CRYPTO KNOWLEDGE #1 -STEEM- A Brief Understanding on Steem.

Steem is a blockchain-based social media platform where anyone can earn rewards.

Collectively, user-generated content has created billions of dollars worth of value for the shareholders of social media companies, such as Reddit, Facebook, and Twitter. Steem supports social media and online communities by returning much of its value to the people who provide contributions by rewarding them with virtual currency.

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.

Steem (STEEM)

Steem is the fundamental unit of account on the Steem blockchain. All other tokens derivetheir value from the value of STEEM. Generally speaking STEEM should be held for short periods of time when liquidity is needed. Someone looking to enter or exit the Steem platform will have to buy or sell STEEM. Once STEEM has been purchased it should beconverted into SP or SMD to mitigate the impact of dilution over the long-term. STEEM is constantly increasing in supply by 100% per year due to non-SMD incentives. Someone who holds STEEM without converting it to SP is diluted by approximately 0.19%
per day. While the rate may appear high, for transactions that take less than 10 days, it is still cheaper than credit card processing fees. Furthermore, the daily token creation is insignificant next to the daily volatility.
Someone who buys Bitcoin or any other cryptocurrency and sells it 10 days later could easily lose 3% or more due to price fluctuations. Someone who buys Bitcoin and then sells it the same day will usually pay more than 0.4% in market fees alone. In other words, the inflation rate is effectively insignificant during the period of time the typical individual will
hold STEEM. The majority of inflation is actually an accounting artifact rather than true reallocation of
wealth. 90% of non-SMD inflation is distributed back to existing holders of STEEM proportional to the STEEM value of their SP balance, making inflation more of a “split”. Only about 10% of non-SMD inflation redistributes ownership in the network.

Steem Power (SP)

Start up companies require long-term capital commitment. Those who invest their money in a startup expect to wait years before they can sell their shares and realize their profits. Without long-term commitment, a startup seeking to raise additional capital through the sale of additional shares would be competing with existing shareholders looking to exit. Savvy investors want their capital contributions to grow the company, but growth cannot happen if the new capital is given away to those looking to exit. There is significant value to having long-term commitment because it enables communities to make long-term plans. Long term commitment of stakeholders also causes them to vote for long-term growth rather than short-term pumps.
In the cryptocurrency space, speculators jump from cryptocurrency to cryptocurrencybased mostly on which one is expected to have short-term growth. Steem wants to build a community that is mostly owned and entirely controlled by those with a long-term perspective. Because Steem wants to encourage long-term growth, it is hardwired to allocate 9 STEEM to
Steem Power (SP) stakeholders for every 1 STEEM it creates to fund growth through contribution incentives. Over time this drives the ratio of the total STEEM value of Steem Power balances to the total of STEEM balances toward 9:1 . (It seems likely that the ratio will be somewhat greater than 9:1 due to continued net Powering Up of the newly printed
STEEM.) It also means that long-term holders are almost completely protected from the dilution used to fund growth.
SP can only be converted back to STEEM over 2 years via 104 equal weekly payments. ‘1 SP’ can be viewed as a share in a pool of STEEM. The network automatically adds STEEM to the pool every block. At any time users can convert their STEEM into SP at the same ratio as STEEM in the vesting pool to total SP. Converting STEEM to SP does not dilute existing holders of SP. Likewise, every time SP is converted back to STEEM it is done at the current ratio. Individuals are guaranteed to have more STEEM in the future than they have when they first convert from STEEM to SP. SP balances are non-transferrable and non divisible except via the automatically recurring conversion requests. This means that SP cannot be easily traded on cryptocurrency exchanges. SP is a requirement for voting for or against content. This means that SP is an access token that grants its holders exclusive powers within the Steem platform. Transferring from STEEM to SP is referred to as powering up while transferring from SP to Steem is referred to as “powering down.” For example, one can power down their STEEM over a period of two years, yet one can power up their STEEM instantly.

