Steem Digital Asset Report: Introduction
Steem is a blockchain that targets the social media sector and enables users to monetize their content. The blockchain is best known for the flagship application Steemit.com, a blogging website that surpassed 1 mln users in May of 2018. Since then, its popularity has been declining due to the abuse of its reward distribution system and the overall market downtrend.
The entity behind Steam, Steemit Inc. has also been facing funding problems and had to lay off almost 70% of its employees, due to the steep drop in cryptocurrency prices.
However, the technology behind the project is still generating interest amongst developers. Besides Steemit, the project hosts over 100 applications on its blockchain and plans the release of the Smart Media Tokens (SMT) platform, which will enable publishers to launch tokens on the Steem blockchain and monetize their content.
Nevertheless, at present, the future success of the project is questionable as it faces many problems and stiff market competition, which are threatening its long-term development.
Steem Market Opportunities
Steem is a social blockchain where developers can create various dApps as alternatives to existing social networks. The project targets the social media market, which is dominated by giants like Facebook, YouTube, Instagram, etc. The size of the social media market is expected to grow to $39 billion by the end of 2019.
In 2019, it is also estimated that there will be around 2.77 billion social media users around the globe, up from 2.46 billion in 2017, the number of users is forecasted to grow at around 3% annually.
Most popular social networks worldwide as of January 2019, ranked by number of active users (in millions).
Steem has already developed various social networking apps on its platform, like Steemit (analog of Medium and Reddit), Steepshot (analog of Instagram), and DTube (analog of YouTube). While Steem as a layer 1 blockchain faces competition mainly from other blockchain networks, its most popular dApps are competing with products that are currently dominating the social media market.
The major competitors to Steem in the blockchain industry are Ethereum, Tron, and EOS, which remain the most popular choices for dApp developers.
Compared to Ethereuem, Steem provides higher scalability and free transactions, which makes it a better fit for content-driven dApps.
Consider Sapien Network, a social media platform built on Ethereum that is analogous to Steemit. The latter has more advanced technology and a client base of over 1 million users. Sapien only has about 5,656 users and is limited by Ethereum throughput capabilities. The narrative is consistent for other Ethereum based social media projects.
However, the two other major rivals, EOS and Tron, have much more active ecosystems. These blockchains are similar to Steem from a technology perspective, but have more dApps, more transactions per day, and wider communities. Currently Steem dApps are more popular than the EOS (ONO) and Tron (TronChat) alternatives, but due to the rapidly expanding user bases of the respective networks, they will become more prevalent in the marketspace.
Our conversations with projects building dApps on the Steem blockchain revealed that startups are attracted to the platform because it has a lower entry barrier for developers than many of its competitors.
Web developers who are comfortable with Javascript and Python can make an easy transition to working on Steem dApps.
Competition in the Blockchain Space
The competitiveness of Steem dApps relative to their centralized alternatives is very low. The main features that differentiate Steem’s applications from its traditional analogs are content being saved on the blockchain and crypto rewards for content creation. However, the rewards content creators can currently obtain on Steem’s social application cannot compare to the advertising revenue available to them on YouTube, Instagram or others.
The situation has been different with Steemit.com, where popular authors could expect to get paid, as opposed to receiving nothing posting on Medium or Reddit. However, the fall of cryptocurrency prices and flaws in Steemit reward distribution led to authors starting to leave the platform, decreasing the overall quality of the content.
For the most part, Steem’s most popular applications are trying to disrupt markets that are already established and monopolized by a few players. At the same time, these applications are not offering anything new, besides the rewards, which are not enough to attract a large user base. If we compare the activity of these social applications with the activity of well-known social networks, Steem is far behind. Due to the competitors’ network effects, it is highly unlikely that current Steem dApps will ever receive the same recognition.
Steemit vs Medium and Reddit
Steepshot vs Instagram
DTube vs YouTube
From the market opportunity perspective, at its current state Steem will not be able to sustain competition from the already established social networks and will most likely continue to lose positions to its blockchain rivals.
