A preliminary sale that would find bitcoin mining firm KnCMiner continuing under new ownership has been approved, according to those close to the deal.

Speaking to CoinDesk, court-appointed receiver Nils Åberg today confirmed that a sales agreement was reached on Friday with a Swedish firm called GoGreenLight. Founded for the purpose of completing the acquisition, GoGreenLight is a new sister company to Borderlight, an Uppsala-based IT and telecom firm founded in 2000.

Notably, Borderlight's Sten Oscarsson said that GoGreenLight could continue to operate KnC's bitcoin mining pool and data centers once it assumes leadership.

Oscarsson told CoinDesk:

"We will run the mining to the extent that it is profitable, but in addition to our core business. We have a strategy to solve their current problems. It’s most likely the case that we’ll be a player."

Oscarsson said his firm is aware of the struggles KnCMiner had in adapting its model from one focused on direct-to-consumer sales to one focused on industrial mining, but that it could acquire talent as part of the deal.

"It was one of the few operations that had successfully competed on the world market," he continued.

While GoGreenLight is in discussions to hire members of the KnC team, no previous owners are involved with the acquiring firm, he added.

The developments follow an update from Åberg in July in which he suggested KnCMiner, which entered bankruptcy in May, was considering multiple buyers.

However, he indicated the GoGreenLight team provided the most compelling of all proposals.

"This was the best alternative for the estate and the creditors," Åberg said.

Åberg further said that "additional considerations" needed to be finalized before the sale was properly concluded.

Image via KnCMiner

AcquisitionsEuropeKnCMinerMiningSweden

Original author: Pete Rizzo

Nozomi Hayase, PhD, is a writer who has been covering issues of freedom of speech, transparency and decentralized movements.

In this opinion piece, Hayase discusses the recent hack at a major bitcoin exchange and why she believes this should serve as a call to action for those who believe in decentralized solutions and their virtues.

The problems associated with operating a bitcoin exchange are not going away.

On 2nd August, Bitfinex, one of the largest bitcoin exchanges by volume, became the latest to declare itself the victim of a major security breach. Accounts were hacked and consumer funds stolen. The ghost of Mt Gox stirred again.

Yet despite the issues, exchanges still serve as gateways into bitcoin, the interfaces with the world of central banking. With large exchanges like Coinbase and Bitfinex dominating the trading scene, commercialization has come to the fore of what was once a grassroots movement spurred by anarchists and technologists.

These fast-growing companies provide convenience to users, while at the same time, funds accumulated in a handful of exchanges tend to concentrate risk and create single points of failure.

The Bitfinex theft represents another failure of centralized systems. While some call for more regulation, it appears that new solutions are already emerging within the ecosystem.

Promise from the future

As Bitfinex works to restore its services, interruption from the hack has encouraged community members to examine what has become the familiar landscape of centralized exchanges.

It may be helpful here to look back at the genesis of cryptocurrency.

The message embedded in the first block of the blockchain reads: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". This can be seen as a warning about an alarming future, locked in a trajectory from the past.

Bitcoin presented a choice that has never existed before. Its mysterious creator Satoshi Nakamoto described it as "a distributed system with no single point of failure…" where "users hold the crypto-keys to their own money and transact directly with one another, with the help of the P2P network to check for double-spending".

The white paper published under pseudonym was a promise. Bitcoin, which became operational in 2009, was its fulfillment. The promise was to build security through cryptographic proof, replacing third-party trust and creating networks resilient to counter-party risk.

The 2008 financial crisis coupled with unprecedented institutional corruption began to unveil adversarial forces that the creator of this technology had recognized.

Assumptions about governments, namely that they are "there to protect us", have increasingly been challenged. Trusted third parties that are meant to serve the people are actually often doing the opposite.

The high interest rates of many credit companies are verging on predatory. Corporations skim massive profits through service fees and chargebacks. They target the poor and migrant workers with remittances and usurious loans, and are now even going after the middle class. Central banks debase currency, while governments using media propaganda divert taxpayer money to fund resource wars.

New vision of security

This force of control is found not only in monetary transactions.

The centralization that was implemented for efficiency has now planted the seed for data mining, making systems vulnerable to censorship and spying. Edward Snowden's disclosure of NSA mass surveillance revealed the degree of its egregiousness.

