoter.. The author earns Steem and Steem Backed Dollars (SBD) when they receive upvotes, and the upvoter earns a portion of that income.

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Each Steem users’s action (posting a blog post, commenting, and upvoting/downvoting) is performed on the blockchain. As such, the blockchain needs to be fast, scalable, and free to use to ensure a good user experience. Steem uses a unique consensus algorithm and monetary system to make the platform work. Although the content the Steem blockchain surfaces is often of questionable quality, Steem boasts the best user experience of all cryptocurrencies to date.

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How does Steem work?

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Steem is a complex blockchain. There are many components that come together to keep the platform running. The core components are the consensus algorithm, economic system, content curation system, and user interface.

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Consensus algorithm

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Steem's consensus algorithm is key to a good user experience. It enables a 3 second block time with a 65kb maximum block size. A fast block time and large block size allows users to get finality on their actions quickly, even when the blockchain is under heavy load. To achieve this response time and scalability, Steem uses a unique delegated Proof of Stake (dPoS) consensus algorithm. Holders of Steem vote on accounts to be "witnesses" (block producers). The number of votes an account has is equivalent to the Steem Power it has. Block production occurs in rounds. For each round, 21 witnesses are selected to create blocks. 20 of these witnesses are guaranteed to be the top 20 witnesses with the most votes. The 21st witness is timeshared by every witness that didn’t make it into the top 20 proportional to their total votes. Because the 21 witnesses for each round are known beforehand, Steem can schedule witnesses to reliably produce blocks every 3 seconds. Witnesses synchronize their block production via the NTP protocol.

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Steem's consensus algorithm is similar to BitShares and EOS. The three cryptocurrencies share the same creator, Dan Larimer.

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Economic system - spam prevention

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Steem's economic system also contributes to Steem's stellar user experience. The system allows writes to the blockchain to be free. As long as a user holds enough Steem Power, posts, comments, upvotes, and downvotes are free. This is a unique property that's unlike most blockchains where every write requires a fee to prevent spam. Free writes are important to a social blogging platform as a user needs to write to the blockchain for minor actions like upvoting, downvoting, and commenting. If users needed to pay a fee every time they did one of these actions, the social blogging platform will see little activity, rendering it a poor social blogging platform.

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One weakness with free and fast writes to the blockchain is spam. Steem prevents spam by utilizing bandwidth. Users are allocated bandwidth proportional to the amount of Steem Power the user holds. When blockchain usage is low, bandwidth allocation per active user can stretch; conversely, when blockchain usage is high, bandwidth allocation per active user shrinks.

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Economic system - payouts

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Steem pays authors in Steem and Steem Backed Dollars when their posts and comments are upvoted. Users who upvote a post or comment also receive a cut of the payout. The payout occurs 1 week after the post or comment has been made. The amount of Steem and Steem Backed Dollars paid to an author or curator is determined by how much Steem Power is committed to upvotes on their posts; an upvote from an account with a large number of Steem Power is worth more. . For example, when Ned Scott, the CEO of Steemit, upvotes a comment, he gives out more than $2000. Each account has voting power, which rate limits the number of upvotes the account can give in a period of time. The more an account upvotes, the less value each upvote has.

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To pay for these payouts, Steem has inflation. Each year, the total supply of Steem increases by about 9.5%. This inflation rate decreases yearly until it reaches 1% in 18 years. The new Steem created from inflation is used to pay authors and curators (75%), witnesses (10%), and Steem Power holders (15%).

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Economic system - Steem, Steem Power, and Steem Backed Dollars

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Steem has three types of assets: Steem, Steem Power, and Steem Backed Dollars (SBDs). Steem and SBDs are liquid assets, meaning that they are instantly sendable around the blockchain. Steem represents equity in the blockchain and an SBD represents debt the blockchain owes to a user. Theoretically, an SBD can be redeemed by a user for approximately $1 in Steem. Steem, the blockchain, maintains this peg through a price feed, a redemption system, and a controlled issuance rate. When the price of an SBD is below $1, it's easy to raise it back to $1 since users can buy the SBD for less than a $1 and redeem it for a $1. Additionally, the blockchain can also raise the interest rate for owning SBDs, which also increases SBD supply. When the price of an SBD is above $1, it's not easy to bring it back down to $1. The best way the blockchain can reduce the price of SBD is by lowering SBD issuance, thus restricting supply. However, this hasn't worked well, as the price of SBD has soared to $12 in December 2017.

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Steem Power is vested equity in the blockchain. A user can convert Steem to Steem Power through a process called "powering up". Steem Power can be converted to Steem through a process called "powering down". Powering up is instant while powering down happens over 13 weeks. Steem Power is not sendable to another user and is thus not liquid. However, owning Steem Power gives a user many perks. They increase the power of an account’s upvotes, downvotes, witness votes, and passively gives the owner 15% of inflation, proportional to the amount of Steem Power owned by the user.

