Math of Steem: Where does the profit from voting bots come from?

in #steemit6 years ago (edited)

So a couple of weeks ago @yabapmatt made a post about voting bots and @abh12345 asked a question that I thought was interesting: what if everyone started buying votes? He characterized his issue thusly:

Profits are there to be had by everyone in the chain: delegator - bot owner - user (sometimes). The reward pool, and thus the blogs of the non-users suffer though.

I had some short thoughts at the time, but it stuck with me. There is a whole lot of profit in the vote-buying system, and figuring out where it all comes from took a little while. I knew that "it comes from the reward pool" was wrong: moving pieces of the reward pool (RShares) between users cannot create profit. Vote-buying or vote-trading in and of itself is fundamentally mathematically neutral. So where does the profit come from? Four primary places, listed in order of how easy they are to understand, not necessarily how important they are.

1. The cost of powering up

Users pay a cost by committing to keep their money in the system for a certain period of time by staking Steem as SP, and in return when the currency inflates, the new currency generated goes to those users in proportion to their stake. This is the fundamental basis of all Proof-of-Stake systems, and while it might be novel to you it's not particularly new; government bonds operate on a very similar methodology.

On Steem the new currency generated goes to users in RShares distributed as voting power. This is the profit from the stake, not from vote-selling. Part of what this means is that, in spite of perception, vote-sellers aren't making profit when they sell their votes. They are, generally, selling on their RShares for less than their nominal value, and taking a loss in return for not having to put effort into using those RShares themselves. It's possible to sell those RShares at a profit at some times through some bid-bots, but that profit comes directly from a loss taken by the vote-buyer.

It is not possible for both seller and buyer to make a profit on the vote sale. It only sort of looks that way because of the way Steem obfuscates the staking rewards. The staker makes a profit from staking and then is selling some of that profit to others at a discount.

2. Investor Confidence

This is tied into #1, because if you think Steem is going to go up in price and are going to hold it anyway, the external cost of locking that Steem up in a stake goes down. That means that the actual cost paid in lending the system money lowers while the absolute return remains the same, increasing ROI. That doesn't matter for the vote sale itself but affects the stakers' willingness to discount their rewards.

Investors who perceive themselves as having a higher ROI will be more willing to discount some of it in order to receive it as cash.

3. The Broken SBD Peg

But you say that's responsible for just about everything!

Well, it kind of is. If something weird is happening around here, look to the broken SBD peg first, because it's probably doing something unexpected. In this case, when SBD is above $1, it inflates the value of all votes substantially: by a percentage of (SBD - 1)/2.

With SBD at $1.76, votes are worth 38% more in real money than the system thinks they should be. This is entirely profit put into the system by traders who are overvaluing SBD, and it's responsible for a lot of the extra money floating around. It scales with the price, so puts us in an interesting spot where some of the biggest self-voters and vote-buyers and middlemen with the most capital ought to be devoting some of it to pumping SBD. Since there are far fewer SBD than Steem out there the price is very vulnerable to manipulation, but I don't think they've noticed.

(In practice the effective percentage is somewhat lower because of curation not paying out 50/50. 38% is the instant-vote value.)

4. Steemit Inc.

The @steemit account, as well as several related ones like @steem and @ned, decline a lot of their rightful stake reward RShares by allowing their accounts to sit at 100% voting power much of the time, not voting. When this happens RShares that would have been rewarded to them for their stake simply aren't; this inflates the vote values of everyone else in proportion to their stake. Since @steemit holds 44 million SP, this is kind of a big deal. Between them these accounts hold at least 25% of all of the staked SP, and the total value held in inactive accounts might be as high as 40%. This is reciprocal: sitting on 25% of SP makes everyone else 33% more important in the voting pool, and sitting on 40% of SP makes everyone else 67% more important.

With Steemit not using their stake, the value of everyone's votes is increased by at least 33%. This is profit being injected into the system by Steemit Inc. Crucially, this multiplies with the profit from the broken SBD peg. We're beginning to see why there's a lot of money floating around. Even if we use the 25% of SP number the combined effect is a 84% increase in the real value of everyone's vote. If we use the 40% number it increases to 130%. It's interesting that somewhere in the middle there is the immediate ROI of self-voting.