Part One: Technology Case
Underlying Technology
Steem is a scalable blockchain protocol with a fast and feeless digital token (STEEM). Its creators wanted to make a blockchain that would be suitable for micro-payments and would allow such use cases as tipping an author. The blockchain adopted a DPoS consensus algorithm according to which 21 witnesses (nodes) are selected to create blocks every 3 seconds. The block production is done in rounds, and each round lasts 63 seconds (or 21 blocks).
In total, there are over 100 nodes, but only the top-21 participate in the consensus, 20 out of 21 witnesses (full-time witnesses) are selected by approval voting and 1 witness (backup witness) rotates through a list of witnesses outside of the top 20.
Witnesses participate in block creation and approve hard forks. Steem hard forks take effect if at least 67% of the active witnesses have upgraded to the latest update. This procedure ensures that there is a single persistent chain after a fork. It also makes the update mechanism convenient for developers. As a result, the Steem blockchain has already successfully forked 20 times.
Although Steem has developed a good mechanism to decentralize the network with its witnesses, centralization still appears when it comes to core developers team.
In 2018, the whole blockchain simply stopped, and only the developers could roll down a patch for witnesses to fix the issue. The main team has all the power to implement the necessary fixes, but it also represents a central point of failure.
The team behind Steem tried to develop technical features that would enhance the user experience:
Native Name System – user name is used as the wallet address. This is much more convenient than using long public keys.
Hierarchical Private Key Structure – there are three private keys: Posting, Active and Owner. The first allows the user to post, comment, edit, vote, and follow other accounts. The second one is used to transfer funds, power up/down transactions, vote for witnesses, reset the posting key, place market orders on the internal decentralized exchange. The owner key is the most powerful, because it can change the other private keys and prove ownership during an account recovery. This hierarchical private keys structure increases the security of using wallets.
Stolen Account Recovery – if a user’s account is compromised, it is possible to change private keys using the Owner key.
Steem is also planning an important release of Smart Media Tokens technology. SMT – is a token issuance protocol (like ERC-20) which enables any website, company or content library across the Internet to facilitate fundraising and integrate tokens into its interface (more detailed information is available here). The launch of this protocol was planned for March but has been postponed. Nevertheless, if fully implemented it will positively affect the adoption of Steem blockchain.
The Steem blockchain can handle a large number of transactions per second almost instantly, which puts it among the most technologically advanced blockchains.
Scalability Comparison
The activity of the main repository in its GitHub has dropped significantly in the last two months, while other repositories are in an active state. Developers are currently focused on optimizing the blockchain (DevOps solutions, reduction of Staging and Testing nodes, pruning, etc.). This will decrease the costs of running full Steem nodes which should lower the adoption barrier for application developers and exchanges.
Developers are also working on improving Consender, the open source software that powers steemit.com, which should reduce its maintaining costs.
GitHub Activity
From the technological point, the Steem blockchain solves the problems it was meant to solve. Although the network is dependent on the developer team and even experienced a shutdown, it still has good throughput capabilities, which attracts dApps creators and drives adoption.
Part Two: The Business Case
Ecosystem Development
Steem is a social media blockchain that utilizes the DPoS consensus algorithm. Its network is supported by two types of nodes (witnesses):
Top-20 witnesses – store the whole blockchain, create blocks and confirm transactions.
21st witness rotates through a list of witnesses outside of the top 20, and can also participate in the consensus, if chosen in a certain round. The higher the rank of the witness, the higher the probability of it being part of the consensus.
All other witnesses – store the whole blockchain and maintain its functionality.
However, the potential witness candidates need to own powerful and reliable servers, have technical experience, and convince the community that they can become good node operators. In fact, for witnesses, marketing plays an important role, since they have to promote themselves in order to get votes from the community. Witnesses use different marketing strategies, some even offer to spend 80% of the block reward to advertise Steem on Facebook, YouTube, and Google every day.
