A Billion Dollar Disaster of a Business Model

People will gravitate to the social platforms that pay them. This is the future of social media.

Last week, I have published an analysis of Steemit, a social platform with its own cryptocurrency. The idea behind Steemit is to pay its users to post, comment, and upvote. Wait don’t rush to Steemit.com yet. Let me finish my post first.

The first reaction to a social platform paying its users is that it is probably a scam. I argued in my previous post that it is feasible for a social media platform to pay its users. Users add value to a social platform, by posting, commenting, and liking posts and comments. So, why not compensate them for the value they add to the system?

Facebook has a market cap of $500 Billion USD and turns a healthy profit every year. They have the funds to compensate their users for their contributions. With Steemit, the cat is out of the bag now. Eventually, people will gravitate to the social platforms that pay them.

The question isn’t whether it is feasible or not. It is feasible. The question is how to do that. Unfortunately, Steemit is doing it wrong.

Reward Distribution Scheme of Steemit

Steemit is programmed to distribute 6.5% of their market capitalization to their users in the first year. Their system foresees the reduction of this amount gradually over 20.5 years from 6.5% to 0.65%

At the moment of writing this post, their market capitalization is $1 Billion USD. That means, Steemit will give away $65 Million USD in one year to its users for posting, commenting, and upvoting, if they can maintain their market capitalization of course.

Yes, they do. I’m not joking. If you don’t believe me, read their FAQ, verify their market capitalization, and do the math. If you think I’m wrong, post your calculations in the comments section.

I wonder whether anyone in their team or in their investors realize that they will burn through $65 Million USD in one year for mostly mediocre content.

The giveaway rate will be reduced to 0.65% in 20.5 years, but by then, they will have blown 50% of their market capitalization away, which is a whopping $500 Million USD, if they can maintain the billion USD market cap, which I highly doubt.

System Is Open to Abuse

The amount of funds distributed to users on Steemit is absurd. What is more absurd is the way they distribute it. They distribute these funds according to the votes those posts and comments receive. As you can imagine that is open to all kinds of abuse. Some people simply maximize their return on investment by voting their own posts and comments instead of voting valuable posts and comments.

No company can survive blowing away a significant portion of their market capitalization every year on something that doesn’t add any value at all. If they don’t stop this mistake, Steemit won’t be able to survive. Eventually, they will face a selloff of their tokens. Without any market capitalization to distribute to their users, their whole system is going to implode.

Disclosure and Disclaimer

At the moment of writing this post, I owned some Steem Power tokens. This post is for information purposes only and not intended to be business or investment advice.

Burak Bilgin
Software developer with a Ph.D. and 15 years of experience. I write daily on personal development and life lessons. Sign up to my email newsletter to receive a weekly overview of my latest content on personal development and life lessons.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.