STEEM #1 Dilution of STEEM & How to Break Even

in #steem-help5 years ago

First a quick note: I do not take into account fluctuation in the trading value of STEEM to any external currency. Although this value will have great impact on your investment in STEEM, it does not have any effect on the internal functions I am about to describe. As long as all rewarded SBD is converted into SP without considerable delay.


01 Thumbnail - Dilution of STEEM.jpg

New STEEM tokens are created every year, and this have a diminishing effect on the STEEM tokens value. This post will show you how to compensate for this continuous loss in value. Since I will include some basic information, please define yourself among the following three categories in order to skip to a suited segment:

  • You are new to Steem/Steemit, want to know what is required, but not interested in why; skip to CONCLUSION

  • You know the basic, and wish to see the numbers; skip to “THE MATH

  • You are new to Steem/Steemit, want to know what is required, and the reasons why; continue reading.



THE BASIC
One of the first things you will notice after signing up a Steem-account is its three currencies and tokens; STEEM, STEEM POWER (SP) and STEEM BACKED DOLLAR (SBD). I will not go into details explaining these. There is plenty of good descriptions around already. If you are here to stay a while (3 months or more), the quick answer on what to stack is SP. In addition to giving your votes more value, it also help reducing losses due to the continuous dilution of STEEM.

The amount of STEEM available is steadily being increased by the creation of new blocks on the blockchain. The creation of this new STEEM is the reason we can give away free $-rewards by simply voting. Well, this is not completely true. We do pay for it through the dilution of STEEM.

If you’ve already tried to search for this information, or even read the Steem Whitepaper you might have read that the STEEM supply is doubled every year. I did, and it freaked me out a little bit.



“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.” - Steem Whitepaper, page 8



This would mean that, if no new outside investments was made to STEEM for a year, the value of STEEM would drop to half its initial value over one year. This was true until Hardfork 16. After Hardfork 16 the dilution rate was reduced to 9,5%. (Scources: Hardfork 16 Notes & Steemitblog’s Review)



  • Inflate at 9.5% APR narrowing to 0.95% APR by 0.01% every 250,000 blocks (Roughly 0.5% per year).
  • Witnesses receive 10% of inflation
  • 75% of inflation goes to authors and curators
  • 15% of inflation is allocated to Steem Power
    Source: Steemitblog’s Review


Hardfork 16 was released 9 months ago, on this very day. Therefore, today (the posting date of this article) the inflation rate should be approximately 9.13%. I do not know if the current inflation rate is available somewhere. If it is, I wouldn’t be surprised if it is hiding on this page, which I have mentioned in this series introduction post.



H2 Horrizon 1.jpg



THE MATH
Now you know the magic number. As the total STEEM and SP supplies is increased by a rae of 9,13% per year, also you must increase your stock of STEEM and SP by the rate of 9.13% per year - only to break even. Otherwise you will lose some of your marked share.

You may have read that there is an interest on SP, and therefore you are safe if you convert everything to SP. While converting to SP reduces the loss, it only covers a small portion of it.

INFLATION POOL SPLITRATE
Annual Inflation Rate (August 6th 2017)9.130%
SP Holders(15%)1.369%
Witnesses(10%)N/A
Author & Curation Rewards(75%)N/A

Table 1: Showing the distribution rates of the inflation pool.

I must assume all witnesses already is aware of the content in this article. Therefore, I will not address the possible income from that slice of the pool. It would also depend on how many blocks they “witnessed”.

By Powering Up your STEEM to SP you gain a 1.369% passive “interest”. In other words, you slow down the dilution of your STEEM from 9.13% to 7.756%. The remaining dilution you must cover through author and curation rewards.

How much each one of you will earn on your own posts is impossible for me to speculate on. Therefore, I will focus on how many votes you will have to send out to cover the remaining dilution loss.