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Curation system

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For Steem to be successful, it needs to surface quality content. As such, its curation system needs to be effective. Steem's curation works via an upvote and downvote system centered around Steem Power. The theory is that the more Steem Power an account holds, the more vested interest the account has in the success of the platform. As such, the account is more willing to upvote quality content. This justifies the account's votes having more value based on the amount of Steem Power the account holds.

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In Steem, users are also rewarded for curation. If a user votes on a post early, and the post then receives a large payout from future votes, then the user receives more curation rewards. As such, users are incentivised to seek out high quality posts with a low number of upvotes to upvote.

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Users can also downvote posts. A downvote accomplishes the exact opposite of an upvote. While an upvote increases the visibility and payout of a post based on the amount of Steem Power behind the upvote, a downvote decreases the visibility and payout of a post based on the amount of Steem Power behind the downvote.

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User interface

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Steem is just a blockchain and requires a user interface for users to publish, read, upvote, downvote, and comment on posts. The most popular user interface for Steem right now is Steemit.com. Steemit.com is operated by the Steemit company, which also leads the development of Steem. Other popular user interfaces for Steem include busy.org, chainBB.com, and the eSteem mobile app.

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The team behind Steem

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Steem is the brainchild of Dan Larimer. Dan is a serial blockchain entrepreneur who created BitShares prior to Steem and has since moved on to building EOS. When creating Steem, Dan and Ned Scott cofounded Steemit, Inc. to operate Steemit.com and lead the development of Steem. While Dan has left to be the CTO of Block.one, the company behind EOS, Ned has remained CEO of Steemit and continues to lead a team of operational staff and software developers building Steem.

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Ned is currently working on the release of the Smart Media Tokens (SMT) protocol, which is an upgrade to Steem that, among other things, primarily allows developers to issue custom tokens on Steem. The SMT protocol is slated for release in early 2019.

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Project concerns

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Poor curation and a bot economy

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One of the biggest problems facing Steem right now is a curation problem. As previously mentioned, a key factor for the success of Steem is the quality of content readers can find on the platform. A social blogging platform with low content quality will lose its readers quickly. Unfortunately, the content on Steem is currently, more often than not, of low quality. This is because many authors are paying bots on Steem to upvote their content (often of low quality) to the top. It's not uncommon to see posts containing a single image and one sentence of text on the front page with a large payout, while well written and thoughtful posts are buried with a few cents in payout. This is not to say that every post on Steem's front page doesn't deserve to be on the front page, but too many posts of questionable quality manage to get on the front page.

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Content quality is a pressing issue for Steem and an important problem for the team to solve.

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Inflation

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The inflationary supply of Steem makes it uneconomical to own Steem unless you're a witness or a successful author on Steem. If you're neither, the passive income from owning Steem Power is far from enough to match Steem's overall rate of inflation (Steem Power always provides 15% of that rate). As such, Steem is a poor long term investment for traditional cryptocurrency investors. However, there is a case to be made that when Steem's rate of inflation reaches 1% in 18 years, it's at least better than holding cash since cash inflates at 2%.

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One way Steem can mitigate this problem with inflation is to leverage advertising on Steem. If Steem had dedicated advertising slots embedded in the content that advertisers can spend SBDs to get on (and the SBDs are burnt from the total supply), then the demand from advertising can counteract inflation, to a certain extent. The beauty of this solution is that the more successful Steem is as a platform, the more demand there is for advertisements on it, which results in a higher burn rate of SBDs. Theoretically, the demand for advertising could turn Steem into a deflationary platform instead of an inflationary one.

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That said, Steem's inflationary supply is not a problem if you're not an investor and simply want to use it as a cheap platform to host a blog.

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Censorship by "whales"

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Because the visibility of posts is determined by the amount of Steem Power behind the upvotes and downvotes of a post, users that hold a large amount of Steem Power (whales), have significant control over the content surfaced on the platform. Whales can easily control what is on the front page and what is not on the front page. This runs opposite to the anti-censorship spirit of cryptocurrencies. Fortunately, at the very least, the transparency of the blockchain allows anyone to see who is censoring what whereas the censorship activity is opaque in traditional, centralized content platforms like Reddit and Twitter.

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Summary

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Steem is a cryptocurrency for a social blogging platform. It has the best user experience out of all cryptocurrencies. Steem achieves this with a unique consensus algorithm and economic system that supports fast and free writes to the blockchain. However, Steem also has many weaknesses. The most pressing of which is a vibrant pay-to-upvote bot economy resulting in low quality content on the front page. The team has a lot of work to do to align incentives such that users upvote high quality content.

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Author

Kevin Pan
Kevin has a background in CS with a Software Engineering major from the University of Waterloo. He programs websites, Ethereum dApps, and researches and writes about cryptocurrencies. twitter.com/SovCryptoBlog