So what does that mean?

I'm not necessarily willing to draw a lot of conclusions from this just yet. But it looks to me like if the system were working efficiently in a mechanical sense, with SBD at $1 and everyone voting their stake, self-voting and its cousin vote-buying would be very close to simply distributing the RShares at their nominal value. Any profit in buying votes would be tied directly to the effort saved their original owner in not spending their RShares, and vote-selling would mostly be used at its most human-useful and system-useful points: allowing people to continue using their stake when for life reasons they weren't able to vote it.

However, if SBD stays high and @steemit keeps staking and doing nothing, there's going to continue to be a ton of profit available for someone. It will doubtless spread out in the system depending on vote supply vs. demand and competition between the middlemen. We're onboarding a lot more customers and almost never a new whale, so expect the price of votes to keep going up.

Epilogue

All of this, of course, comes down to the core question of Steem, which is what all of this conflict ends up being about at its base: do you feel you're getting value for your RShares when using them to vote on other people? You're getting less direct financial return for your stake than the people who are using theirs to self-vote or selling them. But if you feel like the non-financial value of your voting is worth the nominal value of your RShares, then you're actually making more than the vote-sellers are.

If you feel like the value of your voting isn't worth the nominal value of your RShares, then you should probably be doing something with your money other than staking it here and refusing to sell your vote. You're losing value just by being here.

Personally, most of the time I feel like the value of my voting on other people is worth more to me than the value of my RShares. That's part of why I like buying RShares from other people at a discount, so that I will have more of them to use later. The times my vote isn't worth more it's my fault for not having built up my reading list sufficiently and managed my voting power sufficiently well. (Although if you really want to change something, please, post more on Wednesdays.)

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This very well researched article and I agree with your conclusions. However, we need to balance between what I needed now vs how much it will be worth in future. Therefor, self voting as well as vote selling can become essential for those who have stretched themselves in investing into the platform

Very much so, yes. How you choose financial reward vs. personal reward is the key decision you make here, and there are plenty of people who will try to tell you what the right way to do it is.

Interesting post, thank you. I have a couple of questions:

  • are financial reward and personal reward always opposed, or are they on a continuum, is there a situation when they are aligned (win/win)?
  • is vote selling the same as leasing delegation?

One immensely philosophical question and one immensely practical one.

are financial reward and personal reward always opposed, or are they on a continuum, is there a situation when they are aligned (win/win)?

Personally I think the two are nearly always aligned to some extent, and a large part of life strategy in a money-driven society is identifying the places where they're most closely aligned for you. That's why I spend so much time here.

is vote selling the same as leasing delegation?

The mechanism is different but the essence is the same. Vote seller:delegator, vote buyer:lease buyer.

I like to mix it up :)
I was thinking the same about financial vs personal reward, so it is interesting to have your opinion. I have been thinking about how I can best do good here and I'm moving towards a more focussed approach. I liked your Doctor Worm (have I got that right? can't remember but it's in a safe place) post and the conversation on mountainjewels post about growing a star. I'm thinking about that approach myself.

Why post more on Wednesdays ?

This intrigued me, can you explain ??

Thank you.

For whatever reasons Tuesday and Wednesday nights are always when I find myself going to bed needing to spend some voting power in order to stop it from reaching 100% overnight, and I end up dumping it into things that are marginally profitable for me (recently @socialwallet for instance) rather than spending it on excellent posts. I'm not sure if that's a quirk of the people I follow or if the sitewide content is really at its minimum on those days.

Good to know.
I have been really behind on my posting lately as work is crushing me.

Thanks for the response.

Steem on !!!

Very interesting and thorough explanation, why vote trading is currently so profitable, but over time it should be less profitable, when more and more of the stake of Steemit Inc is spread out to millions of new users who will actually use their SP for voting.

Ideally this is true - as more Steem gets created it will dilute the power of @steemit and bring the system closer to balance. However, it's a very slow process, and every time someone decides to power down it gets slower.

This is an excellent thought provoking post, thank you for that.

To me, it's odd to be comparing to the state where everyone (including steemit, Inc) is optimally self voting as the baseline for profit. It rather makes it all seem meaningless. After all, the staking/voting mechanism is about giving the stakeholders the ability to allocate funds from the reward pool to the participants of the platform, in a way that is agreeable to investors of the platform. And the state in which every single participant is merely posting nothing and self voting optimally has little value (...or does it...? If it can be adopted as a currency maybe....)

