Control - Issue #5
Control - Issue #5
There's been lots of drama in this fast moving space in the past few weeks, but this newsletter is about the innovation not the drama. Let's get to it...
Observations after 1 Month Steeming: The Promise and the Problems
The idea of enabling content creators to get paid directly for their work is as old as the Internet itself. No one has been able to bring that idea to reality yet, but new attempts to solve the problem will continue until it’s solved. The Steem protocol is the latest attempt and I was excited to jump on the Steemit platform last month when it popped onto my radar.
After a month using Steemit, I think it’s a promising experiment for a number of reasons. It also has a number of potential problems worth discussing.
The Promise
1.) Steem democratizes the distribution of crypto tokens and opens up crypto to new users
In Bitcoin, tokens are created by miners who run software on complex and expensive hardware. Bitcoin utilizes a proof of work algorithm to reach consensus and distribute tokens. Steem reaches consensus via a delegated proof-of-stake consensus algrorithm. Steem co-founder Dan Larimer invented the DPOS consensus and it’s one of the more interesting innovations in consensus that I’ve seen.
In the Steem DPOS system, a limited number of miners are elected by stakeholders to secure the network and validate transactions. They earn some Steem for their work, but not all of the Steem created in the network. Another part of the token supply gets distributed directly to content creators (based on the value they are providing the community, via posts, upvotes, and comments). As a result, Steem is more easily accessible to newcomers than any other crypto token. A few examples of new people entering the blockchain include Neil Strauss and Brenda Zambrano.
2.) The combination of a crypto-token business model and an easy-to-use social network has led to extremely strong engagement
It's historically proven to be extremely difficult for challengers to displace the incumbent network effect businesses on the Internet - UI/UX is simply not enough (if it was, Craigslist, Reddit, & Ebay would not still have such a large market share of their respective categories). Business innovation is how incumbents are typically disrupted and the business innovation that Steemit has is what gives it a chance to displace Medium, Twitter, and Reddit and find it's place in the mindshare of the hundreds of millions of users already using content-based social networks.
The early data supports the notion that a crypto-token model + social network is driving engagement. The number of transactions per day on the network is rapidly rising. On August 4th, there were 189,345 transactions on the Steem network (by comparison, on the same day there were 228,244 transactions on the Bitcoin network). Not bad for a protocol that's been fully functional for about a month!
3.) The Steem team created clever ways to reduce spam and align long-term incentives within a digital currency community
Spam is an issue all social networks face and making sure the quality content rises to the top can be difficult. Steem allows the quality content to rise to the top by implementing a weighted voting mechanism (the higher one’s reputation on the platform is, the more their vote matters). Spam has not been as bad as I expected as a result of the clever voting mechanism and reputation algorithm.
An issue all crypto tokens need to deal with is greed and short-term speculation. Steem reduces this by implementing Steem Power, a vested type of Steem that is locked up for 2 years. Those that believe in the platform long-term can choose to “power up” to Steem Power. Those that wish to get liquidity short-term can “power down” to Steem. As a result, the short-term price of Steem isn’t as much of a focus in the community as it is in other crypto communities.
The Problems
As with all early stage ventures, there’s a lot of risks and things that could go wrong on Steem. Here are the potential failure modes as I see them:
1.) The founders may own too much of the token
Right now, the founders of Steem own approximately 80% of the total outstanding token value (see http://steemwhales.com/ for details). While that ownership level is not unheard of for a startup, Steem is a protocol not a startup. Such a high ownership level means that the top whales have a disproportionate ownership of the token and impact on the content that surfaces on the platform. They may not be well equipped to surface the best content and new services may not be willing to integrate Steem because of the control it would be giving to the Steem whales. Other social networks may rather fork a new version of the protocol, which would minimize the long-term success of Steem as a protocol.
2.) The monetary policy may be off
Steem, just like Bitcoin, is an economic experiment that has never been attempted before. Creating three different tokens (Steem, Steem Power, Steem Dollars), and assigning different inflation and interest rates associated to each is very complex and does not have any historical analogues.
The infinite supply of Steem and Steem power means that Steem assets lack digital scarcity, one of the core characteristics of Bitcoin. It's possible that an infinite but predictable money supply may be more appealing to users than an unpredictable but infinite money supply (all central bank issued currencies). In that case, while Steem may be inferior to Bitcoin from a monetary policy perspective, it could still have a niche use case. Even the most seasoned economist could not say for sure whether it will work or not and the great thing about digital currencies is for the first time economists have a test ground for new ideas.
3.) Steem may have gotten too big too soon, which could lead to the security of the network or services on the network being compromised
Steem quickly emerged from idea to live mainnet in a matter of 6 months. The total market value of Steem is now north of $200M and such fast growth inevitably attracts hackers who will attempt to break the system and steal funds. The same could be said about all new blockchains that emerge quickly, but its definitely a risk to be aware of..
It’s too early to write Steem off, but also too early to bet big on it
Overall, I think Steem is worth keeping an eye on in the coming months. If interested, there’s lots of good resources to track progress on the ecosystem:
• Steemle, which tracks user growth and engagement in the ecosystem
• Steemd, a blockchain explorer
• Steemwhales, which tracks data on Steem users
• Steemshare, which makes it easy to create Steem lists
Articles worth checking out this week
Kim Dotcom Claims Revived Megaupload Will Run on Bitcoin Micropayments - Fortune — fortune.com Entrepreneur Kim Dotcom claims he's solved the bitcoin scaling problem to let the Megaupload 2.0 file-sharing service run on micropayments.
Bitcoin Worth $72M Was Stolen in Bitfinex Exchange Hack in Hong Kong - Fortune — fortune.com
Nearly 120,000 units of digital currency bitcoin worth about US$72 million was stolen from the exchange platform Bitfinex in Hong Kong.
Brave, the ad-blocking browser from former Mozilla CEO, grabs $4.5 million | TechCrunch — techcrunch.com Brave Software, the new web browser company co-founded by former Mozilla CEO Brendan Eich, has raised $4.5 million in seed funding for the continued..
The Great Digital-Currency Debate: ‘New’ Ethereum Vs. Ethereum ‘Classic’ - MoneyBeat - WSJ — blogs.wsj.com
There's an ongoing debate about the role of hard forks in digital currencies and the debate is far from settled. Following the Ethereum hard fork, there are now two versions of Ethereum trading on several major exchanges.
Steem co-founder Dan Larimer highlights many of the Steem innovations that he believes will prevent Steem from dealing with a lot of the issues that the Bitcoin and Ethereum communities have faced over the past few weeks.