Any user can vote for up to 30 witnesses at any time. These votes can be added or canceled at any time. The ranking for witnesses plays an important role. A witness at rank 25 will be producing more blocks per hour than a witness at rank 50, which will directly affect its profitability. Witnesses are paid proportionally to how high they are in the rank. Current, top-20 witness pay is about $3,800 per month (approximately) based on the current feed price. Such a structure incentivizes a free market competition among node operators, which in general is beneficial for the network.
The Steem network is highly centralized. The project has had a questionable launch in 2016 with the network being allegedly rigged to ensure that founders had a major stake in token supply.
Bitcointalk thread on Steem launch (2016)
This led to a situation where most of the coins were accumulated in the hands of a small number of people, which is not reflected on the STEEM rich list. According to steemdb.com, the top-10 wallets hold 25.7% of coins (exchange wallets – 22.7%), and the top-100 wallets – 29.2%, which shows a relatively low level of centralization.
TOP-10 Wallet Distribution
However, the STEEM rich list is not showcasing the real situation. The Steem blockchain has complicated token economics. It operates on three tokens: STEEM, STEEM Power (SP), and STEEM Dollar. Users can voluntarily obtain STEEM Power, by locking-up STEEM tokens in the system. The more STEEM Power a user has, the more influence they have in the system, which is expressed when voting for witnesses or for content that is posted on the blockchain.
Currently, around 40% of STEEM Power is concentrated in 100 accounts. It’s also possible that many of them are duplicates, making the system highly dependent on a small number of people. Such a concentration of SP has produced a lot of problems for Steem’s main application Steemit, a blogging platform where users get paid for creating and curating content. The payment is received from newly issued tokens, and 75% of the new tokens are distributed among content creators and curators. The content rating is based on the upvotes received from holders of STEEM Power. The more upvotes from large STEEM Power holders an article receives, the more money is distributed to its author.
As a result, STEEM Power holders are not incentivized to be interested in the quality of the content, they are participating in the ecosystem simply to receive the reward, killing the whole point behind the platform.
Centralization of STEEM Power is also supported by bots. Any user can simply pay directly to the bot owner and receive an upvote for his article. The upvote from the bot is usually worth less than the reward the user would receive from Steem. It appears that the platform has been overrun with people who are there to make money and don’t care about the quality of the content.
Looking at Steemit.com’s trending page, readers can find either sponsored or low quality articles. Moreover, the platform has been criticized for having a poor user experience, plagiarized content and censorship. In fact, the content that users are posting is saved on the Steem blockchain, but it is not necessarily posted on Steemit.com, the website has its Terms of Service for what is acceptable and what is not. It is understandable, that in order to comply with regulations, Steemit has to have an editorial policy. Nevertheless, it contradicts the non-censorable notion of the blockchain.
Steemit.com Posts vs. Authors
The overall Steemit statistics shows that the number of authors and posts has decreased dramatically since January 2018. Although Steemit was able to build a large community around itself, its long-term prospects are highly questionable due to loss of interest from users.
The entity that supports Steem ecosystem development is Steemit Inc. It is a privately held company based in New York that officially launched Steem and Steemit in 2016. However, the company has been under serious pressure because of the fall in cryptocurrency prices and in Q4 2018 announced that it has been forced to lay off close to 70% of the team. This is concerning since without financial and human resources the company will not be able to solve its current problems and expand its user base and ecosystem.
The team has not been active in terms of partnership development. In 2017, Steem Inc. announced a partnership with the Global Blockchain Technologies Corp, according to which both companies signed a non-binding agreement to create a joint venture and establish $20 mln Steem Fund that would support startups building solutions on the Steem blockchain. However, after the announcement, there was no more information on the progress of this initiative, and during our conversation with the team, it was confirmed that the team decided not to move forward with it.
In general, Steem lacks good partnerships, which means it is not prioritizing business development, which is a negative sign for the ecosystem.
Although most of the factors above negatively affected ecosystem development in 2018, there are also some positive developments expected in 2019.