In response to the demand for reform that came after the revelation, US President Barack Obama swiftly moved to defend the secret surveillance program. At that time, he told the American people, "You can’t have 100-percent security and also have 100-percent privacy." Then he noted that people have to make choices as a society. His solution was for the public to simply trust the government.

As most money now has become digital, central servers that collect information have devastating consequences when personal data is breached. Contrary to Obama's expressed claim of security, the truth is that people under indiscriminate surveillance no longer have privacy, nor do they have the security to protect themselves against governments that operate in secret and erode their basic rights.

Unlike the security promised by politicians entrenched in power, bitcoin is built on a different vision of security. The Cypherpunks who advocate use of strong cryptography as a means for social change held the idea that "we cannot expect governments, corporations or other large, faceless organizations to grant us privacy out of their beneficence."

They saw that people must come together to build new systems.

Bitcoin developers, who are inspired by this same vision, strive to build a new model of security that does not make anyone compromise their civil liberty. Carried by a passionate network of peers around the world, in these last seven years, this security has never been broken.

Despite recent setbacks with Bitfinex, Bitcoin’s hashrate right after the hack was at an all-time high.

Open-source protocols

Bitcoin is a community-driven free software project.

Its network immutability is supported through decentralization. Satoshi's anonymity represents the core of this technology. By keeping the network horizontal, from its origins to its development, it maintains an unprecedented model of security and the ecosystem grows organically.

In this, decentralized exchanges could become a vital link that connects many users to bitcoin’s network, yet there is a shortage of these exchanges.

Bitsquare is one of the few fully decentralized and censorship-resistant exchanges that is attempting to fill this gap. Launched in late April this year, it aimed to creatively tackle issues intrinsic to centralized exchanges.

After the Bitfinex incident, an account that belongs to the exchange tweeted:

Time to extend Bitcoins model of "Be your own bank" to "Be your own exchange".@aantonop

— Bitsquare (@bitsquare_) August 3, 2016

Founder Manfred Karrer explained how Bitsquare is decentralized by removing trusted third parties from exchange transactions, allowing anyone to buy and sell Bitcoin with national currencies and alternative cryptocurrencies.

Using Tor Hidden Service for the server, the project tries to bring stronger privacy protection that could address bitcoin's weak anonymity. What is unique here is that Bitsquare is not just a decentralized exchange, but it is a protocol aimed at keeping the network open. Bitsquare is not a registered company. It is an open-source project that can be studied, modified and freely shared.

Bitsquare’s commitment to decentralization is practiced through its choice of prioritizing security over convenience, manifested in their act of not holding users funds or collecting data. This priority also extends to how they bootstrap the organization, valuing community-oriented development, rather than top down management driven by rapid growth and profits.

After Bitfinex’s security breach, Bitsquare is now gaining more traction, with clients currently supporting 73 different altcoins. In this early stage of the project, it has some limits, so there is room for improvement.

Solution from below

Centralization has been a dominant paradigm of the society we live in today.

Corporate structures are organized hierarchically, divorcing CEOs from the needs of their own employees and customers – often turning people into cogs in a machine. This style of organizing not only dominates markets, but greatly influences political systems. As a consequence, governments are increasingly becoming foreign to the people they are supposed to represent, creating a vast divide between those who govern and the governed.

In the world of trusted third parties, we have become "consumers" who are meant to passively accept programs and apps that are designed without much consideration for our best interests. On the other hand, distributed systems empower individuals and increase the role that users play in the network.

One lesson from this Bitfinex heist may be to realize our own power and the responsibility that comes with it. This can become a collective wisdom that makes the community stronger.

Decentralization creates a fertile ground that nurtures diversity. Platforms like BitMarkets and OpenBazaar that enable fully P2P markets bring a space for people to directly engage in trade without anyone in the middle. The more decentralized exchanges and projects there are, the more that both risk and opportunity are distributed.

Problems of centralization cannot be solved through the same modes of thinking that created them. Instead, solutions require innovation from below.

Security through cryptographic proof was a promise.

Our network effect of participation can fulfill this promise, making the system bulletproof; one that cannot be hacked, Goxed or Bitfinexed and that leaves the tyranny of the past behind.

Alarm clock image via Shutterstock

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

BitfinexDecentralizationExchanges

Original author: Nozomi Hayase

Antony Lewis is a bitcoin and blockchain consultant, who previously served as the director of business development at bitcoin exchange itBit.

