The Steem Takeover Controversy Exposes Failings in Governance Jonathan Follow Mar 13 · 7 min read

Steem has recently experienced a major breakdown in blockchain governance.

The Steem community is currently experiencing what appears to be a takeover of their blockchain and network and a protracted conflict with the new owners of Steemit, Justin Sun’s cryptocurrency platform TRON.

Some quick background

Here’s a quick rundown of the Steem ecosystem:

Steem is a blockchain developed by Dan Larimer and Ned Scott in 2016 that is continually built by 20 “witnesses” elected by the community

Steemit is a blogging platform built on the Steem blockchain

The blockchain runs on STEEM tokens and anyone holding STEEM can participate in the witnesses’ election

Steem Power is the voting power STEEM holders receive when they “power up” their holdings and there are rules and conditions on how this process works

The witnesses building new blocks in the chain have the power to set rules and standards in the code by coming to a consensus on the changes and pushing these changes in soft or hard forks

Hard forks require everyone to update to the new standards and comply with those rules to participate; soft forks don’t and they still allow participation with older versions dating back to the last hard fork

The Takeover Timeline

Cobbling information together from several public sources, here’s the order of key events shaping this controversy:

February 14 — TRON announced its purchase of Steemit from the remaining founder, which included a pile of STEEM amounting to roughly 20% of all STEEM in existence.

TRON also revealed its intentions to migrate Steem users and products to the TRON network and possibly convert STEEM into a TRON-based alternative.

February 24 — The 20 Steem witnesses convened to push a reversible soft fork of the blockchain to lock down TRON’s new pile of STEEM from exercising its voting power with the stated intention of building a consensus on next steps with TRON leadership.

March 2 — Steemit’s new leadership contacted exchanges including Binance, Huobi, and Poloniex to power up the STEEM tokens they were holding for users to vote in an entirely new slate of witnesses, pushing out the previous 20 and rolling back their soft fork. These witnesses are alleged to be dummy accounts held or controlled by TRON leadership, according to longtime Steem witness Luke Stokes.

Since then, the Steem community responded in a widespread uproar over the perceived hostile takeover and have since mounted large campaigns to elect new witnesses, having captured a majority of witness slots at the time of this writing.

This community-driven effort was only made possible when Binance and Huobi acknowledged their part in the takeover and withdrew their votes from the conflict in the face of criticism. Note: the witnesses stated the fork was built soft so as not to make life harder on the exchanges.

According to a recorded virtual meeting between TRON and Steem witnesses, TRON has no interest in interfering in Steem’s governance and made the moves it did because it wanted to protect its investment in the STEEM tokens from the ninja stake.

How Steem was built made this possible

Regardless of who’s in the right or wrong, this situation was avoidable. The conflict was able to occur as a result of choices the founders made when they built Steem. Before the public launch, the founders of Steem mined a massive pool of STEEM tokens before opening the mining algorithms to the public. This pre-mined stake was so large that it currently adds up to about one fifth of the aggregate value of STEEM.

This move was criticized by the Steem community and dubbed the “ninja stake.” The founders responded by promising to never exercise the voting power of the ninja stake and that the tokens would only be used for things like covering development costs, supporting new account creation, and supporting projects. Unfortunately, this gentleperson’s agreement was never written in Steem’s code, leaving the blockchain vulnerable to the influence of whoever owned that ninja stake.

It seems this promise also wasn’t communicated to the TRON team during the sale process, hence the current controversy. Allowing the ninja stake to pass on to a new owner presented a huge risk to the community.

The Steem blockchain is billed as a decentralized system (just check Steem’s Wikipedia article), but keeping a massive amount of the voting power in the hands of a single account and promoting decentralization do not seem to be complementary strategies.

Creating such a massive advantage over a community like this seems similar to autocratic systems of the past. Steem was never truly decentralized as long as the founders’ STEEM reserve could be powered up and exercised. An ongoing question may be why the community never pressured the founders more successfully to lock out the pre-mined stake, especially given that the Steem witnesses had control of the blockchain’s rules.

Steem’s delegated proof-of-stake (DPOS) system also appeared to have some weaknesses. The DPOS structure caused a great deal of chaos for Steem, so other similarly-built communities and projects should examine their governance carefully, as Vitalik Buterin states. The same goes for everyone else — proof-of-work isn’t perfect, either.

This leads to another inconsistent feature of the Steem community: it’s entirely driven by wealth. Whosoever controls large quantities of STEEM can dominate the network, creating a blockchain-powered plutocratic oligarchy. A search of “Steem whales” turns up significant material. Check out this Steemit post defining what “whales” means to the community.

One Steemit user even spelled out his process for drawing whales’ attention in order to establish himself in the community. Another built an analytics script for finding whales in the hopes of earning their votes.

It was a remarkable achievement that Steem’s founders built their own blockchain and a social network on top of it; but, the presence of whales and the ninja stake stand in direct philosophical conflict to the mission of decentralization Just as the pre-mined stake aggregated power, so too did the early users fortunate enough to become whales. This is not the common definition of decentralization — it looks more like a technologically complex reinvention of a simple capital-based system.

Another mechanism that could be of concern in the wake of TRON’s takeover is the 13-week vesting period required whenever a STEEM token is powered up: those tokens are functionally inert and illiquid until the period expires or the tokens are powered down. While the lockups are good for lending stability to the network by forcing power-ups to be strategic, this feature can adversely affect users with less wealth because they have less Steem Power to exercise and could easily be outvoted by whales.

Even though the exchanges rolled back their votes in favor of TRON’s witnesses, the STEEM they powered up could have remained locked up in the exchanges if the exchanges didn’t recant. Those Steem owners would have to wait about 3 months or hope the witnesses push a hard fork that reduced the vesting period for those tokens immediately.

In general, Steem’s governance protocols appear regressive and plutocratic, highlighted by this latest controversy. Blockchains and social networks built on them should be built more equally, more democratically if the dream of true decentralization is to be achieved.

Everyone in blockchain should be paying attention

If you haven’t been following this saga, it’s actually developed into a critical moment for the blockchain world and it all hinges on one key word: trust.

Can communities trust the powers that be?

Can users trust the exchanges to exercise their currencies they hold in their best interest?

Can users trust their founders to build good governance and decentralized systems?

Justin Sun didn’t appear to trust the Steem community when he reached out to the exchanges to unilaterally leverage their STEEM holdings and the distrust appears to be mutual since, given the Steemit feed. Even if the community retakes more or all of the witness slots, Steem’s reputation has been damaged and Steemit seems to be in a downward spiral given the community’s sentiment and the exit of widely respected staff members.

There are many lessons to be learned from the issues Steem is experiencing, especially for building strong, effective governance models, ones empower users and create a viable, decentralized community with protections from single-handed control and abuse.

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