Ponzi Scheme, Gift Economy, or Something Else Again?
After initially being very enthusiastic about the Steemit platform, I began to doubt whether it could be sustainable. I therefore began to listen to criticisms of the platform and to think at length about those criticisms. One persistent criticism I came across was that Steemit was nothing but a Ponzi scheme that would eventually collapse. The most prominent critic who has made this claim seems to be one Tone Vays, but I came across others. I also listened to counter arguments from pro-Steemit people, and I also listened to a lot of video clips featuring Dan Larimer (the site creator). I wanted to share some key thoughts that occurred to me along the way, and my resulting conclusions, with people here.
Please note that my technical knowledge of the Steem blockchain is next to zero, although I have been making an effort to learn the basic concepts of blockchains. My assumption is that the Steem blockchain is technically sound. I suppose this assumption becomes more reasonable as time goes by - if there was anything wrong with the technology then I presume that it would have been discovered and exposed by now. I am not qualified to assess the underlying technology, I am concerned here entirely with the question of whether the concept of a reward system such as this is sustainable.
PONZI SCHEME?
The first obvious problem with the claim that Steemit is a Ponzi scheme is the fact that Steemit is not primarily an investment scheme, it is a perfectly functional social media website. Unlike most existing social media sites however, Steemit also offers rewards and encourages participants to reward each other financially. Some people may choose to see it as an investment opportunity because it uses the Steem crypto currency, but this is in fact just one feature, not the primary purpose of the website. People are also not being encouraged to join with the promise of high interest returns.
Of course from the point of view of a crypto-currency investor, it's not so difficult to see how the platform could appear to be a Ponzi scheme. This impression could be being fueled by the fact that currently an awful lot of content on Steemit (particularly among the most read/trending posts) is concerned simply with how to make money on Steemit. I also have seen a lot of posts where the writer is concerned about this situation and so it is well recognized as a problem, and many people seem to be thinking about how to address this.
Obviously a social media site where the participants are solely concerned with making money from the site would be pointless and consequently would eventually collapse. However I think this is just a phase in the evolution of the site's usage, that the site will move beyond once more people have joined and started posting a more diverse range of content. It is also noticeable that many people are posting other types of content as well, it's just that so far more of the most popular posts tend to be concerned with the financial opportunities. It may also be the case that the underlying technology will be used increasingly in other websites.
Another of Tone Vays's issues is with the fact that he thinks most of the "Steem power" is currently held by a relatively small number of individuals (known as "whales") - adding further fuel to the Ponzi scheme claim. The idea I suppose is that these people are drawing people into the site with the intention of cashing in once they have attracted enough capital. Even if they did though, the site would presumably still be there as a social media site and I cannot see why it would not continue to exist.
Even if the Steemit site folded, as I understand it the underlying blockchain would still be there and others could build websites to replace the Steemit website - all the content that people had posted so far would still be on the blockchain (the underlying database). This is assuming that all the people who are maintaining the blockchain (as I understand it they are called the "witnesses"), are not all participating in the "scam". As I understand it the number of these people is growing however, and users can vote for people who they trust to join their numbers as well, a fact that seems to be at odds with the claim that the site is a scam.
By comparison, if existing social media sites suffer financial collapse, there is no guarantee that all the users' content will not be lost. Furthermore, if you compare the financial situation with the situation at other social media sites where individuals like Mark Zuckerberg are the net beneficiaries from a huge percentage of the wealth that their sites attract, then in fact presumably the gains from Steemit's growing popularity are already a lot more spread out than they are at those sites.
Tone Vays also took issue with the fact that established media operators such as Jeff Berwick (the Dollar Vigilante) have been apparently rewarded with unrealistically large payouts for simple posts. Jeff Berwick received a payout of almost $15,000 for his first short post, which was little more than an announcement of his presence at the site really, and was enthusiastically telling the world about this financial gain.
However after I thought about this for a while it dawned on me that in fact it was perfectly logical that this should be happening. For Steemit to grow as a social media site it must attract these big established players from the other social media sites. Of course the insinuation is that a very false impression is being created, that the virtual streets of Steemit are paved with gold. However, as long as nobody is making the claim that you will be CERTAIN to receive financial rewards no matter how worthless your posts are, then I really don't see the problem. Crucially, quite unlike in a Ponzi scheme, Jeff Berwick did not have to put any money into the system initially to receive this generous gift of approx. $15,000.
GIFT ECONOMY?
The first alternative explanation that I came across of how the platform can function in a sustainable way was that Steemit could function as a "gift economy". In a gift economy, most people would be putting money into the system just simply in order to reward others who produced good content, in other words they would be doing so in an altruistic spirit.