In this article, Lewis attempts to describe two very different uses for blockchain technology and why the division of these two functions is increasingly of interest to enterprise firms.

On Tuesday, 2nd August, I had the privilege of attending an event hosted by the Monetary Authority of Singapore, the city-state's central bank and financial services regulator.

For 90 minutes, we heard from an all-star panel: Blythe Masters, CEO of Digital Asset; David Gurle, CEO of Symphony; Daniel Gallancy, CEO of SolidX; and Tim Grant, head of R3's Lab and Research Centre.

One of the panelists said something that got me thinking – using blockchains for what she called 'proof of satisfaction', ie evidence of agreement or assertion that something happened to the satisfaction of the parties involved.

It seems that two types of blockchain* or distributed ledger are emerging: blockchains as digital token ledgers, and blockchains as registers where proofs of activities (transactions, bets, etc) are recorded.

1. Digital token ledgers

These ledgers record ownership and changes to ownership of digital tokens.

There are two distinct types of token:

Digital assets: The token is the asset. The classic example of this is bitcoin. You own a bitcoin, that's it – you can’t take that to anyone and claim the 'underlying' thing. Satoshi Nakamoto, the creator of bitcoin, doesn’t own a bunch of gold he promises to give you if you wave a bitcoin at him. (Neither do central banks for fiat currencies, but that’s for a different post).

A bitcoin is your asset, and there is no corresponding liability owed by someone else.

Digital claims: The digital token is a claim for something against someone else who promises to give you the actual asset upon presentation of the token. It's a debt token, or an IOU. It’s your asset, but their liability.

The classic example is user-issued tokens on Ripple, where "gateways" (eg banks) issue tokens representing underlying assets (eg gold) or issue them in place of existing liabilities (eg currency deposits).

These tokens can be passed around to different owners, where changes to ownership are recorded on the shared ledger, and where owners ultimately need to come back to the issuer to claim the underlying thing, rather like claiming your coat by presenting your cloakroom ticket at the theatre.

(Note: user-issued tokens on Ripple are not to be confused with Ripple’s underlying token XRP, which actually is an asset).

2. Activity registers

This second class of blockchain contains entries that feature data, usually fingerprints of data called hashes, possibly stored with some other non-sensitive metadata. The data can represent anything, but in the financial services context, they might be trading facts about transactions negotiated and agreed "off-chain" via another channel.

This keeps the commercially sensitive secrets off the industry-shared ledger, while leaving an indelible mark on it that can be referred to later if needed.

For example:

Two banks agree on a trade, with various trade facts (dates, price, amounts, etc). They can agree via any mechanism such as telephone, email, click and trade, or carrier pigeon. They both record the trade details in some very standardized way (standards are important here as pedantry is key when creating and agreeing hashes). They calculate and agree the hash of the trade facts. The hash gets submitted onto some sort of timestamped industry blockchain, cryptographically signed or agreed by one or more parties.

Note that the hashes themselves can't be backwards-engineered into the trade fact data if they are well constructed. But in the future, either party can take their copy of the trade facts and show it to anyone interested and point to the hash on the blockchain which proves:

These are the original trade facts – or at least these trade facts existed at the timestamp time. Whoever signed the hashes, must have also agreed to the trade facts (if there was some some sort of requirement for both parties to put a signature against the hash in the first place).

This concept can also be used to store data such as images, newspaper headlines, identity information, etc.

Which blockchain should activities be registered on?

Private blockchain supporters prefer to store proofs of activity in databases visible to only known participants, with the comfort that all writers are known entities, and censorship may be possible, if required, and it is also cheap to write on a private blockchain.

Public blockchain supporters would argue that if all you’re doing is putting hashes somewhere without giving away any trade facts, then why not use bitcoin’s blockchain as it is the most tamper-resistant and battle-tested chain, and the cost of transactions can be kept low by bundling data and committing the bundle at once – using techniques like Merkle trees.

Personally, I think the industry needs more differentiated terminology, or to at least be clear on what we are talking about. I would suggest "distributed ledgers with asset tokens", "distributed ledgers with claim tokens" and "distributed activity registers".

Not as sexy as ‘blockchain’, but probably more clear.