Steem Dollars (SMD)

Stability is an important feature of successful global economies. Without stability, individuals across the world could not have low cognitive costs while engaging in commerce and savings. Because stability is an important feature of successful economies, Steem Dollars were designed as an attempt to bring stability to the world of cryptocurrency and to the individuals who use the Steem network. Steem Dollars are created by a mechanism similar to convertible notes, which are often used to fund startups. In the startup world, convertible notes are short-term debt instruments that can be converted to ownership at a rate determined in the future, typically during a future funding round. A blockchain based token can be viewed as ownership in the community whereas a convertible note can be viewed as a debt denominated in any other commodity or currency. The terms of the convertible note allow the holder to convert to the backing token with a minimum notice at the fair market price of the token. Creating token-convertible-dollars enables blockchains to grow their network effect while maximizing the return for token holders. Steem Dollars are referred to with the symbol SMD, an acronym for Steem Dollars. Creating SMD requires a combination of a reliable price feed, rules to prevent abuse, and liquidity. Providing a reliable price feed involves three factors: minimizing the impact of an incorrect feed, maximizing the cost of producing an incorrect feed, and minimizing the importance of timing.

Voting on Distribution of Currency

Assume there is a fixed amount of money to distribute, and that those who have a long-term vested interest in the future value and utility of the currency are the ones who must decide how to allocate it. Every vesting user casts their votes on who did the best work and at the end of the day the available money for that day is divided proportional to the votes such that
everyone with even one net positive vote gets something. The naive voting process creates a Prisoner's Dilemma whereby each individual voter has incentive to vote for themselves at the expense of the larger community goal. If every voter
defects by voting for themselves then no currency will end up distributed and the currency as a whole will fail to gain network effect. On the other hand, if only one voter defects then that voter would win undeserved profits while having minimal effect on the overall value of the currency.
In order to realign incentives and discourage individuals from simply voting for themselves, money must be distributed in a nonlinear manner. For example a quadratic function in votes, i.e., someone with twice the votes of someone else should receive four times the payout and someone with three times the votes should receive nine times the payout. In
other words, the reward is proportional to votes rather than votes. This mirrors the value of
network effect which grows with the number of participants, according to Metcalfe’s Law. Assuming all users have equal stake, someone who only receives their own vote will receive much less than someone who receives votes from 100 different users. This encourages users to cooperate to vote for the same things to maximize the payout. This system also creates financial incentive to collude where everyone votes on one thing and then divides the reward equally among themselves.

Mining in Steem

Traditional proof of work blockchains combine block production with the solving of a proof of work. Because the process of solving a proof of work takes an unpredictable amount of time, the result is unpredictable block production times. Steem aims to have consistent and reliable block production every 3 seconds with almost no potential for forks.
To achieve this Steem separates block production from solving of proof of work. When a miner solves a proof of work for Steem, they broadcast a transaction containing the work. The next scheduled witness includes the transaction into the blockchain. When the transaction is included the miner is added to the queue of miners scheduled to produce
blocks. Each round one miner is popped from the queue and included in the active set of witnesses. The miner gets paid when they produce a block at the time they are scheduled. The difficulty of the proof of work doubles every time the queue length grows by 4. Because one miner is popped from the queue every round, and each round takes 21 * 3 = 63 seconds,
the difficulty automatically halves if no proof of work is found in no more than 21 * 3 * 4 =
252 seconds. Mining Rewards require Steem Power After the first month, Steem miners are paid in Steem Power (SP). SP is liquidated through the two-year process of “powering down.” This means that miners must wait for a long time,
likely many months, before sufficient mining rewards have been powered down to allow them to recover the cost of electricity and computational resources. The powering down process discourages creation of mining pools because the pool operator would have to spread payouts over years. The effect of paying mining rewards in SP is to prevent miners from using today’s price to determine the profitability of mining. Few people will agree on what the future price will be. This means mining difficulty will be driven by those who place the highest estimate on future value. Miners without a long-term interest in the platform will be discouraged from competing. Ultimately this means that the proceeds of mining are less likely to be dumped
on the market because they will accrue to long-term believers in the platform.

Mining Algorithm

The mining algorithm adopted by Steem requires the miner to have access to the private key of the account that will receive the rewards. This requirement has several important consequences. First it encourages optimization of elliptic curve signature verification algorithms needed by Steem. Second it makes it challenging to set up mining pools because the pool operator would have to share control over the reward with all of the “anonymous” miners. Third, it makes it difficult to use botnets because the botnet operator would have to distribute their private key to all compromised machines.
The following pseudocode describes how the proof-of-work hash value is calculated:

Let H = Head Block ID
Let H2 = SHA256(H+NONCE)
Let PRI = Producer Private Key
Let PUB = Producer Public Key
Let S = SIGN(PRI, SHA256( H ) )
Let K = RECOVER_PUBLIC_KEY( H2, S )
Let POW = SHA256( K )

Conclusion: