A lot of things in Crypto land are Ponzi’s, Pyramids, Speculative Bubbles or Pumps and Dumps. Those that aren’t are often accused of being Ponzi’s, Pyramids, Speculative Bubbles or Pumps and Dumps. Ponzi’s and Pyramids are very similar and can be assessed together. Speculative Bubbles and Pumps and Dumps can also be considered together which in the interests of space I will do in Part 2 along with considerations for the future.
So in Part 1 let’s look at Ponzi’s and Pyramids and evaluate steemit.com in relation to them.
The Ponzi scheme is named after Charles Ponzi who scammed so much money in 1919 and 1920 that he was the first to become widely known throughout the United States.
A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors.
These schemes usually collapse on themselves when the new investments stop.
A pyramid scheme is an illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, or so-called returns, given to the earlier investors/recruits above them.
A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system.
For both schemes, however, eventually there isn't enough money to go around and the schemes unravel.
http://www.investopedia.com/terms/p/ponzischeme.asp#ixzz4A8na4su9
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Initial investment
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First up regarding Ponzi’s and Pyramid’s. Steemit.com is disqualified in that it does not require an initial investment from its users, in fact it gives them a small quantity of Steem Power to get started. The platform can continue to function in its growth stages without major upfront investment from many new entrants. The few that are investing are creating sufficient buying pressure for Steem to maintain a reasonable price and market capitalization.
Steem Power operates in such a way that prevents Steem being cashed out immediately, allowing those exiting to dump the price and market capitalization of Steem. This is an excellently devised protective measure to limit short term manipulations. Steem Dollars are devised to also further protect and safeguard those who remain invested in the platform.
The rewards/returns remain at 10% of market capitalization. If the market cap drops, there are less rewards that can be cashed out. Buying pressure will increase because, in order to receive a better share of the now more limited rewards, individuals will need to cash out less and reinvest more into Steem Power. This will cause the price of Steem and its market capitalization to rise due to greater buying pressure.
This rewards-to-market-capitalization ratio has a stabilizing effect by balancing supply and demand and evening things out over time.
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Returns
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Unlike Ponzi’s and Pyramids 50% of steemit.com returns are based on popularity (and hopefully quality) of content submitted. Only 50% of returns are based on investment to increase voting power and this is not a given. Voting rewards are dependent on how effective the “investor” is in voting up good content early. New entrants to the platform can experiment with their voting prowess before investing in Steam Power or, decide never to invest and just let it accumulate slowly.
Other returns are not monetized and are in the form of socializing, reading, writing and possibly broadening ones knowledge, understanding and perceptions.
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Risk
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Risk is set at the level you want it to be:
- it can be as little as the time you spend on the site, reading and
voting for content, - you can risk more time by writing and posting content an commenting
on posts - you can invest in Steem Power to increase you potential curation
rewards - you could go full out and speculate on the price of Steem on
exchanges
In short risk is variable and determined by your own risk appetite.
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Acquiring new investors
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Steemit.com like any social media platform does need new entrants to grow and it’s up to each person to decide if the platform offers enough in monetized and non-monetized returns to grow.
Steemit.com’s value proposition is unique in the market today and it has first mover advantage.
Once steemit.com has grown beyond a certain tipping point the importance of a steady flow of new recruits will significantly diminish. More on this later in Part 2 under future considerations.
The new entrants are not required to pay the old entrants but just to ensure there is enough of a buyers’ market for Steem to prevent the market capitalization dwindling down to zero.
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Conclusion
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On the basis of the four points above it is safe to say that steemit.com is not a classic Ponzi or a Pyramid Scheme. I offers reasonable returns that match initial investments and efforts. Risk level is up to the investor and requirements for new recruits for growth are normal for any venture in the social media space.
Thanks, @gavvet, this is a well-thought-out and detailed analysis, which does a good job of introducing the relevant issues, and then addressing them and how they apply to Steem. Fwiw, my (somewhat simpler) analysis is as follows:
I would say it can be quickly ruled that Steem is not a Ponzi scheme, since a fundamental characteristic of all Ponzi schemes is that no value creation takes place; the entire system merely moves existing value around (in other words, there's no independently desirable product or service that brings users/victims into the network). The same is true of pyramid scams.
