It is fair to say that there is so much to Steemit which is different and difficult for the new users to understand. It is also a fact that a huge number of people now joining Steemit are not familiar with cryptocurrency. In fact, Steemit is fast becoming the gateway to cryptocurrency world for most people. With an expected influx of millions new users this year—reasons mentioned in the post where I explained why 2018 is Steem's year—it is important to help our new users understand the whole Steem powered economy that they are going to be part of on Steemit.

Image created using free online tool Canva.com

Newbies have many questions related to Steemit and there's a lot that needs to be clarified. Here are some common questions about the economics of Steemit.

How does Steemit reward its users?
Where does the money for the rewards come from?
Why does Steemit reward in the first place?
What are Steem, Steem Dollar and Steem Power?
How much money will I get?

There are many confusions regarding Steemit reward structure and with this post, I am trying to remove majority of them. I am sure this post will help current Steemians, and future generations of Steemit users to understand Steemit better and benefit from that understanding.

If you are an absolute beginner on Steemit, checkout this post. If you are old but struggling, this post will solve some or all of your problems. As always, I will be glad to help.

Currencies of Steemit

There are three currencies in your Steemit wallet; Steem, Steem Power and Steem Dollars. Let's see what they are.

STEEM

It is a cryptocurrency token, similar to Bitcoin. Steemit is based on Steem blockchain (like Bitcoin has its own blockchain). Steem token is the cryptocurrency of Steem blockchain. On Steemit, it can be powered up into Steem Power, traded for Steem Dollars, and transferred to other accounts. On exchanges like Bittrex and Poloniex, it can be traded just like any other coin. \

STEEM POWER (SP)

Abbreviated SP, Steem Power is basically, what I prefer to call it, frozen Steem. It is Steem that is vested into the platform and does not remain liquid (immediately trade-able) once vested. It is the standard measurement of how much influence a user has in the Steem network. The more Steem Power a user holds, the more they can influence the value of posts and comments they upvote. The more value their upvote has, the more curation rewards are also earned.

STEEM DOLLAR (SBD)

Steem Dollars is abbreviated SBD (Steem Blockchain Dollar or often called Steem Backed Dollar). It isl liquid, stable-value currency tokens designed to be pegged to $1 USD (but difficult to prevent a breach of the peg). SBD is basically a token value of which is deigned to remain equal to one USD of Steem value (explained later). Steem Dollars can be traded with Steem, and transferred to other accounts for commerce or exchange.

If you want to know more about these currencies, this video by @andrarchy will help you.

https://youtu.be/z-V6HnfbGUA

To study the role of Steem Dollars, this post by @dragosroua will definitely help. Some accounting knowledge may be prerequisite to understand the whole concept. I did not fully understand initially but now I get it after attending a course on financial accounting.

Why Does Steemit Reward Its Users?

Let's talk about Bitcoin. Bitcoin is created and stored by its blockchain. It is created when powerful computers solve complex mathematical problems. The process is called mining and the concept of earning Bitcoin through mining is called Proof of Work.

Image Source: Pixabay

So, mining is work. When this work is done, Bitcoin is created. Let's come to Steem now. Steem is earned through Proof of Brain. There are two ways of earning Steem using your brain, which are briefly mentioned below.

Author Rewards: When you publish a post or a comment and other users upvote it, you earn author rewards.
Curation Rewards: When another author publishes a post or comment and you determine it to be valuable enough to upvote it, you get rewarded a share of the value of your upvote as curation reward.

Creating content and upvoting content based on its quality both are activities done using the brain, hence Proof of Brain. So, Steemit rewards the use of brain (and I personally love the concept!).

Source

Contrary to Bitcoin and other blockchains, which store only the currency they produce, Steem blockchain stores content too. All the content published on Steemit is permanently stored on the blockchain. It is immutable, meaning you cannot delete it from the blockchain, even if you delete it from the website. Whenever you create or upvote content, you actually are doing a transaction on the Steem blockchain and that transaction is permanently stored.

The immutability means total freedom from censorship.
The upvote system means decentralization and power in your hands.
Proof of Brain means you can mine Steem with your brain.

Due to the unique reward system and censorship proof social media platform characteristics, Steemit.com holds an edge to become the world's most attractive social media / micro blogging website. Despite having been around for more than a year, the website is still in beta and improvements are being made frequently.

To answer the "why" part, let me give conclusive answers and move forward to the next part.

Steemit rewards its users to incentivize content creation and curation.
The use of Steem as the incentive currency and token of influence on the website increases its value; thus making multi-million dollars for the founders and share holders of Steemit.
Rewarding users attracts more users to the website, thus making Steemit popular.
Steemit has the potential to cross Reddit and Facebook in popularity and become the face of internet. By incentivizing use of brain and intellectual activity, Steemit is helping itself become great.
Steem is vested (frozen) in the form of Steem Power by users to have more influence (power up) which locks Steem on the platform and decreases available trade-able Steem; causing an increase in value.

These are some of the main reasons I wrote from my perspective. I know you can be a lot more creative so do suggest more uses in the comments. Meanwhile, we move ahead.

It would be useful for you to read Steem's bluepaper.

Where Does Steem Come From?

