Steem Basics For Investors: Inflation and Rewards

Steem is an Inflationary Proof-of-Stake Blockchain System. What this means is that the blockchain continually prints more Steem tokens and uses them to reward holders of existing tokens who commit to holding them for a certain period of time. ("Staking.") Steem currently requires this commitment to be a total of thirteen weeks: an unstaking process returns 1/13 of the amount unstaked each week until the entire value is returned.

^{Steem's current annual inflation rate is 8.766%.}

A feature of any Proof-of-Stake system is that unstaked coins subsidize returns for staked coins. Inflation applies to all coins, but rewards are given only to those that are staked. Unstaked coins are continually losing value to inflation, while staked coins not only get their own inflation balanced out by rewards, they get the unstaked coins' share of the inflation as well.

Currently 33.5% of existing Steem are unstaked, boosting the value of rewards for staked coins substantially above the inflation rate.

Steem's unique voting system, which we'll talk about more in a later post, provides a second version of this benefit, as the system distributes a large majority of the rewards to active users. Only 10% of rewards are allocated across all staked accounts.

Currently 15.9% of Steem are staked but inactive, once again boosting the value of rewards for active accounts.

This allows active accounts to achieve a significant return above the inflation rate. The below chart shows the current average rewards for each category, both raw and adjusted for inflation. (Basic includes all Steem, Staked is all Steem staked, and Active is all staked Steem that participates in voting rewards. So each category includes the ones beneath it.)

Type	Effective Rates	Inflation-Adjusted Return
Basic	8.77%	0
Staked	13.18%	4.06%
Active	17.32%	7.86%

These factors make Steem an exceptionally fertile ground for entrepreneurship, and for investing in new businesses.

So what's the catch?

There are two catches. The first is that achieving the average return requires dedicated conscious activity, growing as the size of the stake increases. So the larger the investment, the larger time commitment someone must be prepared to make. This makes passive investment in Steem itself suboptimal, but businesses built on Steem are fundamentally active, so investing in them is a good way to achieve average or above-average returns even before accounting for the added value of the business activity.

The second catch is that the price of Steem is not currently controlled primarily by its supply. While active staking accounts do quite well in a Steem context, the exterior market for Steem remains tied to the value of other cryptocurrencies. So the value of Steem depends primarily on the value of Bitcoin. This is not a feature of the Steem system, it is a characteristic of market sentiment. In the long term at some point Steem should have a valuation of its own, but right now buying and holding Steem exposes the investor to the risks and rewards of the general cryptocurrency market. Investors should be aware that as far as the current markets are concerned, they're investing in cryptocurrency first, and Steem second.

That said, the advantages of Steem's staking system make it a more attractive home for active projects than any other cryptocurrency. While holding Bitcoin simply exposes you to the price of Bitcoin, actively staking Steem will earn you more Steem, in some cases with surprisingly friendly risk profiles within Steem itself. If the risk profile of cryptocurrency itself does not discourage you, Steem will feature many excellent opportunities. And if you see buying cryptocurrencies as a great opportunity, Steem will allow you to put your money to work while still keeping it within the general cryptocurrency market, compounding any returns that may come from holding cryptocurrency in general.

Thank you for reading.

@forinvestors is a project to build an information portal for Steem entrepreneurs and for investors looking for startup projects to invest in. We believe that Steem offers exceptionally fertile ground for blockchain startups, and are working to communicate that more clearly. We appreciate your interest.

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