Based on observing my own upvotes this is the percent return of my own vote value for the different voting scenarios:

  • An early upvote on a moderately popular post: 30-50% return
  • A late upvote on a popular post: 10%
  • Only upvoter on a comment: 25%

During a day, I would say I may get the following distribution ratio of votes: 2 early upvotes, the equivalent of 1 full upvote on comments (I do many smaller upvotes), and 2 late upvotes. The average return of all my votes in this case is 25%. In the further calculations, I will therefor use 25% return per vote. Your return may differ some.



H2 Horrizon 3.jpg



Now let’s imagine an account with 6 500SP. 7.756% of 6 500SP gives 504.156SP worth of loss to dilution per year, which equals 1.381SP per day. A 100% upvote from this account would be worth 1 SBD. 1 SBD at this moment equal 0.777SP (1 STEEM=1.27$, 1 SBD=0.9787$). 25% of one vote is then 0.194SP – the account-owners return per full upvote on average.

1.381SP/0.194SP=7,1 votes per day to break even

If you were a robot you could cast 10 evenly distributed 100% up-votes per 24 hours sustainably. As a human sleeping 8 hour, and voting evenly over the 16 wake hours, the 7,1 votes per day is possible to do sustainable. However, just barely. When you are less efficient then this you will fall below the required limit.

For comparison; if you were to upvote your own post, this is how many votes you would need:

1.381SP/0.777SP=1,78 self-upvotes per day to break even

If you were to post 1 article per day, and self-upvote it, then you only would have to cast 3,1 additional votes to break even. This is what you would need to do to break even if you received 0 upvotes from other people, which is unrealistic.

In table 2; “DAILY DILUTION” show how much you must earn on author and curation rewards combined on average per day to overcome the dilution losses.

STEEM POWERDAILY DILUTIONONE 100% VOTEDAILY UPVOTES REQ.
1000.021SP0.012SP7.1
5000.106SP0.060SP7.1
1 0000.213SP0.120SP7.1
6 5001.381SP0.777SP7.1
10 0002.125SP1.195SP7.1

Table 2: Examples of account size. There is a linear correlation - you can stipulate the daily dilution for your own account using the examples. Or you can ask me to make the calculations for your account in the comments below.



H2 Horrizon 4.jpg



CONCLUSION
To compensate for the 9.13% annual dilution of STEEM and SP, my suggestion for new members would be to convert your STEEM and SBD to SP. Make one post per day and self-upvote it. Then make the equivalent of 3-4 100% upvotes to other posts or comments daily. By doing this you would be “guaranteed” to cover the dilution loss. Any upvotes your posts or comments get in addition to this will increase your net profit.

When your posts or comments start earning enough rewards from other upvotes, this will likely more than cover the dilution losses. You may then want to consider spending your votes differently. See the pre-calculated daily requirements in table 2 above for an indication of where your limit is, or ask me in the comments.

You can also choose to ignore the losses entirely and focus on making good posts. When they start to catch on, your previous losses will be eaten up quickly. This is especially if you have not invested large amount of external currencies into STEEM. If you have made big investments, I urge you to read and understand what is written above. You cannot stack everything into SP and leave the account inactive, without losing some of your market share in STEEM.

This post grew longer than ever intended. Still I hope some of you found it useful. Feel free to share your thoughts and comment below.

Thank you for stopping by!



Best regards,
warjar


STEEM SERIES
This is a series I will use to present and discuss features of the STEEM system and its future. Please feel free to make you own contributions in the comments below.

I will do my best to update the information in these posts to keep up with future changes.

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Absolutely a good article with many enlighting points. Personally, I don't think the inflation is such a big issue. The fact that the quantity of a coin rises over time, doesn't necessarily mean it's value decreases. If you look at the current growth rate of Steemit as a community, and we assume the devs will manage the backbone of the platform to keep things working smoothly, the inflation rate is countered and more than compensated by growth.

Therefore, in case the growth continues, your Steem or SP will increase in value over time, not 1 single post or upvote necessary.

But please do continue to write interesting articles, I'm not here to stack your wallet, I upvote your post because I genuinely like the content.

Thank you for taking the time to reply @fitzgibbon! I highly appreciate your response and pointing these factors.