When people say profit comes from the reward pool, I don't see that as the wrong way to look at it. They are simply saying they don't agree with how the reward pool is being allocated, and that is relevant to your second point.

I think people really need to think about the question of value though. In my mind, as with the value of social networks in general, the value is almost entirely outreach and advertising. Content creation and consumption is most certainly part of this equation, but it is not where the actual money comes from (it attracts money though, eyeballs). Bid bots right now help with that which I grudgingly have to give them credit for, but that's not because bid bots are great. It's because the promotional avenues in the platform suck and this is a workaround.

To me, it's odd to be comparing to the state where everyone (including steemit, Inc) is optimally self voting as the baseline for profit.

Well it's not the baseline for total profit, just for vote-buying profit. When you stake you get rshares as profit and they're worth something. Vote-buying is about what you do with them afterward. You can look at it as giving up your resources in the Core Game for cash if you like, but your Core Game resources have equal systematic value no matter who you vote on.

When people say profit comes from the reward pool, I don't see that as the wrong way to look at it. They are simply saying they don't agree with how the reward pool is being allocated

If you like; but disagreeing with how the rewards pool is allocated in this sense is a fundamental disagreement with the Proof of Stake protocol and it's pretty much arguing with the sky. Bidbots don't change anything about the rewards pool. Those people's problem is with allocating it by staked SP and they should be honest with themselves and others about it.

As a resource with value, (rshares/voting power) it's certainly an odd thing to wrap my head around. Its intrinsic value is exactly the ability to decide, not the end result of choosing to use it on yourself. I still don't think it makes sense as a base line even for vote selling.

From my perspective, staking gives the power to choose, not only the power to possibly line one's own pockets. (And part of that is fear of being called out and having that value negated. Same for vote selling). The discussions we are all having affect this behavior and certainly are having effects on how people choose to behave. This is why I don't think it's necessarily as futile as arguing with the sky.

Its intrinsic value is exactly the ability to decide, not the end result of choosing to use it on yourself.

On a very basic level, if its value to you otherwise is less than using it on yourself, then not using it on yourself is you giving up value. It's not the vote fundamentally having less value.

In reality the baseline should be somewhere above self-voting, adjusted for how compelling the Core Game is across users who value their outgoing vote higher than their self-vote. That's the promise of Steem as a system. But getting to a number there is pretty difficult.

Ah interesting. Now I see what you mean. In this framework the goal would then be to convince vote sellers and such that they are being inefficient with their behavior (well, I guess that depends), though I'd add that the value seems to depend on the behavior of the game users as well. Makes it all very weird and circular in my head.

Oh, it's all very weird and circular out here too. Not helped by a white paper whose purpose is to obfuscate it all.

In between your comments I was thinking that I should be able to quantify my own premium on outgoing votes by analyzing my voting behavior. That might be useful for finding places I'm not using it as well as I would like.

OK. I needed to read this. It’s a bit late here in Australia so some of it went over my head so I’ll be needing to reread it again to understand it all.
Sorry for my ignorance and if this is a stupid question (wouldn’t be the first time I’ve asked stupid questions), but what’s an SBD peg?
Thanks mate

what’s an SBD peg?

The intended system design of Steem from the beginning was that SBD would be a stable store of value that was pegged to USD, so it always held a value of $1. All of the payout systems are designed as if this were true. For instance, if SBD were $1, the number at the bottom of your posts would be USD instead of the difficult-to-understand hybrid we have now.

But no plan ever survives contact with the enemy, as my friend Lois likes to say. The actual market has been valuing SBD quite a bit higher, which makes everything that was designed for it to be $1 act very strangely.

I really wanted to read this... But alas I've been up for almost 20 hours. Resteemed... I will check it out tomorrow

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Thanks for sharing @tcpolymath. I'm trying to understand the backend system of everything and feel like I still have a while to go. Each articles puts me a step ahead.

Absolutely intriguing, I need to spend more time researching on this to better understand certain parts of your article. Very thought provoking, thank you for an amazing post!

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