Summary

Blockchains seem to be being used for very different uses: recording ownership changes of digital tokens, and recording activity with timestamped proofs of existence of data or agreements about data.

Bitcoin

Bitcoin has a blockchain which contains:

Asset tokens (BTC) – this was the intended use Claim tokens in the form of volored coins etc – not really the intended use Hashes of data – not really the intended use.

Ethereum

Ethereum has a blockchain which contains:

Asset tokens (ETH or ETC depending on which ethereum!) A multitude of 'user generated' tokens that are created and managed through smart contracts Hashes stored in smart contracts.

Ripple

Ripple is a distributed ledger which contains:

Asset tokens (XRP) used mainly as an anti-spam mechanism to make each transaction cost a tiny amount Claim tokens (gateway-issued tokens) whose transmission from user to user is the main purpose of Ripple Hashes of data – not really the intended use

Private Industry Activity Registers

These may be distributed or not, but they are databases that contain:

Immutable(ish) records of hashes of private activities between participants Usually cryptographically signed by known participants for non-repudiation.

The distributed ledgers may not include records of real final settlement of actual digital assets eg stock ownership unless the token is the asset a la bitcoin or a real central bank-issued digital currency.

In the private blockchain space, there are still privacy issues around letting your competitors know what you own.

This article originally appeared on Lewis's blog Bits on Blocks, and has been republished here with his permission.

Chicken and egg image via Shutterstock

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

Bankingdistributed ledger

Original author: Antony Lewis

Bitcoin development startup Blockstream has announced a slew of new hires that serve to further the firm’s already impressive technical team.

Covering new additions to its engineering, finance and operations and special projects divisions, the announcement formalizes some relationships that have been semi-public for months, while including other, more recent moves.

For example, BitPay open-source lead Eric Martindale, now the company's "technology evangelist", has been with the company for over a year in some capacity. Further, Andrew Poelstra was co-author of the sidechains white paper, the technical proposal for which Blockstream would raise upwards of $20m toward the end of 2014.

Elsewhere, Blockstream announced the addition of former Swiss Federal Institute of Technology researcher Christian Decker, best known for his work on Duplex micropayments channels. Decker will continue this work by contributing to the bitcoin Lightning Network, an alternative implementation of a similar concept, on behalf of Blockstream.

In statements, the startup sought to stress the diversity of the new hires in terms of subject matter expertise and geographic distribution.

The company said:

"With this new group, we're now even more distributed as a company with people working from across the US, Canada, Europe, Australia, and New Zealand."

The announcement follows the startup’s acquisition of wallet startup GreenAddress in July.

Image via Consensus 2016

BlockstreamLightning NetworkTechnology

Original author: Pete Rizzo

Bitcoin prices experienced some notable price fluctuations in July, pushing higher as anticipation surrounding the halving drove bullish sentiment.

In spite of ups and downs over the 30-day period, bitcoin volatility fell significantly in July. By the end of July, 30-day realized volatility had declined to 27%, compared to 30% at the end of June.

Arthur Hayes, CEO of leveraged trading platform BitMEX, said that the decline in this key metric likely had both positive and negative effects on the market.

Hayes told CoinDesk:

"When volatility falls, so does trader interest and that takes the price down with it."

Indeed, July's most high-profile news story was ultimately a non-event.

The halving saw a reduction of the network's miner reward from 25 BTC to 12.5 BTC. This event took place on Saturday, 9th July, when the 420,000th block was mined.

Strong market sentiment

Still, that wasn't to say there weren't notable developments in the market's fundamentals.

In July, market sentiment was stronger on average than in any other month in 2016, according to figures provided by bitcoin trading platform WhaleClub. During the month, 81% of total position volume was long.

This figure nearly doubled January’s figure of 43% and far surpassed February's 55% total.

Past that, it was notably higher than the 62% that sentiment averaged during the first seven months of 2016.

The trader optimism that existed in July was also illustrated by WhaleClub confidence data, which measures the percentage by which a particular day’s position sizes were larger than average. Confidence averaged 82% during July, higher than any other month in 2016 except February, when it reached 83%.

While July's confidence measure nearly doubled every month in 2016, it did not sharply exceed the other monthly confidence figures the way sentiment did. The lowest confidence figure observed for the year was 68% in June, and the remaining months registered figures between 71% and 74%.