I don's see the inflation as a issue. In face I see it as an necessity! If the inflation was set to zero, there would be no "free" SBD/SP for voting. The whole STEEM community would run a high chance of collapsing. I'm sorry if I gave a different impression in the article.

It was already becoming longer then I wanted, so I held back on some factors to not bloat it. Since you point it out I will address some of them here:

In the very top of the article I tried to put aside the STEEM to USD value of the token, to put more focus on the dilution effect. The daily fluctuation in STEEMs USD value we see today easily outperforms the dilution factor. If the STEEM to USD value remained unchanged over a year - that would mean that you had a stream of new investors, just big enough to cover the dilution + the "interrest" you got over that year. Meaning you have made a profit if you cash out. Even if you have made a profit you still lost "market share" in this case. If I started bringing this into the article. I think it would become too confussing. So I simplified.

At some point in the future the current level of dilution could become an issue, when the available new investors is running out. What I showed in one of the references, but did not really talk about is that the dilution will gradually be reduced to 0.95% over time. With this change I think the developers acted on that very concern.

My main goal for this post was to raise awareness, put a number on the dilution and show what is needed to over come it. Before I researched it, I know I had a wildly flawed understanding of it.

My no. 1 advice is what I mentioned last; ignore the dilution because it's neglectable and focus on making good posts. But just saying that would not help much conveying an understanding of the dilution of STEEM.



There...now I can say I've made 2 posts today, right? =)

All in all it sounds like we have a similar mindset on all the points you brought up.



Thanks again for pointing this out!

Yes, you have made two posts now! I really appreciate that you reply so fast, that's amazing commitment and engagement. Keep it going! I upvoted it, but I'm a really small minnow and I upvote too much, so the payout won't be much...

I thought you would have replied in one or two days in a new post, because you really seem to have a good grasp on things and you can write and explain very well the intricacies of Steemit, even though it's sometimes a bit of a long read. I sometimes have the feeling I don't understand 80% of what is going on on this platform, so you are a beacon of light!

Your kind words are humbling!

I too have most yet to learn. I start out at 0% and sometimes it goes up, other times it goes back down. I learn about the times it went down, at the times it goes up. Usually those times occur when spending some time to dig around.

Regarding your upvote, I think you said it best:
"...I'm not here to stack your wallet, I upvote your post because I genuinely like the content"

Those are my most favored upvotes!

nice article. and nice addition.
following

Wow! That's a dense article! I'll have to bookmark it and read it again to make sure I understand it well.
What I do not get is this - "By Powering Up your STEEM to SP you gain a 1.369% passive “interest”.". What do you mean? How do you get it?

Hi @gmt117!

Your question made me think of one factor I may have entirely over looked, that could affect the "interest rate". The factor is the SP:STEEM-ratio of the communitys' collective holdings. The mentioned 1.369% is a minimum at a ratio of 1:0. I'm now thinking the "interest" may be higher. I will do some research and make an update/post about my findings.

THANK YOU gmt117! Questions is the best kickstarters for the brain!

But first I will answer your question:

All newly created STEEM goes into one pool. This pool is distributed like shown in Tabel 1. 15% of the pool is divided evenly to everyone holding SP (divided per SP, not per holder).

You may have noticed that your SP is slowly constantly increasing. This is the mentioned "interest". I keep using quotes because it's not the most precise term.

How do you get it? As long as you keep ypur earnings in STEEM POWER you will get it automaticly. And I can see that you do =)

Oh that's cool! I did not notice it at all actually. My SP is quite small and I keep increasing it piece by piece by my activity here, so I did not notice. It's cool!

It's confusing, because in the Wallet under SBD it says that there's 0% APR interest, so it did not even occur to me that there would be any for SP! Getting smarter every day!

Thanks for your article. It's great! I'm looking forward to read more from you! It's very interesting to read more of these kind of articles that go quite into detail how Steem works! 👍👍👍

Yes, I too was confused by the 0% APR in the wallet, while in posts people was talking all kinds of different rates. That was the main reason is decided to dig into this myself. BTW, the wallet is correct about the APR on SBD and STEEM in you savings, but it does not say anything abou the SP rate.

