What is a block chain and how do people make money on Steem?
There are many parts involved in a block chain and in how money gets involved with all this. This is a long post, so buckle in and lets go.
Steem is a block chain based social network. Block chain is a completely new technology that was first introduced by the creator of Bitcoin.
Before we look at how this system works, let us look at a common way people pay for things.
If you pay with a credit card, a machine in the shop will communicate with the bank and check if you have enough money. This is an example of a centralised system. In a centralised system, like a bank, your account balance (how much money you have) is stored in one place. Unless they have backups, if that place fails, then all information about your account balance is lost.
Centralised systems are fast, because the information is in one place. Being centralised is also a weakness though because if someone manages to get control of the system (such as a hacker), they can make changes such as take money from people's accounts when they normally wouldn't be able to.
Block chain on the other hand is a decentralised system. This means there are no clients or server, but rather a large number of participants who all communicate with each other and maintain information about the current state of the system.
A centralised system works because a small group of people control the system according to a set of rules they have come up with. They can set interest rates and account fees and all other aspects of the system.
A decentralised system though is run by all participants. They each agree to play by the same set of rules and this allows them each to maintain a copy of all the data in the system and they all update that information in the same way as everyone else. This way, no matter which person in the system you ask, you will get the same information. It is similar to a centralised system in the way that there is a set of rules, but in this case, the rules are created and enforced by all the participants, rather than the small group of people in a centralised system.
Someone who doesn't play by the rules and adds false information to the system will be detected because their information will look different to the information all the other participants of the system have.
In a centralised system, a change (such as illegally moving money from an account) might not be noticed because it looks like any other transaction. In a decentralised system, such an action would be noticed because that action was not copied by the other participants because that action did not follow the rules.
If an action does follow the rules however, then other participants of the system will copy it in their copy of the system. As more and more participants copy this information, we can say that the information has been confirmed. Bitcoin transactions often require up to 6 confirmations before they are considered final.
Ok, so in a decentralised system everyone agrees to play by the rules and this makes it very hard for people who are trying to cheat the system to achieve anything because their actions will not be confirmed and will not be copied across the network of people who keep a copy of the system. This is already a big advantage of block chain technology over traditional client server systems.
Now let's say I am playing by the rules, but how does the system know it was actually me doing it and not someone else? This is another fundamental aspect of block chain technology. I won't go into the technical aspect of this, because it is very complicated, but the short version is that there is a way to identify yourself online using a pair of numbers called keys. Using certain formulas, you can encrypt and decrypt information. The creator uses what is called a private key, and the receiver can use the creator's public key to verify that it was indeed created by who they said it was.
If you want to know more about public and private keys, look up "cryptography" on Google and they can give a lot more detail.
These keys are needed because anyone on the internet can say they are someone. You can't see their face. You can only see what they have typed into a webpage. Would you trust someone on the internet that you don't know enough to send them money? Probably not. You don't know if the money will get to them, or if they even will give you what they said they would.
How is this situation handled in the real world? When you buy something with a credit card, how does the shop know that you actually have money? Well, they don't. That is why a bank gets involved. To get a credit card, you enter into an agreement with a bank where they will pay for the item straight away in exchange for you paying them the full amount later, plus some interest. So everyone is happy. You get the item, the shop gets their money and the bank gets interest.
This arrangement is necessary because unless you can prove you have money, like giving them actual paper money, someone has to vouch for you. In this case, the bank vouches for you. It's like a well known and reputable friend following you around. No one knows you, but they do know your friend. When you enter a store and your friend vouches for you, that satisfies the shop that they will get their money even though you have left the shop without giving them cash.
It's all about trust. Shops trust that the bank will pay them, and you make a deal with the bank that they will pay for the item, and you will pay them back. Without that trust, unless the people in the shop know you personally, they won't let you leave with a product and not paying for it with paper money.
This situation is fine as long as the centralised system maintains correct information. In the case of a system failure, you could lose money. In a decentralised system this is far less likely.
Using a decentralised system with everyone maintaining the same set of information, you can prove that you have what you say you have because everyone in the system has confirmed the information. If you receive Bitcoin from someone, the network has checked if they have enough Bitcoin to be able to send to you. At some point they too received Bitcoin. The system maintains a complete record so they can track that Bitcoin all the way back to when it was created.
Because everyone is maintaining a copy of the information it is incredibly unlikely that this information will be lost. This means that actions on the decentralised system have meaning. They have meaning because they can be verified. People can verify that a particular user actually has how much Bitcoin they say they do. Once the system can verify their account balance, it can also change that balance to reflect the fact that some of their Bitcoin has been moved to another account. This action too can be verified by the network using public and private keys. Only someone with the private key of a user can perform that action. To guess a private key (which is a long string of numbers and letters) for someone correctly could take millions of years, so they are pretty much uncrackable.
Ok, so we now have a store of information that is backed up and verified by all participants. This is a very important point because it is what gives any block chain its power. It is not possible to lie about having a bitcoin. Anyone can verify the information which means that if you have it, only you can spend it and once you spend it, you can't spend it again because the history of every bitcoin is stored on the bitcoin blockchain.
The reason the technology is called block chain is because all the information of the system is stored in blocks which are created at regular intervals and connected in a chain, hence block chain. Putting transactions into a block and then putting all the blocks together into a chain is the key innovation that made Bitcoin possible. The idea of storing other types of information besides monetary transactions has lead to many new start ups that all want to explore the possibility of solving a real world problem with the block chain technology.