Market sentiment was particularly strong leading up to the halving, as 89% of total position volume was long between 1st July and 8th July, according to additional WhaleClub data.

During this period, confidence averaged 82%. These figures not only exceeded those for July as a whole, but far surpassed the sentiment and confidence measures for the first seven months of 2016, which were 62% and 63%, respectively.

During this time, bitcoin prices rose to as much as $704.42 on 3rd July, nearly 5% from the opening price of $672.48 on 1st July, CoinDesk USD Bitcoin Price Index (BPI) data reveals.

The digital currency’s price had recently suffered a “sudden and intense” decline from nearly $800 to $550, and "the price rise back to $700 was a natural market response" as traders took advantage of the depressed price that existed before the halving, said Zivkovkski.

He emphasized that before the price dropped more than 13%, Whaleclub registered a record long-short ratio of 22 to 1, which pointed to an abundance of market participants having long positions open.

"No new money entered the system, and following a few days of low volume and failure to reach new highs, low entry buyers triggered a large sell off by taking profit," he said.

Impact of halving

When the much-awaited halving finally took place 9th July, bitcoin prices fell to as little as $626.87, 11% lower than the monthly high.

Tim Enneking, chairman of cryptocurrency investment manager EAM, spoke to how the digital currency was bound to suffer a fallback.

"The halving is what drove prices from around $400 to almost $800," said Enneking. "[This effect] was not lasting, however, with an almost immediately retreat back after the fact to $700 and then $600."

Even though bitcoin prices declined following the halving and remained subdued for a few days after the event, the markets remained bullish.

WhaleClub data showed that in July, 81% of total position volume was long and confidence stood at 76%.

Mining production

Another area market observers had pointed to when emphasizing the potential drawbacks of the halving event was mining production.

As miners faced the possibility of generating less revenue, some analysts voiced concerns about the long-term viability of some companies.

Analyst Chris Burniske, blockchain products lead at investment manager ARK Invest, said these concerns proved overblown. "Hash rate trends since the halving have been reassuringly stable," he said.

Still, he suggested that there perhaps isn't enough evidence to suggest all halving events will be similarly smooth for the network.

"That said, if the hash rate stays flat over the coming years, then it actually gets cheaper to attack the network due to the deflationary effects of technology," stated Burniske. "Hence, watching the hash rate with each halving of the block reward will be critical to assessing the efficacy of long term incentives for miners to support the network."

Using a basic analysis, Burniske estimated that capitalizing a 51% attack would currently cost $680m. Given this figure, he emphasized that the mining network has remained “extremely robust” throughout the halving.

Market developments

While the halving – and the sentiment surrounding this event – grabbed the lion’s share of the attention in July, market observers pointed to other developments as contributing to bitcoin's price fluctuations.

Some analysts asserted that the Brexit, the highly visible exit of the UK from the European Union (EU), affected bitcoin prices in July.

While British voters approved the proposal of leaving the EU during the month, the situation could help heighten global macroeconomic uncertainty for years to come. The nation’s officials have not yet triggered Article 50 of the Lisbon Treaty, which is needed for the UK to formally begin the process of exiting the EU.

Once they do, they will have two years to negotiate new agreements with trade partners.

Analysts see the EU as a potential influence on the price of bitcoin ahead.

"I think the Brexit has something to do with the relative stability (or conversely, lack of uptick) of BTC, as the industry in general sees it as an opportunity for bitcoin (and other meta-assets) to play a larger role in the UK economy," said Rik Willard, founder and managing director of Agentic Group LLC.

 

Algorithmic trader Jacob Eliosoff also weighed in on the situation, stating that the Brexit probably boosted bitcoin in July, thought he said the US election, and the strong polling observed by Republican nominee Donald Trump were also factors.

Yuan manipulation

Another development that grabbed the attention of digital currency market observers was the People’s Bank of China’s (PBOC) manipulation of the yuan. The central bank has maintained a currency peg to the dollar for years and reduced this fixed exchange rate more than once in 2016.

These policy moves generated significant visibility, as some market observers asserted that devaluing the yuan would prompt Chinese market participants to put their funds into bitcoin as a store of value.

Olaf Carlson-Wee, founder of digital asset hedge fund Polychain Capital, commented on this situation.

"Chinese markets usually drive bitcoin prices, especially when it's a bull run," he said.