Like I mentioned to you in the first reply, I was going to look into a possible mistake I made. Here's a link to what I did:

STEEM #1 Dilution of STEEM & How to Break Even (INTEREST RATE CORRECTION)

Do you know if delegated Steem also accumulates this interest rate?

It does, and the accumulated interst will add to your SP for voting.

However, the interest is accumulated on the deligated portion. This delegated SP can be pulled back by the owner at any time. When this occurs, the accumulated SP on what was delegated will go with it.

Very interesting article. I invested some of my saving in Steemit so trust me your advices are very important for me. Thank you again.

This post received a 2.3% upvote from @randowhale thanks to @cryptopassion! For more information, click here!

Thank you @cryptopassion! You and my both ;)

Please be aware that I've made a mistake in this post. It is corrected in the follow-up post I just released.

This is a fantastic post and is certainly something that more people need to see. Would you mind letting me know what my break-even point is?

Thank very much @brandonp!

I've used your SP balance to make the calculation below. Your daily dilution to overcome is 1.350SP. It also includes the corrections on the "interest rate". I will explain what I missed in a new post following this reply.

Keep in mind that some of the other values will change with the STEEM value!

SPDD1UPARP1UPDID1UPR
5,3991.350SP0.636SP0.159SP0.280SP6.7

I'm posting the abbreviations here since I'm replying to you before posting the new correction-article.

SP = STEEM POWER | DD = Daily Dilution | 1UP = One 100% upvote worth | ARP1UP = Average Return Per 1UP | DI = Daily Interest | D1UPR = Daily 1UP Required. – “1UP” being a name-suggestion I once read @jerrybanfield made. I think it was a good suggestion.

Thanks @warjar! So basically if I understand you correctly, I need to make at least 1.350SP per day to keep up with inflation?

Thats right, brandon. And since you stack SP, 0.280SP of that is already covered passivly.

So if I'm understanding this correctly, I need to "actively" earn 1.07SP via posting and curation rewards per day to beat out inflation? Very very good to know.

@warjar this is gold thank you very much for sharing!

Hi @jerrybanfield. Glad to see your comment here as I have a question for you regarding this. Matter of fact I ended up here after watching your 2% video every 5 days that you posted. I noticed that your voting power at the time at 100% on 6/26 time frame with $80k in value generated a $32 100% vote, but now it looks like your vote is worth just over $8 with right around the same amount in SP? All of this dilution and change in voting has me really confused! If your vote is truly worth 4x less, what is the issue here and what happened since the end of June until now? Thank you. If I have calculated things wrong, I apologize for wasting any time. I would love to understand this better though.

Thank you Jerry!

Great analysis. I hadn't taken into account the dilution when calculating ROI.

Thank you @financialcritic!

Please check back later. I'm making an update (follow-up post) on a possible mistake that I mentioned in the reply to @gmt117.

Wow! Never had this in mind. 7.1% upvotes it is!

Sorry for not making it more clear. It's not 7.1% voting power. It means you have to make 7.1 votes at 100% power per 24h hours, to make up for the dilution rate. (if you assume getting 25% of you vote value back that is). I presented it like this to quantify the amount of work/activity is required to counter the dilution rate.

As I replied to fitzgibbon, you best bet in the long term would probably be to focus on making good posts and voting on good content. Thant will strengthen the STEEM value and come back to you as a STEEM/SP holder with even greater return.

And I know for a fact that is what you are already doing Mark!

Thanks for stopping by again!

Awesome break down on this. I will resteem it because I think more new members need to see this.

Also this reminds me I need to start writing articles again. haha

Please do! Heading over to check your blog right now.

Waow! Thank you @joeyknowsbest!

Amazing and nice post ,i like ;)

Thank you @atta09! Much appreciated!

Hehe , thabk you too @warjar

Thank you for this info! I had noticed interest rates on SP seem much lower than what people seemed to be getting in the past! so activity is key. upvoted

Thank you @madstacks! Glad you found it interesting!

wow beautifull post and good information

Thank you @anikearn!

wellcome

Interesting read thankyou.