This is what differentiates pyramid scams from MLM (multi-level marketing) businesses such as Pampered Chef, Young Living, etc. A legitimate MLM business has an independently desirable product. Some MLM businesses are scams, and the way to detect these is to determine whether the product is actually independently desirable, or the product is simply a prop intended to legitimize the pyramid scam. Making this determination isn't always easy, but a quantifiable heuristic is to measure whether new participants are attracted primarily by the valuable product, or whether they're attracted primarily by the opportunity to make money.
Steem has an independently valuable service, which is content hosting and curation. Moreover, users are primarily attracted to the platform by the content, not the opportunity to make money (most people wouldn't attempt to use Steem to make money if they themselves didn't enjoy viewing its content). It's even nicely formatted! Thus Steem is neither a Ponzi nor a pyramid scam.
You answered it best.
I see your point, mine does seem a bit "overcooked" by comparison.
yep, that's exactly how they make the distinction.
If MLM (which I did in my younger days. Both 'boots on the ground' and online in the 'AOL days') would adapt the blockchain into their business modal, they would have something.
Thank you @modprobe That was a really nice post.
There is still a chance though that the Steem currency can get hit hard and go to zero (or close to zero) but I imagine that the company would come up with a creative way to offset that for members.
Like anything there are always risks but thankfully people can get involved on Steemit without investing any money. I actually like the format on Steemit more than Facebook!
I love your posts. Getting better and better. Keep up the great work!
This format is new to me, I usually write more technical stuff. I'm sure i need to lightlen up the delivery more
Great article and very well laid out. But I still had to put this meme on:
Steem may not be a Ponzi in the strict sense, however...
Steem distributes wealth without acquiring any. I really don't see how this can work out in the long run. When on July 4th 2 million SBDs have been distributed and everybody tries to cash out the whole scheme will simply collapse. In order to pay out the rewards, there must be demand for STEEM, and there's really no reason to buy any. The only reason I can image is to increase your voting power, and voting power is mostly good for generating income. And that's a point where we're suddenly VERY close to a Ponzi.
This, exactly.
So the reason to purchase steem is to have voting power and and if you are a creator you bet against other creators that you will get more than you put in.
Are there any other reasons? Maybe future reasons ? Why would anyone buy steem other than speculative investment.
I found the reason - to keep ability to vote and write comments:
If the user does not earn or buy enough Steem Power, then their Steem Power will gradually decrease (as a fraction of all the Steem Power existing within the system) and eventually (even if it takes waiting until market saturation of the platform) they will no longer be able to use the platform (as in post, comment, vote, transfer money, or anything other than only read the content on the platform). So to continue using the platform, they must maintain a sufficient fraction of their Steem Power holdings. Fortunately using the platform at its most basic level without terribly restrictive bandwidth quota limits does not require the user to hold a very large amount of Steem Power in dollar terms. Nevertheless, they do need to continue to maintain at least that minimum amount of Steem Power to be able to reasonably use the system, which means that if the user cannot earn (e.g. through content and curation rewards) that minimum amount to counteract the less than 5% per year effective tax on their Steem Power and thus maintain economic status quo, they will need to buy more STEEM (and power up) every year. This effectively amounts to a subscription fee to use the platform. And that is the reason why the platform could theoretically continue to operate indefinitely even after reaching market saturation. Now whether it actually does so or not depends on many factors, but I think the most critical of those factors is whether people would be willing to pay that effective subscription fee (in the form of a less than 5% wealth tax on their Steem Power) to continue using the platform.
https://steemit.com/steem/@arhag/where-does-the-money-come-from-a-look-into-the-economics-of-steem
It's a trade-off between using another site like Reddit and seeing Ads OR using this site and buying Steem Power.
Pyramid scheme you mean? No because we don't have to buy Steem so it's not a pyramid. Ponzi scheme is not exactly the same as a pyramid scheme but I know only that it is not a pyramid scheme.
Upvoted for quality of presentation but in these discussions it is easy to get too caught up in technical and legal details and lose sight of the bigger picture. It is pretty clear that some MLM companies are actually pyramid schemes that make sure to have the minimal degree of product offering they need to escape being illegal pyramid schemes.
I'll never forget my friends dad trying to sell me cleaning products, he used to be an architect , it was embarrassing
Been there, know the feeling!
The real deal
I am really conflicted. It all makes sense mathematically and economically, but on the other hand my bullshit meter is saying "everyone is making a profit, that sounds too good to be true".
I vote NO
https://steemit.com/introduceyourself/@charles-ponzi/charles-ponzi-businessman-and-con-artist-is-now-on-steemit
Charles P.