Pros

The Steem system works to incentivize the use of Steem, potentially supporting demand for the STEEM token.
The smart media token (SMT) is a novel idea that could be useful to website operators who don’t have the expertise to create and manage a custom token on their own.

Cons

The concentration of STEEM ownership in the hands of a few large miners.
The lack of a cap on STEEM in circulation introduces risks to the long-term viability of the STEEM token.
The Steemit platform is ripe for manipulation by deep pocketed users who buy influence.
There is a lack of information about the team behind Steem and the members who have been identified lack any real business experience.
No details provided on how management will sell SMT's to the broader publisher community.

 
Summary
Steem is a cryptocurrency and blockchain that rewards and incentivizes users to post comments on websites. In addition to the STEEM token, Steem created the Smart Media Token (SMT), a customizable token publishers can use to incentivize an active community of users. Steem manages the creation process of the SMT for other publishers and allows the publishers to pay commenters on their third-party site in a custom currency or in STEEM tokens, potentially increasing demand for STEEM tokens.
What is Steemit.com?
Steem created the steemit.com platform as a proof of concept. The steemit.com website is a social media platform that pays users in STEEM tokens for posting articles and comments. STEEM tokens are an example of an SMT.

We recommend staying away from the STEEM token until the new smart media token (SMT) gains at least a few customers and the business model is fully explained.

The Steem ecosystem is very confusing so we have broken down the three different types of currency one can own and what their different uses are.

 
3 Forms of Currency
1. STEEM (STEEM Token)

Can be exchanged for 1 SBD (STEEM Dollars) on the internal Steem marketplace.
When users post or comment on the steemit platform they are paid with a mix of STEEM tokens, STEEM power (SP) and STEEM dollars (SBD).
The amount of STEEM a user owns determines how much bandwidth they're allowed on the blockchain when commenting and transferring currency.
STEEM can be converted into bitcoin on an exchange such as Blocktrades or Bittrex. The Bitcoin exchange rate directly depends on the popularity and use of STEEM.
STEEM tokens have no real use on the platform other than the conversion medium for SP and SBD.

2. SBD (STEEM Dollars) 

Convertible into $1 USD of STEEM tokens over a 3.5 day period using the Steem blockchain. You can also convert SBD to STEEM on the internal Steem marketplace.
STEEM dollars also pay interest at a floating rate (in more SBD), which is set by the witnesses who maintain the blockchain. The dollar peg is supposed to hold due to the ability of Steem insiders to adjust the interest rate to incentivize or discourage buying of SBD and the ability to convert SBD into $1 USD of STEEM tokens.
SBD can also be spent on Peerhub to buy consumer items or traded on a cryptocurrency exchange for bitcoin or any other currency. Affiliated with Steem, Peerhub is a sparse version of Craiglist. Peerhub looks like a ghost town and has very few items available and many for inflated prices. Peerhub is definitely not a deep or active marketplace.
STEEM dollars don't seem to have much of a purpose other than to support the value of the STEEM token because they are convertible between each other.

3. SP (STEEM Power)

Is a measurement of how much influence a user has on the Steem platform. You can convert STEEM tokens into SP for a period of time. The more SP you have the more your upvote counts in determining the value of an article to both the creator and the voters.
SP also entitles you to receive new STEEM tokens as they are created on the blockchain. 15% of new STEEM tokens created are allocated directly to holders of SP. SP holders vote to elect the witnesses who run the Steem blockchain.
Once your STEEM tokens are converted to SP you can only convert them back to STEEM at a rate of 8% of your holdings every week (13 weeks for full conversion).
SP holders also have the power to appoint 21 witnesses who administer the Steem blockchain.

 
Team Background
Dan Larimer (co-founder) - Dan is the founder of BitShares, the founder of Steem and the creator of the Steem blockchain. Larimer graduated from Virginia Polytechnic Institute in 2003 with a bachelors in computer science. A serial entrepreneur, he's been active in the bitcoin scene since 2009, creating Graphene, a blockchain technology, as well as EOS, a new blockchain venture.

Ned Scott (CEO) - Scott is the founder of Steem, CEO of Steemit and the creator of the SMT (smart media token). He graduated from Bates College in 2012 and only had three years of work experience before founding Steem. Based on what we could find, he doesn’t look to have computer programming experience and came to know Dan Larimer through his previous employment at BitShares.

There's limited information on the rest of the team. With the lack of Larimer and Scott's business experience, Steem scores low in this category.
SCORE: 1/5
 
Proceeds to Founders and Quality of ICO
Steem never completed an ICO, but the founders have done most of the mining since launch and are estimated to hold a majority of the STEEM and SP outstanding. We assign a low score for the high insider ownership and control over the entire ecosystem.
SCORE: 2/5
 
Coin Owner Protections
Witnesses, who are the equivalent of miners in the bitcoin world, are the ones who maintain the Steem blockchain, sign blocks, approve hard forks and print the new STEEM/SBD and SP. They also set the official price of STEEM tokens and the interest rate on STEEM dollars (SBD).