Thank you for taking the time @coindevil!

good article very interesting

Thanks for explaining this. Due to the complicated stuff behind the curtain, I never fail to learn something new.

Cheers!

Thank you @sjennon!

Appreciate you taking the time to stop by, read and leave a comment!

Super explanation and most appreciated. I'm a newbie and save steem related posts I feel are important to me learning more and functioning here on steem.

Your post is a DEFINITE save. Thanks

You honor me. Thank you @stuntworksinc!

Very nice! I knew inflation was at roughly 10%, but had no real detailed knowledge like what you present here.

Thank you @fisch!

I overlook a factor on the interest rate. I've corrected it here:

STEEM #1 Dilution of STEEM & How to Break Even (INTEREST RATE CORRECTION)

Excellent job @warjar, thank you so much! I found your post via @jerrybanfield resteem and I think that you have a very good point here, the inflation is necessary for Steemit to function and somethink to calculate with. I don´t think that it is a big problem for most, if you are reasonably active the inflation should be countered nicely.

Thank you very much @almvide!

I think you are spot on about your comforting message to reasonably active members.

THanks for the article. I love being able to follow the math instead of just reading someone's personal viewpoints.

Thank you @realestatecoach!

Couldn’t agree more. I do not want anyone to be convinced by ME. My arguments are what should do the talking.

Very good information! I jumped to conclusion I admit :P I will keep all that in mind, actually I've changed my posts to 100% power up o_o to see what happens in short time =)

Thank you @fabiyamada!

That's aslo an interesting topic. Wheather to go 100% power up, or 50/50 on posts for then trading the SBD for STEEM in the market, which you would power up. I think going 100% PU would be similar to using the convert to STEEM, option in stead of trading on the open market.

Which one is more lucurative, may be affected by wheather the market trend is going up or down. Right now I only have speculations. Could be interesting to take a closer look at it one day.

STEEM is a bit more expensive than Steem Dollars
That would mean losing :(
I think it's usually like that

Going 50/50 doesn't mean you will get equal amounts of SBD and SP. You will get equivalent values. If you take a closer look at your next reward, or check your wallet history, you will see you are receiving less SP than SBD on those 50/50 payouts. At last these days, when 1 STEEM equals 1.3 to 1.4 SBD.

The values you list in the table is volume, not the unit price. Unfortunately STEEM is not at 10 USD… yet =)

If you expect the STEEM value to drop in the near future, then you would make a profit going 50/50, now and trade the SBD at a low point.

hahahaa it's true xD that's what happens when you do things in a hurry, evrything wrong xD
I had noticed about de 50/50 was not exactly 50/50 now I understand why! thank you!
so
1 STEEM > 1 SBD
I didn't understand this:

If you expect the STEEM value to drop in the near future, then you would make a profit going 50/50, now and trade the SBD at a low point.

my English for trading is not so good x.x; do you mean changing my SBD when Steem is cheaper?

It's universal "law" of all trading: Buy low, sell high.

Yes, buy STEEM for your SBD when the STEEM value is low.

The big question is, when do you think it's at it's lowest? =)

I do not want to give advice on when to buy, as I have only my subjective feelings of the market to base it on.

I'm in it for the long term. Day trading is not something I wish to spend time on.

x_x that's why I rather set my posts to 100% power up XD dealing with trading can give me some headaches :P

What's not clear to me is if Steem is doubled every year, won't that then scare investors away by this dilution? It makes me wonder if this is why the currency is losing value? Of course the US is printing dollars like crazy and the price is holding so I imagine there are many factors.

This post has been ranked within the top 80 most undervalued posts in the second half of Aug 06. We estimate that this post is undervalued by $12.44 as compared to a scenario in which every voter had an equal say.

See the full rankings and details in The Daily Tribune: Aug 06 - Part II. You can also read about some of our methodology, data analysis and technical details in our initial post.

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It is impressive to read this type of content as it helps a lot in learning about the steemit community, I hope to continue learning more about the community through your post