The company is planning the release of the Smart Media Tokens (SMT) platform, which will allow companies to create their own tokens. Tokens can be used to raise funds via an ‘Initial Coin Offering’ (ICO) or can be distributed via posting and upvoting rewards. SMT will allow publishers to issue their own tokens and integrate Steemit.com functionality on their websites. This will increase the demand for STEEM since users will have to acquire it to use the blockchain. However, it is still unknown whether the tool will be popular among companies, and how these tokens will be valued by different readers. Moreover, the project has been announced in 2017 and is still under development. The team planned the release of the mainnet in March 2019, but it has been delayed, since the team is working on cutting down the cost of running the chain.
From the community perspective, compared to its blockchain rivals, Steem is far behind in terms of social media followers. However, the number of on-chain operations (to not be confused with on-chain transactions) is quite high, indicating that the established community is very active and is using the ecosystem.
Community Involvement Comparison
From the ecosystem perspective, Steem developed products that are used by a large community. Still, these products are facing serious problems and losing their user-base. Moreover, further developments of the platform would most likely continue to be slow since the team is currently more focused on cutting costs, rather than expanding the ecosystem.
Token Economics
Steem blockchain utilizes a triple token economy model and has no fees to support its ecosystem.
STEEM is a liquid unit of account on the Steem blockchain, which can be bought or sold on exchanges and transferred to other users.
STEEM Power indicates how much influence a user holds on the system. To power up STEEM Power, users can convert their STEEM to STEEM Power by pressing a few buttons in the wallet. However, in order to convert STEEM power back to STEEM users would have to wait 13 weeks to receive the full amount, since the tokens will be unlocked at a rate of 1/13th per week. STEEM Power tokens are not tradable, they are only used within the blockchain (upvoting the content, voting for witnesses, etc).
STEEM Dollar is used to encourage and reward social application users. When a post receives a payout, the user obtains a reward in the form of 50% STEEM Dollars and 50% STEEM Power. Steem Dollar is a stable-coin-like currency pegged to the dollar, with the price maintained around $1.00. The coin can be redeemed at any time for STEEM, but the processing time takes around 3 days. Steem Dollar is also freely traded on several exchanges, which creates problems with maintaining the exchange rate.
Although currently its rate is around $1, its price has been fluctuating from $0.8 in August 2017 to $12 in December 2017. Witnesses maintain the price stability. If the price of SBD is less than $1, traders will have an incentive to buy it and redeem it for STEEM worth $1, which will drive SBD price up. However, if the price of SBD goes above $1, the process becomes harder since the only way to increase the supply is through posting.
Witnesses can also alter the interest rate of STEEM Dollar, making it equal to 0% with the SBD price being higher than $1. Presumably this should decrease the incentive to hold SBD.
Newly issued tokens are spread amongst content creators, curators, users, and node holders. The blockchain is only issuing new STEEM Power or SBD (no STEEM):
75% of new tokens are distributed among content creators and curators (50% SBD and 50% STEEM Power)
15% of new tokens are distributed among the STEEM Power holders
10% of new tokens are distributed to witnesses
Token inflation is the driver of this distribution. When Steem launched, initial inflation was 100% a year, and 90% of generated tokens went to existing STEEM Power owners, creating a large voting power inequality, with a small number of accounts holding the majority of the voting power, thus centralizing the network.
The current inflation rate is around 8.54%, which will constantly decrease until the annual inflation rate reaches 0.5% (~ mid-2037). The overall inflation rate is higher if we compare Steem to its competitors. However, low inflation with the current STEEM prices would hurt the Steem ecosystem even more, since the authors’ rewards would be lower.
Supply Comparison
As an example of how Steem works, consider Steemit.com. There are many articles on Steemit uploaded by different authors, and users have the ability to upvote them. However, not all upvotes are equal. The more STEEM Power a user has, the more their upvote is worth. Currently, according to the upvote calculator, an account with 1,000,000 STEEM Power can produce an upvote that would grant the author up to $30, while an account with 50,000 STEEM Power can produce an upvote worth only up to $1.54.
Users are free to make multiple upvotes. But after each upvote the user loses 2% of the current voting power (STEEM Power). The voting power recovers at a constant rate that equals to 20% per day.