Wee believes July saw some portion of wealthy Chinese citizen using bitcoin to escape capital controls, which in turn helped drive the market.

While many have pointed out the relationship between yuan devaluation and bitcoin demand, in July, the bank boosted the yuan’s daily fixing.

Hayes described this as "a price negative factor".

Child with muscles image via Shutterstock

Halving 2016Prices

Original author: Charles Bovaird

When an obscure cryptocurrency with a total market cap of approximately $14m skyrockets to over $400m, people take notice.

But, when that cryptocurrency forms the backbone of a social media entity rewarding people for creating content, sometimes with thousands or tens of thousands of dollars for single posts, excitement and skepticism ensues.

Launched in March and gaining prominence in July, Steemit, a self-described "blockchain-based social media platform", has seen this level of notoriety in just its first few months of operation. To date, it has polarized blockchain experts while winning scores of newcomers to the technology.

The brain-child of Daniel Larimer, founder of BitShares, and Ned Scott, a former financial analyst, Steemit aims to provide a place for individuals to create content, promote the content they believe is good and comment on stories — all while earning money.

But Steemit is more than just a website for earning spare change.

It’s an actual blockchain built on a piece of technology developed by Larimer called Graphene, which allows for the deployment of application-specific blockchains.

Scott, in interview with CoinDesk, explained that the team only had the idea for Steemit back in January and, because of the Graphene framework, they were able to quickly roll the project out.

The rest, like most things in the blockchain space, is a bit difficult to explain.

The pop

For the first few months, there wasn’t much talk about Steemit.

While there were early miners and people contributing content, the real big bang didn’t come until 4th July. When the dam opened, $1.3m worth of stored-up blockchain-based currency called "steem" was released to those that had been participating on the platform.

Scott explained that, while all of the blog posts, comments and upvotes that had occurred on the site pre-July 4th were all on the blockchain, the rewards users had been promised for their contributions had not been distributed. The underlying idea was that the team wanted to continue testing the platform, finding bugs and fixing them prior to a rush of new people signing up.

He cautioned that, no matter how diligent the development team is, there are going to be bugs and that they wanted to ensure that Steemit was safe and secure for everyone.

Nevertheless, 4th July was a day that they had all been looking forward to.

Scott said:

"What happened on 4th July, it was like a three-month long day that finally ended. Today, the rewards pool distributes in a continuous matter. On that first day, it was sort of this moment that had been building up."

And with that pop, users who had been watching their balances rise were instantly rewarded.

One currency, two smart contracts

Part of the confusion with Steemit lies in the different ways that the currency is presented to users.

At the root is the currency Steem, which is the typical transferrable, fungible, freely moveable token akin to bitcoin, ethereum or any other cryptocurrency. But that same Steem can be put into two different types of smart contracts depending on the particular utility an individual wants.

The first is called Steem Power, which provides utility and leverage. Steem Power is the backbone of an account's voting-potential. In other words, the more Steem Power an individual has, the stronger their vote is on Steemit.

Scott explained that the team wanted to provide a mechanism by which individuals could take a long-term interest in the project, while allowing others to continue with their speculation. In the white paper, Steem Power is compared to long-term capital commitments, similar to what a venture capitalist might do.

While users can invest their money instantly, there is an expectation that it will take time to see a return on that investment.

In the case of Steem Power, should a user want to convert back to the base currency of Steem, it will need to occur in 104 weekly conversions.

The second smart contract is called Steem Dollars. This is a debt-like instrument that promises to distribute $1 worth of Steem to the token holder at some point in the future.

Scott explained:

"[This is] the blockchain telling the holders of Steem Dollars that, at any point in the future, the blockchain will convert their Steem Dollars into a dollar’s worth of Steem after a seven day conversion process."

This seven-day conversion process is meant to minimize the ability to create arbitrage attacks by market timers. If the Steem Dollars were convertible to Steem immediately, a user could take advantage of a difference in price, convert their Steem Dollars into regular Steem and earn more than the $1 worth the smart contract intended for it.

Because it is a stable debt instrument, users who hold Steem Dollars miss out on any Steem price increases. If Steem is worth $1 and this conversion took place, the individual would receive 1 Steem for every Steem Dollar they owned. If Steem rose to $2, the individual would receive 0.5 Steem for every Steem Dollar they owned.

