Well, judging by the price of Steem, I think the lottery is working out pretty well so far.  Steem has gone from being worth nothing less than nine months ago to being valued at over $36 MILLION today.  Not bad for a shoe-string budget startup that's just getting started.  

Gambling is a yuge multi-billion dollar industry.  Lotteries, a subset of gambling, raise billions and billions each year.  So, clearly gambling has appeal to lots of people. They are willing to invest yuge amounts of time and money in pursuit of a big payoff.  

To say that gamblers are "stupid" for gambling may or may not be true, but it's irrelevant nonetheles.  And to suggest that gamblers are too stupid to produce good content is a non sequitur.  The biggest gamblers in Vegas are some of the most successful, creative and brilliant people you'll ever meet.    

Why do you think you get all that survey spam in your inbox?  Because it doesn't work for the spammer?  No, because it DOES.  

In theory, I'm not opposed to your option number 2 above.  I simply suggest that it won't work in practice.  The money will get spread too thin to serve as a continuing incentive to authors.  Perhaps I'm wrong, but I don't think so.  

In any event, subjective downvoting based purely upon one's opinion that a given post doesn't "deserve" the currently advertised reward simply ensures that no posts will be worth much at all.  It will not only discourage authors, but it will actually piss them off to get downvoted.  That's not a great way to attract talent.  

Imagine a scenario where the salaries of football players was determined by fans using a system like steem rewards.  You might think that player "X" deserves $50 million a year, but how many others are gong to think that?  And, in particular, how many others who favor players on OTHER TEAMS are going to think that?  They will simply downvote your guy hoping that more money then gets reallocated to their favored player.  And...you'd do the same.  In the end, you'd have a situation where salaries were much more egalitarian but you'd also have a situation where tremendously talented football players might instead choose to play some other sport without such a silly system.  Or...another league might be formed where comp was truly determined by market forces or player popularity rather than people trying to game the system with votes.