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2. This high interest rate will only last for 9 months... so might as well take advantage of it

What makes you think that? I don't think that is correct. The Steem Power compounding is perpetual.

I read form a post by dan himself if I remember correctly... I think the interest rate changes

I am bit confused about this. There is one form of compounding that comes from the perpetual creation of 9X Steem Power for every 1 Steem that is minted. Those 9X SP are distributed proportionally to all SP holders. So your SP holdings are always increasing. I don't think it ever ceases nor changes.

Is there also another form of interest paid on SP?

The 9-1 ratio between SP and Steem never changes. I'm pretty sure what he means by the "high interest rate" is the numerical reduction in the rate of effective interest as the supply increases.

Example starting with a supply of one coin:

Add first coin (interest/inflation is 100%)
Add second coin (interest/inflation is 50%)
Add fourth coin (interest/inflation is 33 1/3%)
etc.

Hopefully this explains it correctly:

https://steemit.com/interest/@bacchist/steem-power-interest-is-not-compound-interest#@anonymint/re-bacchist-steem-power-interest-is-not-compound-interest-20160723t033339934z

The problem with this design is that if everyone wants to power up, then the STEEM POWER investors are paying for all the exponential debasement, which is paying for blogging (and mining).

The Bitcoin money supply was debased at 100% per annum only the first year in 2009 and is now around 5%; whereas, Steem plans a perpetual 100% annual minting rate, but much of that is a forward stock split not debasement (approximately 2.8% per annum[1] appears to be the typical rate of debasement of STEEM POWER holders assuming STEEM remains about 10% of the money supply). Forward stock split means the price drop due to money supply increase is compensated with an increase in the number of tokens held.

In order to pay for the blogging without taking it collectively roughly 25% (9/10ths of 2.8% versus 1/10th of 100%) from STEEM POWER investors pockets, will require significant demand to hold STEEM tokens (note ownership changing hands rapidly is still demand as long as the demand doesn't want to power it up).

[1] 50% of 2 of the 4 STEEM created are paid as STEEM POWER for rewards, and that is at a ratio of 1/9th of STEEM POWER money supply per annum.

The flaw in this model is that although the STEEM POWER investors are protected from most of the debasement individually due 9/10th of it being a forward stock split, the price must decline due to 100% per annum increase in the money supply. Thus there is no incentive to hold STEEM for speculation. Thus most STEEM will end up powered up, thus most of the cost of funding the blogging will come from STEEM POWER investors.

However, the price might not decline because the supply of STEEM for purchase may become so limited. Locking up most of the money supply gives the impression that the money supply has increased but actually it is at worst 103/104th illiquid on any given week and at best only 50% liquid per year. So in that respect the model is clever.

Let's try this again.

The analysis of this bizarre design is somewhat complex. (The following is for the eventual case when current very high rate of minting of STEEM will reduce as a percentage of the money supply)

https://steem.io/SteemWhitePaper.pdf#page=35

100% of the money supply is minted yearly, but this is not all debasement.
10% of the money supply minted yearly paid out to various parties (77.5% of the 10% paid to blogging and curation rewards, which is 7.75% of the money supply).
90% (9X the prior item) of the money supply minted yearly paid proportionally to STEEM POWER (SP) holders (which is equivalent to a forward stock split, if SP supply is exactly 9 × STEEM supply, else +/- variable interest rate).
STEEM holders are debased 100% yearly, because 100% new supply created yearly and nothing is paid to STEEM holders.
If STEEM holders don't power up (and SP holders aren't powering down), SP holders are debased approximately (100% × (1 ÷ 9)) + (7.75% ÷ 2) = 15% yearly (because half of the 7.75% is paid as SP, which increases the ratio of SP to STEEM to greater than 9[1].).
If STEEM holders don't power up and all SP holders are powering down, SP holders are debased very roughly 15% - (43.875 ÷ 2)% ≈ -7% yearly, i.e. a 7% positive compounding interest rate.
If all STEEM holders power up immediately (and SP holders aren't powering down), SP holders are debased approximately (100% × (1 ÷ 9)) + 10% = 21% yearly.
If STEEM holders don't power up and all SP holders are powering down, approximately 90% + (7.75% ÷ 2) - 50% = 43.875% of the money supply is held as SP.
If STEEM holders don't power up (and SP holders aren't powering down), approximately 90% + (7.75% ÷ 2) = 93.875% of the money supply is held as SP.