STEEM power (SP) holders are able to elect these witnesses, but with Steem insiders rumoured to be holding most of the SP supply, external coin owners effectively have little say in how the company is run.

If over time the ownership of SP becomes more democratic, then the current voting mechanisms may actually provide SP holders with a voice. Even if witnesses are democratically chosen, they don't have any control of the business direction and high-level decisions of the company so holders of SP and STEEM still effectively have no vote on the direction of the Steem platform.
SCORE: 1/5
 
Quality of White Paper/Company Description
The white paper is 61 pages long, which is robust compared to many white papers out there, however the depth of content is lacking. There's nothing explaining who the people are behind the creation of the platform and nothing discussing strategy, such as how they're going to market the SMT to the web or specifics about how the Steem blockchain works. As an investor in the Steem blockchain and STEEM token, the white paper provides very little information on what you're buying into.
SCORE: 1/5
 
Strength of the Coin Ecosystem/Blockchain
Steem’s main selling point is the SMT (smart media token), which will allow publishers of websites who lack expertise in creating and growing message boards, to create their own token, incentivizing users to be active on the publisher’s website.

This idea has potential, as it can be utilized by any website that has a message board function and would like to increase their userbase. More users equal a more robust community and greater opportunity for the publisher to make money. Websites who decide to create an SMT can reward community members in STEEM or their own currency, so adoption of SMT’s is very important to the overall demand of STEEM as a currency.
We are skeptical of the potential adoption rate of SMT for three reasons:
Commitment - For publishers it's a significant undertaking to commit to an SMT. They must decide how the social ecosystem will function in their site whether it's a simple message board or a more robust interactive platform for customers.

Publishers will also have to commit ongoing resources to making sure the token works as expected and to address any issues that arise. The Steem whitepaper makes no mention of a customer service function, which will ultimately be needed if Steem is to create and administer thousands of publisher tokens and blockchain interactions.

Manipulation is a real problem - Both content creators and content voters are paid based on the popularity of an article. This incentivizes users to post and vote on their own article to maximize profits. There's nothing stopping a deep-pocketed individual from hiring an army of content mill writers to churn out bogus content and then use another army of virtual assistants armed with hundreds of SP influence to create accounts and vote on the posts. The mechanics of the Steemit platform are wide open for manipulation.

Steem argues they have safeguards against this behaviour due to influence limits (your SP pushes the value of a post up less after every upvote in a short period of time) though this can easily be circumvented by creating multiple accounts.
They also argue that the public scrutiny that comes from being a valuable article viewed by many users and the ability of users to downvote an article will police manipulative behaviour. Judging by the low quality content floating around with many positive votes, there appears to be very little policing of content. The incentive to downvote is limited as there are no rewards for downvotes, only upvotes. A self-interested user would ignore downvoting to improve the quality of posts and would focus on upvotes to increase their STEEM earned.
Management also argues that someone who has invested money in the Steem platform would not want to do anything to hurt it. This argument is way too naive. The mechanisms in place to catch and discourage manipulation are ineffective and a manipulator would be happy to take advantage of the platform as long as they're not so large as to put downward pressure on the price of STEEM through their conversion from STEEM to fiat currency or other cryptocurrency.

Self-interested communities - The pay for comments model may work in the short term but it ultimately creates a hollow community that may struggle to attract significant interest. Monetary incentives often stifle community development as it fosters profit-seeking “me vs everyone else” mentality. Using steemit as an example, everyone on the site is competing to have the most upvoted post, which stifles deep interaction with others. Every post is like a one-off article for cash. Steemit is not creating a community built on shared values or interests, which is likely much more durable than one built solely on user’s self-interest, which is fleeting and will only endure as long as the price of STEEM holds up.

Concentration of ownership - Ownership of STEEM tokens is highly concentrated in the hands of only a few dozen early miners. These people are called “whales” by Steem users and wield outsized influence on what articles are featured on the main steemit page, keeping the ecosystem from being fully decentralized. Without a distributed ownership structure, other companies will be very wary of using STEEM to incentivize website activity and will likely choose to use their own tokens instead of STEEM for that reason, a bad sign for the continued growth in demand for STEEM.

 
Problems with the Steem Blockchain
STEEM issuance is inflationary - New coins are always being issued and there's no hard cap on how much STEEM can be outstanding, compared to Bitcoin and Ethereum where hard caps on the amount of currency exist. The lack of a hard cap removes STEEM’s ability to be a store of value, similar to gold. Inflation erodes the value of a currency unless demand for the currency continues to grow.

Adoption rate of smart media tokens - We're concerned that if smart media tokens don’t see rapid adoption by publishers, as user growth on the steemit platform slows, support for the price of STEEM could fall off. Not to mention there are only a few entities who own large quantities of STEEM and could crush the price if they tried to convert a significant amount of STEEM to bitcoin or USD.