Putting all the information into a block and chaining those blocks together allows the history of the system to be tracked. Without this, the passage of a coin from one person to another could not be verified and an individual coin could not be used as currency. So using public private keys along with a history finally made a fully decentralised payment system possible.
Now that we understand what a decentralised system is and what a block chain is, what does this mean for Steem and Steemit? A social network is a place for people to post content and others to comment on that. The system that supports that network has a profound effect on the way people end up using the system.
Social networks like Facebook, Twitter, Reddit and Youtube are all centralised Client Server systems. They are run by a small group at the top who make rules that affect how everyone uses the system. Facebook makes money from ads and they can choose how to spend that money. No one besides Facebook employees have any say in how Facebook uses its money. Twitter, Reddit and Youtube are the same. They each run their networks in the way that suits them and try to help their users in various ways, but it is fundamentally traditional system where those who run the systems make the rules and reap the benefits of the systems and in many cases users get little or no benefit from their interaction with the system.
Steem on the other hand is a fundamentally different system. It is a decentralised system where everyone agrees to play by the same rules so that everyone can participate on an even footing. If something goes wrong on Facebook or Twitter or Youtube, you need to rely on the people running these systems to fix it. If they feel like they don’t want to change an aspect of the system, then they simply won’t. They take the benefit of being in a powerful position and offer little or no power to those who use it.
On Steem however, everyone has a voice. Everyone has a say in how the system is run. Steem is a block chain so that means that blocks are created at regular intervals which store the data that make up the system. With Bitcoin, the people who create blocks are called miners. With Steem, the people who create blocks are called witnesses. With Bitcoin, anyone can be a miner.
Steem is slightly different in that only 20 people become witnesses, but everyone has the possibility of being a witness. Every Steem user can vote for witnesses and the 20 people with the most votes are given the opportunity to create blocks for the Steem block chain. Bitcoin miners are rewarded with Bitcoin for creating blocks. Steem witnesses are rewarded with Steem.
Now we have Bitcoin and Steem. How do these turn into real money? Real currency such as Dollars and Euros have value because they are issued by an authority, they are hard to forge and they are limited in number. Bitcoin and Steem have value because they are issued by their respective block chain. A block chain makes a cryptocurrency such as Bitcoin hard to forge and there are a finite number of them.
Bitcoin, Steem and other cryptocurrencies have the same characteristics as real world currencies so they can be used like real world currencies. People are willing to pay real world money to obtain Bitcoin and Steem. This means that as a creator or curator on Steem, you can earn real money. A creator or curator obtains Steem by creating or curating and they can then sell that Steem to cryptocurrency traders for real world currency.
Bitcoin is more like a traditional currency. You can buy it with real world currency, keep it for a while and then sell it and try to make a profit on the trade. Steem works a bit differently. Steem can be converted into Steem Power. Steem Power are like shares in a business. The more shares you have, the more money you can make from the activities of the business.
The Steem blockchain sets aside an amount of Steem called the reward pool. This reward pool is divided up into small parts and used to pay the creators and curators on Steem. How does the Steem blockchain work out how much Steem to give creators and curators? It works this out by looking at the Steem Power curators have when they vote. There are a lot of other factors that go into deciding how much Steem is actually awarded to a creator and a curator, but the main part of it is a user’s Steem Power.
Steem Power basically represents a share of the economic activity of the Steem block chain. When a vote is cast, the Steem block chain calculates something called rshares which is based on the Steem Power of a user, when they cast their vote, how much of their Steem Power they are using to power the vote and what their voting power is.
The higher the Steem Power, the higher the rshares. To stop people spamming, almost all of the rewards generated by a vote very close to when a post is made is given to the author. At 15 minutes the split is 50 / 50. After 30 minutes all the rewards go to the curator. The earlier the vote, the better (taking into account the pre 30 minutes and post 30 minutes situation). The higher percentage of your Steem Power you use in a vote, the better. And finally, the higher your voting power at the time of your vote, the better.
After 7 days, all the rshares are added up to get a total. These rshares are added up with all the other rshares of other posts to work out how much activity that post is getting in relation to other posts on the Steem social network. You can go to steemd.com and look at the reward fund. This is the total amount of Steem set aside for rewards on Steem. This means that getting more rshares on your post will in general lead to a larger percentage of the reward fund being issued to that post. But it is of course dependent on activity on the rest of the network.
There are a lot of specifics involved in this social network and they can and do change, but I have learned a few general things about Steem.
This social network encourages participation.
Vote often, comment on posts and create articles and pictures. Get people to vote on your stuff, and vote on other people’s stuff you like.
This social network rewards those who invest in it
The higher your Steem Power, the more rshares will be added to a post and in general the more money a post will make. With more Steem Power you give larger rewards to creators you like and you can even use your Steem Power to reward yourself. You paid for that Steem Power, why not use it?
This social network is decentralised
This means that everything people do on it are public. Don’t post things that you don’t want people to see. Be helpful in comments, flag bad posts and try to contribute to the community.
This social network allows everyone to get involved
Do you want to have a say in how the network is run? Vote for witnesses that you like, or even campaign for people to vote for you.
This social network is about you and me and all of us
I like Steem because it puts the focus on the community. We are all here to work on this community together. Work hard and you can get the rewards. Post quality content, vote up quality content and invest time into the community.
I think Steem has the potential to be a force for good for content creators and could set the benchmark for how social networks will be built in the future. I am so glad I have found it and that I am a part of this amazing community. Here’s to the future!