This is an attractive and interesting way of looking at it, but I had nagging doubts. For one thing, as I already mentioned, a good many of the people currently joining the site seemed to be doing so with the hope of making financial gains. Call me Mr. Cynical, but somehow this gift economy concept just didn't square too well with my experience of how most people behave in the real world, and it didn't seem to square well with the behaviour of those who had so far joined the platform either. Certainly many people at least were joining with the hope of making financial rewards, as far as I could tell.
SOMETHING ELSE AGAIN
Having rejected the first two theories of how the platform's use will evolve, a third more complicated possibility began to take shape in my mind that involved multiple factors.
Some people I am sure will be motivated by an altruistic desire to give, this will be one factor. We can be sure of this because people actively do donate to content providers via paypal donations and Patreon, Hatreon etc. currently elsewhere on blogs and other sites. What's more, the Steemit system makes it much easier for people to donate - it's a simple point and click, no need to keep entering account details at different websites. However I think the donation aspect will just be one smaller factor in the functioning of the site's economy, alongside other larger factors as follows.
As I mentioned already, the Steemit platform is a totally viable social media site, it has value to people simply as a platform that they can communicate on, have fun on, just like other existing social media sites. One huge advantage that it has OVER existing social media sites however is that it is built on blockchain technology that is (as I understand it) virtually impossible to censor. This gives the site a huge advantage over existing centralized social media sites which are all extremely vulnerable to state interference - a stark reality that is increasingly becoming a very serious problem in Europe and elsewhere. Perhaps even the majority of ordinary users will be neither financial givers or receivers, they will be simply using the site mostly as a free, uncensored social media platform.
Governments will probably become hostile to the platform as soon as they become aware of this aspect, but by then the platform may be too well established and have too much popularity and momentum for them to succeed in shutting it down (although I am sure they will want to try). Another thing that became clear from listening to Dan Larimer explaining his thinking, is that he wants the world to move beyond the current heavy dominance of big government, towards a more voluntary society. Understanding this motivation has greatly increased my own interest not just in this site but in other projects that he is working on as well.
Add to these strong points the fact that there is a potential for financial reward as well, then you have I believe got a social media platform with a very strong pull factor. Of course for some time the crypto currency may increase in value, and this will probably compound the phenomenon I mentioned above where many early joiners will be drawn to the platform with the hope of making a fast buck, but I think this phase will eventually be followed by a very exciting phase where the platform starts to go mainstream.
Some of these early joiners will probably invest their own savings into the system in order to buy influence, another factor that will cause the crypto currency to rise further in value. I am also sure there will be volatility in the currency value as well, and many of these people will probably lose some of those savings - in every economy there are winners and losers. Eventually the currency will probably stabilize I suppose though, at which point a more settled and sustainable situation will emerge. As it goes mainstream, no doubt corporations will start wanting to use the platform to advertise their products and they may I suppose also invest money into the platform to buy influence.
As the usage of the site evolves, I suspect that wealth transfers from mere speculators and poor quality content providers to those who are genuinely providing valuable content will occur. Thus, even those who do lose money will have the consolation that their money has gone to a good cause - the promotion of the best content. This aspect could perhaps be seen as a little bit similar to national lotteries which raise money for charity, many people buy the tickets hoping to win big, but at least when they don't win they know their money has gone to a good cause. In summary this aspect of the platform then could be seen as a sort of game, not gambling exactly but something else again. Of course people should never invest money that they can't afford to lose - the golden rule of investing.
Putting all these factors together, I can see how after an initial volatile period, usage of the platform could very well eventually settle into a sustainable economic model.
CONCLUSION
I believe that Tone Vays's and others' criticisms are born out of sincere but misguided concerns. I do not believe that Steemit is a Ponzi scheme in any sense at all, in fact I think that the claim is a gross misrepresentation of the platform. I believe that Steemit is in fact a completely revolutionary type of social media site that I believe will have a huge impact on the way people communicate on the internet. I believe that Dan Larimer is in fact not at all the scam artist that Tone Vays and others have claimed, but a visionary technology creator and thinker. After this period of reflection I am therefore returning to the platform with revitalized enthusiasm.
DISCLAIMER - This article should not be regarded in any way as investment advice. Rather this is simply the view of an end user who is trying to gain an understanding of the nature of the platform and is thinking hard about how the usage of the platform will probably evolve over time. Gaining such an understanding is vital if we are to invest a significant amount of our time into creating content at the site, because of course our time is so very valuable to us. I hope this article has provided some insight that will help others to decide whether to invest their own time in creating content on the platform.