The problem such setup generates is that it encourages unethical behavior from users. Large STEEM Power owners have the incentive to upvote their own articles or sell the upvotes and receive rewards.
The fact that STEEM Power can be delegated also produced automated services that offer users to invest their STEEM Power, concentrating it in the hands of a small number of people. This resulted in the community being more incentivized to make money rather than work on the quality of the content.
Although in the beginning Steem was thought to be a platform that would be community driven and would encourage authors to publish quality content, the flaws in its token economy encouraged user behavior that was detrimental to the quality of content and led to an alternative development course.
Lead Team
Ned Scott – Founder and Executive Chairman. He is also the ICO Advisor at Matchpool. Before launching the Steem blockchain, Ned Scott worked as a Financial Analyst at Gellert Global Group.
Elizabeth Powell – Managing Director. She graduated from Texas A&M University with a BA in Journalism. Elizabeth has wide experience in marketing, business development and communications.
David Jefferys – Business Development at Steemit Inc. He graduated from Canisius College with a BS in Accounting. He has 10+ years of experience in business development and worked for New Era Cap, ShoptoCook Inc., Pyramid Brokerage Company.
Steemit Inc. was founded in 2016 by Dan Larimer and Ned Scott. However, Dan left the project in 2017 and started the well-known EOS. There were no corporate conflicts, but Dan wanted to create “something bigger” than Steem.
Following the departure, Steem peaked in January 2018 and begun slipping down during the entirety of the year. Steemit Inc. reported that it laid off 70% of its employees. According to our sources, the team was reduced from around 50 people to 10. The decision was caused by a 96% decrease of the STEEM price, which led to a significant loss of the company’s finances.
The announcement of the staff layoff at the end of 2018 left community dissatisfied with the way the project was running. Two major problems identified with Steem Inc were “planning and the other is the delivery”. There were calls for the CEO to step down. To assuage concerns, Elizabeth Powell was appointed as a Managing Director at the start of 2019, to help move the project forward.
As a result, the project found a new direction (cost reduction, advertisements, etc.), which was positively perceived by the community. Our conversations confirmed excitement within the community regarding the progress the project has made over the last few months.
Nevertheless, despite having a good idea, the project was unable to get mainstream success which it was aiming for. An unclear strategy and poor decision making during the downtrend of the cryptocurrency market forced the company to rethink its priorities and outline a new direction for the project.
Although the team is taking steps to get out of the crisis, the success of their new strategy is not guaranteed, given the fact that the old strategy proved to be unsuccessful.
Roadmap
Facing many issues in 2018, the company proposed a new strategy that it would implement in 2019.
Steemit.com – the company is working on improving Consender, open source software that powers steemit.com. The company bears a large cost maintaining it, and while it was justifiable during the bull market, currently it is not.
Lowering Node Costs – the company aims to lower the cost of operating the nodes, so it would be less expensive for the 3rd parties to run their own full nodes. This should also increase profits for witnesses.
Advertisements – the company plans to integrate advertisement into steemit.com in order to generate revenue to pay for front end back-end infrastructure necessary to power steemit.com and the overall project.
Real Solutions – the project wants to improve its economic sustainability by developing a workable business model that generates revenue needed to support the growing ecosystem.
The company will also focus on implementing Version 1 of Smart Media Tokens (SMT) platform and RockDB, the solution that would help to store Steem data more efficiently.
The company has developed an anti-crisis plan. However, as every plan of such nature, it focuses more on saving what project already has, rather than new developments and ecosystem expansion. The project also did not provide any clear dates for the much anticipated SMT platform, so it is not clear when Version 1 will be released.
Overall, the project is working on solving short-term problems, while its long-term mission still remains quite vague, which raises questions about its long-term sustainability.
Part Three: The Investment Case
STEEM Token Performance
STEEM is in the top-45 coins by market capitalization and it is in the top-59 coins by trading volume (24H).
STEEM price increased significantly a few months after the Steem blockchain launch, pushing it into the third place by market capitalization after Bitcoin and Ethereum. Steem’s ATH occurred in January 2018 reaching $8.57 during the last peak of the cryptocurrency market. Since then the price has suffered a significant drop of 96%, while prices of its competitors have diminished a little less: Ethereum – 91%, Tron – 93%, EOS – 85%.
