Let's assume that there is no crypto-speculation.
One may ask why anyone should buy the token and power up in the first place. Curation? Curators get 0.25*(1-0.1-0.15) = 19% of the total inflation. So, to earn STEEM faster by curating than it is diluted requires that you are much better at curating than the average curator. On average, buying STEEM and powering up in order to curate on Steem would be a losing proposition (if it weren't for irrational crypto speculation). The only way that could keep the external price of STEEM from crashing is for a continuous stream of new wannabe curators to exist who grossly overestimate their ability to curate more effectively than most other curators. Most of those who try curation on Steem as a way to make money will fail which will make them stop, power down and sell their STEEM and some point. The only economically rational buyers are those who accurately estimate their curating ability to be much better than average. You won't find an ever increasing fresh supply of overconfident wannabe curators sufficient in numbers and/or obstinacy to support the price of Steem Power. Even under the most optimistic theoretical scenario, the world would run out of people. The pyramid would come crashing down at some point.
If the crypto winter continues, what will happen before long is that Steemit Inc will run out of money to cover its costs. To continue to cover them it will have to pull away its delegations from the apps, power that SP down and sell the tokens. Then the only apps left will be those that stand on their own financially, that is, are capable of covering their costs and pay for their Steem Power out of their own pockets to be able to have the Resource Credits to claim accounts, empower new users with RC and to reward their users. To do that without sitting on a massive supply of mined SP like Steemit Inc, they will have to have adequate fiat revenue streams in place. Currently the only app like that is SteemMonsters, the true gold standard of a Steem application at the moment.
There is no escaping the fact that without irrational crypto speculation buyers of Steem Power must have reasons to buy it other than outearning other buyers of Steem Power by a very large margin. There will have be some kind of financial benefit in doing so. In fact, the white paper of Steem spells this out by saying that the value proposition of Steem is to become a global advertising and promotion network. Its value proposition is exactly the same as that of every other freemium Internet service out there: advertising and paid promotion made profitable by having eyeballs on the content, be it eyeballs belonging to registered users or people who just consume the content without having an account.
What makes Steem better than its centralized alternatives is the fact that the content producers have full ownership of their content and the openness and adaptability of the platform enabling anyone to develop apps that use it. But there is no way it can survive as an elaborate pyramid scheme for long. Getting people to join Steem is very hard because most people correctly identify it as an elaborate pyramid scheme its current state. But according to the white paper it was never intended to be that. Paid promotion and advertising are an inevitable part of the future of Steem. If too many of the current Steem account holders can't stand ads, then perhaps a good compromise would be to show targeted ads (based on keywords on the page they're reading) only to those users who haven't registered or have registered but have Steem Power below some threshold. That threshold could be adjusted according to the how much support the price needs.
Thanks for such an in-depth response!
I agree with your point that as a curator you are betting on overperforming other curators. What you missed though in your analysis is that the curators must be weighted by their SP. If you factor that in, suddenly it's much much easier for smaller SP holders to overperform the average, because the more SP you have the harder it is to earn more curation.
Regarding your idea with adds - I think it could work. But I would prefer to just base the business model on subscriptions. The incentives would suddenly be much more aligned compared to using any adds system.
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Yes, it's easier for small SP curators have much easier time overperforming the average. But that incentivizes large SP curators to sell, creating selling pressure on the tokens.
A subscription model is one possibility. You could think of buying SP as a kind of subscription fee. One selling point of SP could be not the profit you can make but the fun of having influence over which of the content creators get rewarded and how much.
I think we need every possible incentive to purchase SP. I think commercial promotion should be made as lucrative as possible. That's because witnesses have ongoing costs that need to be covered for the network to even survive. I, for one, would love it if, say, some camera manufacturer bought a load of SP to promote its camera gear in a community of photographers on Steem. They could organize a photography contest and fund the prizes. That would be sure to generate a lot of positive attention and motivate Steemians to creating high quality content, thus increasing the value of the whole network. The camera manufacturer would benefit from increased sales. There is a lot of potential for mutually beneficial interactions with commercial actors like that.
It incentivizes curators to maintain the level of SP which is profitable to them.
Of course people will start powering down at some point, but that doesn't mean they will power down everything. The more SP you have, the more responsibility you get and the short term profits shouldn't matter so much to you, you have to care about the community more and about the health of the whole ecosystem, as this will be more profitable to you as your stake increases.
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The average of which is negative. Nearly all high SP users have gained most of their SP by mining it in the spring and summer of 2016. We are talking also about why anyone would buy large amounts of SP and not just not power down if they have a lot of SP.
Without speculative bubbles there are no long-term profits.
The question is also about incentives to power up. If it is profitable to power up at all only because there are high SP users who behave altruistically, that model can't be sustainable.
For Steem to be sustainable, paying for Steem Power with fiat must enable the payer to gain access to fiat revenue streams. Paid commercial promotion does just that. Remember the photography contest example where a camera manufacturer buys or more likely rents Steem Power to be able to reward the contestants. If priced right, paying for SP can be a financially rewarding proposition under that scenario. This, in fact, is the actual value proposition of Steem according to the white paper.
If don't see clear signs of growth in the number of users in the years following HF21 and acceptance of paid promotion and advertising on Steem as a way to fund it among prominent stakeholders, I will power down and sell everything at the peak of the next speculative bull run and never look back.