To compensate for the locked value, Steem Dollars accrue interest. At time of story, users that hold Steem Dollars will earn 10% a year in interest, paid out in Steem Dollars.

Rewards for writing and curating

There are two methods of earning Steem on Steemit.

The first is by writing a blog post. As that blog post accrues votes, the amount of Steem that will be distributed to the writer increase.

However, every vote on the site is not worth a flat amount of money. Instead, the amount earned is based on both the number of votes an individual receives and the amount of Steem Power a voter has.

For example, if one user had 1,000 Steem Power and another had 10,000 Steem Power, it's clear that the latter has a more powerful account than the former. The effect of each of those two people voting on a piece of content is not equal; specifically, the user with 10,000 Steem Power's vote is worth more.

This has resulted in the development of a sort of whale chasing culture, whereby writers hope to convince the large Steem Power holders to give them upvotes. A vote by Scott or Larimer has been seen to increase the value of a post by hundreds of dollars, resulting in a pile-on effect where others chase the post.

To incentivize this sort of voting, there is also the curation reward paid out in the form of Steem Power. If a post does well, you earn more Steem Power than if a post doesn’t do well, thus incentivizing you to only vote for content that you believe is high quality.

Further, not every vote from the same account is equal in value. Voting on multiple pieces of content reduces the strength of each of your votes depending on how much time passes between each vote. Scott explained voting power by comparing it to certain video games.

He said:

"It’s a lot like Diablo or something where you have mana. What happens is, if you're casting a lot of spells, your mana decreases and then it generates over time. The same is true of voting power. You have to put some thought into votes because you don’t want to waste your voting power."

There are two reward pool distributions.

The first is approximately 12 hours after the post has been submitted. The reward, denominated in US dollars, is released to the writer divided evenly between Steem Power and Steem Dollars. Voters receive the reward entirely in Steem Power. The second reward pool distribution occurs one month later.

Delegated proof-of-stake

A blockchain without security is not one anyone would have faith in.

Steemit gains its security from a delegated proof-of-stake algorithm, first developed for Larimer's BitShares project, which is a variation of proof-of-stake. A true proof-of-stake algorithm, such as peercoin, relies on those who hold the currency to verify transactions.

The more currency held by a wider variety of people, the more secure the network is.

In a delegated proof-of-stake system, the community votes for individuals, called witnesses, to be responsible for verifying transactions.

The easiest way to think about it is proof-of-stake is true democracy similar to ancient Athens. Delegated proof-of-stake is more of a democratic republic, such as the US. By that logic, witnesses are like Congressmen, elected by the community to be responsible for securing the network.

However, the analogy ends there, because witnesses can be kicked out of their job for not doing it, something the US Congress has been immune to for some time.

Scott said:

"It’s a paid position. We're not talking about four-year terms. We're talking about people with very specific jobs, which are to produce and verify blocks."

In total, there are 21 witnesses responsible for creating and signing blocks of transactions each time a block is made. The first 19 are voted for, as described above. Then there is a 20th witness, which is a random witness who might not have been in the top 19. The 21st witness is a miner doing typical proof-of-work.

In the Steemit white paper, the authors write:

"This process is designed to provide the best reliability while ensuring that everyone has the potential to participate in block production regardless of whether they are popular enough to get voted to the top."

New, but growing

Since catapulting in value to over $400m, Steem has cooled to an approximate market-cap of $157m, but this still makes it one of the six largest cryptocurrencies on the space.

While there are certainly naysayers, the reality is that Steemit continues to see more people signing up and participating.

However, it’s not simply Steemit the social media site, but also the blockchain that has experienced tremendous growth. Scott said that entrepreneurs and developers have already created 50 different tools, such as Catch a Whale (which tracks where whales have recently voted) and SteemMarket (which lets users buy, sell and rent goods with Steem).

Ned said:

"The people showing up to use this are going directly to the blockchain. We don't have the authority to tell them not to. In fact, we implore it. What we set out to do is build an ecosystem and that’s exactly what’s happening."

Whether they stick around past the excitement, though, remains to be seen.

If the stories of people paying off bills, buying family members washing machines and going on vacations is any indication, Steemit might have found a niche for content creators looking for ways to generate income.

Disclaimer: The author posted several articles on Steemit in conjunction with writing the report. 

Social media hero image via Shutterstock

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Original author: Jacob Donnelly