Price Comparison
The main trading pairs are STEEM/BTC (48%) and STEEM/KRW (40%), which are mostly traded on top exchanges such as Binance, Bithumb, and Upbit. The coin is quite liquid.
Steem Volume
STEEM trading volume is significantly lower than that of its competitors. Also, changes in trading volume among all cryptocurrencies have the same downward trend since January 2018.
Trading Volume Comparison
STEEM price fluctuations lie within a range from -5% to + 8% on average. The same behavior is observed among its competitors. Essentially, STEEM is following the market.
Daily Change
Given the fact that Steem was a number 3 project in 2016 on Coinmarketcap.com, its current 45th place is discouraging. Users and cryptocurrency speculators are losing interest in the project, which is reflected on its price and overall ranking.
Technical Analysis
STEEM / USD Short-term price analysis
Steem has a neutral short-term outlook, with price falling back towards the STEEM / USD pair’s key 200-period moving average on the four-hour time frame.
The four-hour time frame also shows that the STEEM / USD pair is currently trapped inside a descending price channel that has been in play since early March.
The cryptocurrency is starting to create bearish lower highs and lower lows on the mentioned time frame as sellers attempt to take back control of price action.
STEEM / USD H4 Chart (Source: TradingView)
The MACD indicator on the four-hour time frame is slightly bullish, with the MACD signal line and histogram still trending higher. The RSI indicator on the four-hour time frame is under downside pressure, although the RSI continues to hold above neutral levels.
Traders should note that ascending price channels are typically seen as bullish patterns, and sometimes signal reversals at the end of a bearish trends.
STEEM / USD Medium-term price analysis
Steem has a bearish medium-term outlook, with buyers repeatedly struggling to move price above the pair’s trend defining 200-day moving average.
The daily time frame clearly shows that the STEEM / USD pair has been steadily rising since the start of last month, with bulls successfully invalidating a large inverted head and shoulders pattern.
The STEEM / USD pair is currently trapped within a descending price channel on the daily time frame, as the cryptocurrency starts to fade from the best levels of the year so far.
Technical indicators on the daily time frame continue to signal that bearish momentum is gathering pace.
STEEM / USD Daily Chart (Source: TradingView)
The MACD indicator on the daily time has now turned bearish, with the MACD signal line crossing lower. The Relative Strength Indicator on the daily time is neutral and is currently failing to generate a reliable trading signal. Traders should note that the overall bullish objective of the descending price channel on the daily time frame would take the STEEM / USD pair slightly above the current yearly trading high.
STEEM / USD Long-term price analysis
Steem has a bearish long-term outlook, with the cryptocurrency remaining below its important 52-week moving average since the early part of June 2018.
The weekly time frame shows a large head and shoulders pattern, with the STEEM / USD pair trapped in a period of price consolidation close to the neckline of the bearish pattern.
Bullish MACD price divergence is also present on the weekly time frame, with buyers needing to rally the cryptocurrency back towards the July 2nd, 2018 trading high to completely reverse the bullish price divergence.
STEEM / USD Weekly Chart (Source: TradingView)
The MACD indicator is conflicted on the weekly time frame, with the MACD signal line crossing higher while the MACD histogram is moving lower. The RSI indicator is bearish on the weekly time frame and is currently unable to find strength above the neutral level. If bulls can rally the cryptocurrency, the head and shoulders pattern on the weekly time frame may start to form a right-hand shoulder.
From the technical perspective, Steem is coming under slight downside pressure in the near-term as the cryptocurrency struggles to overcome its 200-day moving average and trades away the best levels of the year so far. The presence of the head and shoulders pattern on the weekly time frame has been weighing on the STEEM / USD pair, although the MACD price divergence on the weekly time frame does offer bulls a glimpse of hope that the cryptocurrency could stage an even stronger recovery this year.[/vc_column_text]
Steem Chart
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