This is one of the most frequently asked questions. I hope to clarify this matter once and for all. As we know that the cryptocurrency of Steem blockchain is Steem. Where does Steem come from?

Steem is not mined. It was mine-able initially but the mining was stopped by Steemit Inc. All the Steem in circulation or supply is premined except a small percentage which is created annually through inflation (release of new tokens). I know you may be struggling to understand it so far but let me briefly explain where Steem comes from.

The Steem that is already available on exchanges and Steemit is premined. It means that it was created by Steem blockchain and exists already. Total supply of Steem right now is 264,484,907 tokens of Steem at the time of writing. These Steem tokens can be bought from popular exchanges like Bittrex and Poloniex. Steem is traded on these crypto exchanges just like other altcoins.
However, the already existing Steem are not given to Steemit authors and curators. Steemit users are rewarded tokens from Reward Pool which is a result annual inflation. Starting from December 2016, every year a percentage of new Steem tokens are created (a process called inflation) and allotted to the reward pool. Current inflation rate is 9.5 % and an annual decrease of approx 0.5 % is planned annually until the inflation rate drops to just 0.95 % in about 20 years time.
The tokens created via annual inflation are released daily in form of daily reward pool, from which authors and curators are rewarded.

We can deduce two things from the above information. One is that the rewards we get from the reward pool are result of annual inflation. The second thing, and the more prominent one, is that there always will be a reward pool, no matter how small. However, a smaller reward pool would mean less inflation and thus more value per token.

We Get Steem From Inflation But Where Does the SBD Come From?

Steem Dollars are part, and not the whole, of the author payouts for the posts and comments (content). However, curation rewards are paid only in SP. Author payouts is where SBD comes into play and also in the wallet where it is stored after the payout is finalized.

Why is Steem Dollar even on Steemit?
Why not only Steem?
What is the purpose and use of Steem Dollars?
Where does it come from?

Steem's blue paper on Steem.io website pretty much sums up why Steem Dollars were needed on Steemit. Why was SBD needed as a currency on Steemit? Here's the answer.

In order to help bridge the gap between more traditional fiat money systems which mainstream users are used to, and the cryptocurrency tokens which they are awarded through the platform, a new currency called Steem Blockchain Dollars (SBD) was created.

And this part explains the purpose of Steem Dollars.

SBD tokens are designed to be pegged closely to one USD, so that users who receive them can know approximately how much they are worth in “real dollar” terms. SBD tokens also offer a relatively stable currency for users to hold if they are looking to preserve their account value relative to USD.

Steem's technical whitepaper speaks at length about the purpose of introducing SBD on Steemit.

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.

And about creation of Steem Dollars, the Steem whitepapers maintains anonymity.

The blockchain decides how and when to create SBD and who should get it. This keeps the rate of SBD creation stable and removes most avenues of abuse.

We can say that the SBD was created to bring stability to the platform, alongwith giving its users a sense of what USD (due to its popularity) value their content is earning for them because SBD is pegged to 1 USD.

But my understanding is that the quantity of SBD totally depends on price of Steem. If the price rises, value of upvotes rises for everyone, which means that post payouts also increase (the amount with $ sign). Whatever the amount is shown with the $ sign (post/comment rewards), at least 37.5 % of its amount is paid in form of SBDs. So, there is a direct relationship between Steem's price and the number of SBDs created to be paid to authors.

For detailed study, read the Steem technical whitepaper.

Where Does Steem Power Come From?

Steem Power is basically Steem vested in Steem blockchain. It can come from multiple sources but we will restrict our discussion strictly to Steemit.

A quick calculation is needed to clarify rewards distribution briefly. Suppose your post shows $100 reward. Upon payout, you (author) will only get 75 % of it (that too half in SBD and half in SP). Rest of the 25 % is converted to SP and distributed among people who upvoted your post (curators). For $37.5 (half of 75 %), you get exactly 37.5 SBD. The other $37.5 are converted into SP as per current USD price of Steem (you get as SP whatever number of Steem can be bought with 37.5 USD).

The above brief is just for clarification purpose. Details will be shared in a future post within this week (which you can now read here). Back to SP now. On Steemit, you get Steem Power in three ways.

Author Rewards: As explained above, 37.5 % of your author rewards are converted to SP and paid to you.
Curation Rewards: As mentioned earlier, people who upvote (curate) your content get a share out of 25 % of your post payout.
Power Up: Power Up is a process of increasing your influence on the platform by vesting your Steem into the blockchain. Steem can be bought from internal or external exchanges.

You can also get delegated SP but you do not own it. But it definitely increases the value of your vote. I will do a separate post on it too. That's it for the basics of Steemit economy and the working and purpose of Steem blockchain's currencies. I hope you understood all the important aspects of Steemit economy and a basic idea of how the rewards system works.

Conclusion

I can write at length about Steemit economy and its reward system. But I wanted to keep this post limited to the fundamental understanding of the economics deployed on Steemit. It's not a short post though. It's a thoroughly detailed post and I do hope that it was useful for you in understanding Steemit better; especially the currencies and the reward system.

What you wish to do with this post and how much you value it is up to you. As always, I would be interested in knowing your thoughts in the comments below.