New digital currency Steem raises questions among market watchers

Rage Comment : Steem is the digital currency of the new social media website Steemit. The identity of its fund holders and its rapid value growth have caused great doubts. The durability of this digital currency dedicated to the social media platform has attracted widespread attention, and it has even been linked to a Ponzi scheme. However, according to the Steem white paper, they have adopted Steem Power to ensure the stability of this digital currency. It will take time to verify how it will develop.

Translation: Annie_Xu

Although Steem has recently become the third-largest cryptocurrency by market capitalization, surpassing $400 million this month; some market experts remain skeptical and question the economics of the currency.

In July, Steem’s market value surged 20 times, from $17.9 million to $411.9 million. During this period, its price climbed 18 times, from $0.24 to $4.63.

If newcomers in the digital currency field want to earn Steem, they can post on the social media platform Steemit. The platform will calculate the number of positive comments on the post and give the user a certain amount of Steem reward. The creator of Steemit said that he hopes to reward users who post in this way.

Joe Lee

Joe Lee, co-founder and CIO of digital currency trading platform Magnr, said: "The concept itself is very interesting. It is a hybrid of Reddit (American social news website) and Quora (American online question-and-answer community), attracting high-quality posts with extremely strong monetary incentives. The success or failure of Steem will highlight the value of Steemit as a platform more than the monetary economy itself. This is a good example of a digital currency whose value is closely related to the practical value of its social network and sharing platform."

Market observers question

Although Lee is bullish on the digital currency and its underlying social media platform, some market observers are not hesitant to raise doubts. Jacob Eliosoff, an algorithmic trader, said: "I don't really believe in appcoins or appchains, especially Steem."

"It would be nice to set up a site that rewards good reviews," but doing so would be "illegal" unless done carefully. In addition, he said he didn't understand why the platform needed a new type of currency, and could use existing digital currencies such as Bitcoin or Ethereum.

Eliosoff is also concerned about Steem’s peg to the U.S. dollar, which uses exchange rates on decentralized markets to “keep Steem firmly tied to the dollar,” said Chris Burniske of investment firm ARK Invest.

“The cost of being truly pegged to the dollar is huge, and as far as I know, (almost) no cryptocurrency can afford it,” Eliosoff said.

Potential fraud risks

Some market observers worry that Steem is either a Ponzi scheme or a malicious attempt to drive up prices.

Petar Zivkovski

“My first impression of it is that it’s a cryptocurrency that’s been pumped up, with holders (founders and early adopters) cashing out at high prices,” said Petar Zivkovski, director of operations at bitcoin trading platform Whaleclub. “It’s not certain that this will last.”

Kong Gao, overseas marketing manager at Bitcoin trader Richfund, also expressed concerns. "Most of the posts on Steemit are promoting Steem, making it look like another Ponzi scheme. And the people behind it are the same people who are behind Bitshares. So I don't think it is sustainable, and I don't take it seriously. I also talked to some altcoin traders in China, and they also expressed concerns."

Eliosoff reinforced Gao’s point, acknowledging the Ponzi scheme narrative and predicting that the digital currency “will continue to grow until it runs out of new users and collapses,” just like a Ponzi scheme.

Steem Power

The creator of Steemit responded to these criticisms by emphasizing that there are safeguards added to the system and that users have ample incentive to stick with Steem, such as Steem Power.

The Steem white paper states: “Steem wants to encourage long-term growth, so it is hardwired; each Steem held by a Steem Power (SP) shareholder is equivalent to 9 Steem, providing growth support through a posting incentive mechanism. Over time, the ratio of Steem Power balance to the total value of Steem will approach 9 to 1.”

Steem Power is set up so that "long-term holders are virtually immune to the currency dilution required for currency growth." And "Steem Power can only be converted into Steem after 104 peer-to-peer payments after two years."

Burniske said the benefit of Steem Power is that it helps improve the stability of the digital currency. "By limiting people to Steem Power for two years, it ensures long-term capital investment, stabilizes the platform foundation, and lays the foundation for long-term user and developer network effects. It is an interesting counterbalance to the rapid and massive investment that is common in new cryptocurrency platforms."

Although Steem’s innovative approach has helped it stand out from most cryptocurrencies and become the third largest currency by market cap; only time will tell if this business model is sustainable. Perhaps this is the way to go for this digital currency as many market watchers will be watching closely to see if Steem’s model is sustainable.