The fairly low debasement rate of SP, means the "pre"-mine insiders will control the money supply for years to come.

It appears to me (in the bullish scenario) the economics incentives encourage most all STEEM to be powered up with some % of the SP being powered down over 104 weekly disbursements and (some % of the 10% STEEM created yearly) immediately being sold at an exchange then powered back up again. So the liquidity will range up to 67% of the money supply yearly, but it can be in the low single digit percentages while the users (investors) are ramping up their SP holdings before initiating the powering downs.

[1]	When the ratio is above 9, the 9 SP created for every 1 STEEM, is a negative interest rate (instead of a forward stock split) which debases the SP by the difference of ratio minus 9 (normalized to 100% yearly minting).

Note that when and while the curation rewards are disabled, then the numbers change as follows (and again assuming the eventual case):

92.5% of the money supply is minted yearly, but this is not all debasement.
9.25% of the money supply minted yearly paid out to various parties (83.8% of the 9.25% paid to blogging and curation rewards, which is 7.75% of the money supply).
83.25% (9X the prior item) of the money supply minted yearly paid proportionally to STEEM POWER (SP) holders (which is equivalent to a forward stock split, if SP supply is exactly 9 × STEEM supply, else +/- variable interest rate).
STEEM holders are debased 92.5% yearly, because 92.5% new supply created yearly and nothing is paid to STEEM holders.
If STEEM holders don't power up (and SP holders aren't powering down), SP holders are debased approximately (100% × (1 ÷ 9)) + (7.75% ÷ 2 ÷ 0.925) = 15.3% yearly.
If STEEM holders don't power up and all SP holders are powering down, SP holders are debased very roughly 15.3% - (44.175 ÷ 2)% ≈ -6.8% yearly, i.e. a ~7% positive compounding interest rate.
If all STEEM holders power up immediately (and SP holders aren't powering down), SP holders are debased approximately (100% × (1 ÷ 9)) + (9.25 ÷ 0.925)% = 21% yearly.
If STEEM holders don't power up and all SP holders are powering down, approximately 90% + (7.75% ÷ 2 ÷ 0.925) - 50% = 44.175% of the money supply is held as SP.
If STEEM holders don't power up (and SP holders aren't powering down), approximately 90% + (7.75% ÷ 2 ÷ 0.925) = 94.175% of the money supply is held as SP.

Edit: Note the exponential quality of this design (excluding the 7% compounding scenario enumerated above) is the 92.5 - 100% yearly minting of new money supply. And apparently also a pressure for the price to increase at the start as most are powering up. Thus the market capitalization could become a $10 - 100s of billion bubble before the powering down kicks in and the bubble pops. This would pay for $billion of blogging rewards yearly!

So the 90% compounding scenario I outlined originally is actually still the case in the bullish scenario!

And unless they are able to create a sustained transaction (aka transfers) use case demand for the STEEM token, eventually the bubble will crash as the SP powers down en masse. If they can created a sustained transaction use case demand, then it will peak and fall but find an equilibrium.

One potential flaw I see if that (in the non-bullish scenario) long-term investors may be hesitant to invest because they must power up, but they may not feel confident they can power down with perfect timing. And holding STEEM is debased at 92.5 or 100% yearly. Lack of demand to purchase STEEM could cause the price to be on a downtrend, thus denying the creation of a bubble and the growth in funding for blogging rewards. A declining price might encourage powering down and not powering up, thus reversing my assumption above about the economic incentives.

I am thinking this design has basically eliminated the medium-term speculation case. Investors must choose between holding STEEM for weeks only, or SP for 2 years (1 year weighted average of cashing out price).

Rapid increase of STEEM transactions (aka transfers, not Steem activity) would probably give long-term investors more confidence.

Where does the 10% interest paid to holders of Steem Dollars factor in your equations? I don't see.

Pheonike

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