Potential to game the system - Another problem lies in the “Proof-of-Brain” reward mechanism, which can be gamed. The accumulation of SP is uneven so there are small groups of users who hold most of the SP. These users can decide what articles are seen by the community, which stifles growth of a diverse commenting ecosystem. The few large STEEM owners can also game the system to increase payouts on their own articles, which erodes trust in Steem as a whole.

Bandwidth limits - The Steem blockchain limits the bandwidth used over a given period, serving as a gating mechanism for all activities on the platform. The bandwidth limits would introduce problems converting STEEM to other currencies as your bandwidth limit decreases at the same time more and more people want to conduct transactions.

Overall, without organic use of the smart media token taking off and providing stable demand growth for STEEM tokens, Steem is in a very precarious feedback loop. The attractiveness of adding content to Steemit is solely based on how lucrative it is which is tied to the market price of STEEM and SBD. As the flood of new content creators slows to Steemit it may hurt demand for STEEM tokens, which will then decrease the incentive of users to curate and post on the platform. Couple these risks with the serious lack of disclosure and the business model deserves a low 2/5 score.
SCORE: 2/5
 
Interest:

Steem’s search popularity on Google just recently peaked and is sitting at 85% of the peak. A strong number for a sub-rating of (5/5)
76,000 Twitter followers is almost twice the average coin (5/5)
21,000 Facebook followers is 1.5x the coin average (5/5)

Overall, there's high user awareness and interest in Steem and the Steemit platform. 
SCORE: 5/5
 
Marketing Plan 
A successful marketing plan to sign up publishers (websites) to use the smart media token (SMT) will be crucial for the long term sustainability of Steem. This is an area where the team has really fallen short. The whitepaper discusses how the SMT is expected to work for third party websites, but in all of our research we couldn't find any concrete details on a strategy for reaching a critical mass of client's to sell the SMT to. Are they hiring an internal sales team? What is the timeline for when fully functional SMT software will be available for third-party use? How many publishers do they think they can bring on board in the next few years.

The $20 million joint venture with Global Blockchain Solutions to invest in companies that want to build solutions on the Steem platform will help adoption, but this is effectively paying users in the form of equity to use STEEM coins, still a risky feedback loop. We need more clarity on what types of businesses the joint venture may target before we can judge the potential for SMT use among internet publishers.

Without a growing SMT user base, demand for STEEM tokens may not be as strong as expected, which when coupled with the inflationary nature of the STEEM currency could push down prices as Steemit matures and fewer users join the platform.

The Steemit website is basically a marketing platform for STEEM tokens:

15% of new STEEM minted are paid to users on the platform according to their SP. This is an incentive for users to hold their STEEM instead of converting it into bitcoin or USD and provides depth to the market.

Users are also encouraged to convert their STEEM into SP, increasing the STEEM they're paid as interest, but also locking up their funds for 13 weeks, again providing stability to the value of the STEEM token.

The steemit community is very vocal and have become brand ambassadors for Steem essentially. They post on steemit and in other places on the web about the benefits of Steem. Steem and individual steemit users have held meetups all over the world, which is free marketing for the platform.

The Steem management team does not have a specific marketing plan to increase interest in the token, but their enthusiastic user base is doing most of the work for them.

Steem is a system built on incentivizing users to buy more STEEM to increase their earning power and to hold on to tokens they have via SP. The steemit marketing mechanics are on point, but a lack of strategy for growth in SMT adoption keep us from assigning a 5/5.
SCORE: 4/5
Bottom Line
Steem scores a 1.8 overall on our ICO rating methodology. The lack of management experience and weak disclosure around how management is going to convince other publishers to use STEEM coins, coupled with concentrated token ownership and no hard circulation cap, all contribute to a low score.    
Overall Score: 1.8/5
 

A quick teach-in on how Steem works: The STEEM ecosystem functions very similar to Reddit. Users create conversations and make comments on threads. The big difference is that users are paid to post content, and the value of each posting is determined by the community based on the number of upvotes the content received. For example, a post with 50 upvotes will be paid 30 STEEM while an article with 200 upvotes will be paid 120 STEEM.

Writers are paid 75% of an article's value, while upvoters are paid the other 25% based on their STEEM power (SP). A unique wrinkle to be aware of is if an upvoter votes on an article in the first 30 minutes that it's live, part of their compensation will go to the article creator.

Compensation is paid in either 50/50 SP/SBD/STEEM tokens or 100% SP. The ratio of SBD to STEEM paid out is based on the trading price of STEEM vs SBD. If SBD is trading for 2 STEEM for example, content creators will be paid in more SBD to drive the price back to parity with STEEM. The more SP a voter has the more their upvote will increase the value of the post earning them even more STEEM/SBD and SP.

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