First and foremost, What is a cryptocurrency?
A cryptocurrency is a digital currency that is traded on a shared ledger which is maintained by a decentralized network of computers. Examples include Bitcoin, Ethereum, litecoin and Steem.
As per the Merriam-Webster (online) Dictionary:
Definition of cryptocurrency
:any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions
What is Blockchain and how is it relevant to Cryptocurrencies.
The blockchain can be thought of as the powering force behind cryptocurrencies. Essentially, it is a virtual spreadsheet that is duplicated across a huge network of computers known as ‘nodes’.
The information held across these nodes is updated regularly, and it is shared and completely transparent making it virtually impossible to make unauthorized changes.
By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet.
It is the technology that is literally the backbone of cryptocurrencies.
Now lets look at Steem.
For those who are not familiar with Steem:
Steem is the blockchain database, created as an open source and publicly accessible blockchain database to support community building and social interaction with cryptocurrency rewards.
The Steem blockchain platform is designed to address the major barriers to adoption and monetization of a social media based economy. It mimics the same techniques used to grow major social media platforms (like Facebook, Reddit and Medium) to bootstrap a successful cryptocurrency also called Steem.
The Steem platform is built upon Graphene. This technology has been demonstrated sustaining over 1,000 transactions per second on a distributed test network and can easily scale to 10,000 or more.
Now lets have a look at the cryptocurrencies of the Steem ecosystem:
Steem has two types of tokens, Steem and Steem Dollars (SBD).
Blockchains like Steem and Bitcoin produce new tokens each time a block is produced. Unlike Bitcoin, where all of the new coins go to the block producers (called miners), the Steem blockchain allocates a majority of the new tokens to a reward fund. The reward fund gives users tokens for Steemians participating in the platform(s).
STEEM is the base liquid currency token in the platform. STEEM can be powered up into STEEM Power, traded for Steem Dollars, and transferred to other accounts. It is a cryptocurrency token, similar to bitcoin. STEEM is the standard Cryptocurrency tradable on various exchanges. Its value can fluctuate just like any other coin.
Steem Dollar (SBD)
The Steem Dollar (aka Steem Based Dollar, Steem Backed Dollar or SBD) is a token that is meant to be worth about $1 USD, making its value much more stable compared to STEEM. To be a bit more technical, a Steem Dollar is a promise to pay one dollars worth of Steem when it’s redeemed.
The benefit of Steem Dollars is that businesses can accept them more comfortably since they have a more stable value.
Can you imagine being a shop owner and trying to sell your $5000 product for BTC which only months ago would have been for 10 to 50 BTC compared to today being less than 1 BTC.
Pricing products and services are much easier when using a stable value, as well as knowing that what they’ve already been paid, won’t lose value.
SBD is backed by STEEM, hence the idea is that STEEM is like a Gold Reserve that is used to ensure SBD stays firm at $1 US.
Note: this description using the “gold reserve” is just one way of describing it, without going into all the itty-gritty economics and formulas! But it does describe and basically explain why Steem Dollars use “SBD” as its acronym.
You will also come across the following term:
STEEM Power (SP)
STEEM Power (SP) is STEEM that has been locked in, “vested”, meaning it can’t be immediately withdrawn to spend.
Vesting STEEM to SP is called powering up.
Basically you are investing your Steem into the ecosystem and by doing so, you are increasing your stake and in return you have a higher level of influence.
i.e. When you reward someone with what is referred to as an “upvote” you are sharing a larger portion of the “pot of funds” available for distribution.
In general the more you invest via “powering up” (into SP) the more your vote is worth.
Withdrawing this Steem is done over a 13 week period. 1/13th per week is paid back every week. This is so that the ecosystem does not destabilize when a withdrawal is made. Hence ensuring that the ecosystem stays stable at all times.