The Steem Power You Earn for Holding Steem Power — Revisited

in steemleo •  3 months ago  (edited)

Many newbies here don’t realize that you earn Steem Power simply by owning Steem Power. But even most folks here who do know that don’t understand it correctly. They probably think of it as interest, but it’s not (more on that later). And I’m pretty sure that only a tiny percentage of people here understand exactly how much they’re making.

(This is a revised and somewhat expanded version of posts on this topic that I’ve been doing on and off. In earlier versions, I had used some data from steemdb.com, but that site seems to have partially gone into limbo (at least for account data) so I will mostly be using steemd.com data instead.)

I signed up through Steemit 35 moons ago and was absofreakinglutely clueless about its inner workings. You posted and, after a while, would sometimes earn some Steem Power. A few months later when I had been looking at my wallet, I’d noticed my (then tiny) SP balance, went to my Feed page, and then had gone back to my wallet. To my surprise, my balance had increased by 0.001 SP. What the heck? And so started my long path down the rabbit hole trying to figure out what was going on. I quickly learned that I was earning interest. Much later, I learned that I wasn’t actually earning interest on my holdings (hint: your real holdings are in terms of Vests rather than Steem Power) but prior to learning that I muddled along trying to understand by what percentage my Steem Power was growing “just sitting there”. And the further down the rabbit hole I went, the more I learned that many things I had assumed to be true simply weren’t.

In this post, I’ll show you how much you’re making on your SP today and explain why that percentage is constantly changing.

Since I’ve gone down the rabbit hole, I’ve done several posts on the subject, including one from a while back:
Do You Earn Interest on Your Steem Power? Yes, and No. Implications for Muslim Steemians.

It includes links to earlier posts I’d done on the subject which show some of the ways I’ve fine-tuned my understanding of the value of holding Steem as Steem Power and a link to a post by @lukestokes where he discusses why the Steem Power you earn for holding Steem Power is an adjustment for inflation rather than interest per se. While it seems that you’re earning interest, you’re really not. It’s actually an adjustment for Steem’s inflation rate. A perhaps subtle distinction, but one that might be important to observant Muslims and anyone else who has ethical or religious objections to interest. If you want to think of it as interest earned, that’s fine, just realize that it really isn’t.

And the wording of the Steemit FAQ has changed to reflect this difference. When I first started looking into this, it had said “STEEM tokens that are powered up to STEEM Power earn a small amount of interest for holding.

But now, the FAQ has somewhat clarified that, removing any reference to interest and simply says “15% of the new tokens are awarded to holders of Steem Power.

Straightforward as that might seem, it allows for some fuzzy thinking. In a long comment to Luke’s post, I dug into why it can be a bit confusing even though true to say that 15% of created tokens go to holders of Steem Power. In this post, I’ll show how the interest that’s not interest builds at a higher rate than most people might assume.

In the very early days of Steemit (yes, when dinosaurs walked the earth), Steem had an annual inflation rate of 100%. You read that right. But it didn’t last long. As the FAQ says,

Starting with the network’s 16th hard fork in December 2016, Steem began creating new tokens at a yearly inflation rate of 9.5%. The inflation rate decreases at a rate of 0.01% every 250,000 blocks, or about 0.5% per year. The inflation will continue decreasing at this pace until the overall inflation rate reaches 0.95%. This will take about 20.5 years from the time hard fork 16 went into effect.

So Steem’s inflation rate is constantly falling. We’re now almost three years beyond December 2016 so Steem’s inflation rate has fallen a bit more than 1% since then.

While it’s easy to think of one’s influence on the Steem blockchain in general as a function of the Steem Power you hold, under the hood it’s really about the Vests that you own. One hint about this is what you need to become a Minnow, Dolphin, etc. Many here mistakenly think along the lines of it takes about 500 SP to be a minnow. No, it takes exactly 1,000,000 Vests to be a minnow. The amount of Steem Power needed to be a minnow is constantly rising, but the number of vests needed is unchanging. You can go to steemdb.com to see how much SP equals 1 MVest. As of today, it takes 504.686 Steem, but that number is constantly slowly rising. That rise is a function of Steem’s inflation rate. The Steem Power you earn for holding Steem Power is nothing more than an adjustment for inflation. Metaphorically, Vests are gold (representing immutable, unchanging wealth and power) while Steem Power is the paper currency that is used on a day to day basis in lieu of that underlying asset. At some point in the not distant future, 505 SP will represent 1 MVest. Later still, 506 SP will represent 1 MVest. Think of Vests as a real asset and SP as a derivative.

(Note to self: perhaps it’s time to start thinking about writing a post about vests.)

The formula for determining the current rate of inflation for the creation of Steem tokens is

(978 - (head_block_number / 250000)) / 100

Right now the current head_block_number is 36116943 so

(978 - (36116943 / 250000)) / 100 =

(978 - 144.467772) /100

= 8.33532228%

is the Steem inflation right now as I’m typing, but by the time you read this, it’ll be a little bit less than that.

If you earn Steem Power for holding Steem Power and the holders of Steem Power get 15% of newly created Steem, it’s tempting to multiply the 8.33532228% inflation rate by 0.15 to come up with a bit more than 1.25% as how much your SP grows “by just sitting there”. Not a huge amount, but probably more than your bank is paying on your fiat. But it’s the holders of Steem Power who get that 15% of new tokens; holders of liquid Steem (or SBD for that matter) get none of it.

How much Steem exists? Surprisingly, there’s more than one answer to that question.

virtual_supply refers to the total supply of liquid Steem + Steem Power + SBD

current_supply refers to the total supply of liquid Steem + Steem Power

total_vesting_fund_steem refers to the total supply of Steem Power

We can get the numbers from steemd.com

Right now,
virtual_supply = 369,291,172
current_supply = 332,362,055
total_vesting_fund_steem = 208,426,063

Again, these numbers are as of when I looked but will be different by the time that you look.

Repeating a key point, It’s the holders of Steem Power who get that 15% of new tokens; holders of liquid Steem (or SBD for that matter) get none of it. So we need to adjust our calculation to account for that by introducing a new term:

virtual_supply/total_vesting_fund_steem = fnord

Yeah, I made that one up. Okay, borrowed it from the Illuminatus trilogy.

369,291,172/208,426,063

Right now, fnord = 1.772

(Steem inflation rate) x 0.15 x (fnord)

Right now, that’s 2.216% APR.

That’s what you’re earning for holding Steem Power.

But that’s just a snapshot. It will trend down over time as the rate of Steem inflation goes down. But notice that I said trend. The virtual_supply/total_vesting_fund_steem “fnord” ratio can fluctuate up or down depending on whether, in the aggregate, people are powering down or powering up. So if a bunch of large accounts are powering down at the same time, the rate at which you earn Steem Power because you hold Steem Power can actually increase briefly even though the Steem inflation rate is continuously dropping.

Probably a few months from now, I’ll rework this and post an updated version showing current numbers.

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This was really educational. Appreciate all the numbers involved too. Thanks!



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As always, a wonderful explanation of how the inflation rate works and the impact on the holdings of SP.

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I've seen Vests mentioned before but this is the first time I've seen them explained.

if the mechanisms of Steem can't be made less complex, then education is the next best thing.