Steemonomics: thoughts on the inflation pool

Over the last months the terminology has been steadily changing from 'rewards pool' to 'inflation pool', which I see as a healthy change in how people can visualize it. Adding inflation (more coins) essentially dilutes the value of all other coins in the supply as the total market value is spread across a larger supply. One thing that some people don't seem to really understand though is that the rewards pool is always going to be around about the same size, well, not quite.

So, As you can see, Total Supply puts us between year 3 and 4 (remember this is from when the blockchain started, not the year start) with an inflation rate of 0.085. This is kind of thrown off a bit as far as I know as there is actually a higher rate of inflation when people convert SBD to Steem as it creates more Steem supply that doesn't come out of the pool. (Is that right?)

Anyway, as you can see that in year 6 is the highest amount of new Steem that will be added to the inflation pool and from there, the pool starts shrinking to eventually being just 1% a year from year 18 on. That is about 15 years away, if we make it that far.

The thing is that many people are looking to earn from the pool while concurrently wanting Steem to do well through mass adoption and price. The more people in means the more competition to take hold of some of the inflation coins which also drives price, and the higher the price, the more people in. Access to the pool is essentially shrinking the better Steem performs and in a few years, the pool itself starts shrinking also, which should decrease liquid supply while driving price and increasing demand on the blockchain.

I am not an economist.

My point is that while currently there is 20% of the steem supply sitting on exchanges, people still feel that the best way to get steem is from the inflation pool for free. This obviously depends on the person and their economic position but it could be that for some, the better option is to buy a little. But, that is up to them.

What is more important than that however is to build the understanding that the economics of the inflation pool is continually changing and at some point, it is going to start shrinkin considerably with the lowest point being year 18 (2034) where there will only be 6.18 million in the pool for that year (1% of total supply). Imagine if there are 10 million users at that point all trying to earn from the pool alone. Currently there is ~25 million in the pool for the year with about 30 thousand active. Oh, interest on SP is also paid from the pool, as are witness costs.

If you consider that if Steem does well and can actually survive over the years, usage and competition is going to increase demand heavily and at the lowest point, there will be less than 1/4 in the pool that there currently is. This means that percentage wise, there is going to be an increasingly severe drop in liquidity which means that Steem becomes increasingly scarce while demand increases. Even if demand tops out, scarcity still comes into play.

It is impossible to predict all of the implications this has considering all of the other factors, complexities and of course problems Steem has and will face with growing competition, ubiquity of blockchain, mega investor money pouring into the scene, highly professional app teams and a whole range of other factors but, if things go well, survival should mean that Steem has a bright price future at the very least.

Yes, the higher the price goes the more people will be willing to sell but at the same time as increasing scarcity through a shrinking inflation pool, they won't need to sell that much to cover investment and make significant profits. Also, the longer Steem lasts, the more people feel in the security of it which means less people will have the sense they need to dump as prices increase which in turn brings more stability to the blockchain and price. That means demand on the coin and blockchain becomes the real factor, not speculation. This is where the apps come into their own as investment vehicles.

What I wonder is that for those who are really looking long term, is it wise to drop some small amount at least into Steem and holding it powered up (to earn a little more through voting or interest) and seeing where it will take them? It is risky though considering the longer term one looks, the more uncertainty and therefore risk.

It is interesting to note that the Steem that is available on exchanges has actually increased by about 2% the last week, which I figure is people converting their SBD for Steem and taking it off to sell. That will eventually come to a point where it is no longer possible. The SBD supply has dropped from around 18 million (I think) to the current 13 million and at some point, there isn't that much left to convert to Steem except for what comes out of payouts.

There are so many interesting and complicated dynamics to the Steem economy and I am unable to get my head around them all so I write things like this to help me better understand. It should all be taken with a grain of salt though as my visualization of it might not be correct and I hope that people who understand it in a different way add a little more perspective.

What I love about Steem is that it has forced me into learning about things that have only ever scratched the peripheral surfaces of before but influence life at a fundamental level. If we all knew a lot more about how economies work rather than just complaining about not having enough money or getting enough reward, we would likely change the way we behave and definitely who we support in the economy.

Economics is boring though, isn't it?

Taraz
[ a Steem original ]

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