Dominic’s Proposal To Improve ICP Governance Staking Re : Tax and Tokenomics

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Hi everyone,

Let us start the discussion about the Dom’s fascinating proposal.

Firstly, I understand the proposal is also to preserve people from taxes, I think we should already determine if it would be possible combinating the current system with the one that proposes @dominicwilliams, because not everybody has this taxes problem. If possible, then let us determine if it is preferable or not.

But if it is not possible or preferable to combine the current tokenomics and this new one, let us continue :

Even if I understand the purpose, the collateral effect will be a doubled unpredictability about APY. The IC is very beautiful, but let us not forget that its gas are mainly investors and none investors invest blindly. They need at least « hard numbers », if not hard money.

Currently, investors can’t calculate their fiat APY, but they can calculate the ICP APY. With this proposal, they must add a second and wide volatility (the ICP APY one) to the first one and depending on the first one. We even may speak about a tripled volatility given this : « the disbursal of maturity will occur after a delay, which process cannot be canceled, and the amount of new ICP the maturity shall produce will depend on ICP price trends as current AFTER the delay ».

We may be entering into a bear market, so basically people are preparing to earn - 30% ICP rather than + 5%, maybe for a long while. So not only people would not able to sell their minted ICP for a good price, but they would also have less ICP. But even the day when ICP would rise again, at the moment they would initiate the disbursing delay hoping having + 5%, they would not know if during the delay, the price won’t drop, making them earning - 30% rather than the + 5%, and - 30% of a low priced ICP.

I fear that a lot of new investors will not enter into a such undetermined APY and that a lot of current stakers will encounter financial difficulties. Let us not forget that the tokenomics must be thought not only for the current stakers, but for the tomorrow investors, and it must be explainable. We would have very complex tokenomics, very much more than other projects, and let us not lie to ourselves : investors would choose the simplest APY. So let us be careful : a white paper for the geek has been forwarded this month, let us not forget that the tokenomics must not be thought for ICP geeks. The geeks we are, are not enough to make the ICP sustainable economically. We must catch new investors, and these new ones would be the more vague and the less attractives of the whole market. People will even prefer stable coin staking. So let us not forget that we must expand, not stay between us.

Look forward to reading you all.

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Yes. You got it! Please, friends, read DW proposal with great care. This change means we will lose our ability to collect rewards according to APY. The number of rewards you can dissolve into real ICP will be subjected to a +5% to -30% factor, according to the PRICE TREND!!! So, imagine you are planning to have an ICP 8yrs neuron as your retirement… Your monthly income will not fluctuate only with the price! There will be possible -30% cuts in your minted ICP, based on market trends… Why this? Please, people, READ carefully… For me, IMO, it means we have even less control over our investment… WE ARE ALREADY IN A RISK GAME, staking 8yrs… Now, there is even more risk, because if the trend is up, we will get + 5% in mints, but a downtrend could incur an -30% cut in minted ICPs… Bad, bad, bad for 8yr stakers… Think about that… There is no balance in this +5% to -30% value. (Those numbers have no base whatsoever… Ask yourself: “Where did this +5 and -30 come from? Based on what? So… Dfinity will keep throwing arbitrary new rules to the tokenomics… till when? What is next?” IMO, things cannot be that arbitrary. This is not an experiment, where we could simply play to lose it all… We are talking about ICP. The Internet Computer Protocol, which is supposed to be the backbone of Web3.

+5 to -30. Based on what?

Things can not be that arbitrary!

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And this is not about reducing rewards… it is about tricking the investor’s decision to-mint/not-to-mint the stake rewards (+ trick taxation).

So, in order to -possibly- reach the goal of tricking taxation… we are going to SACRIFICE our ability to decide when to mint our rewards into ICPs.

Investors ability to FREELY decide when to sell their investment/rewards is being attacked, to produce “beautiful Blue-Sky tax-conditions” FOR ICP WHALES (we will give this to ICP whales -NOW-, and in exchange, we sacrifice our Decision-Making -far in the future-). Why a retail (non-whale) investor would like to have that? Why?

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Important Caveat: I was not aware Dom would write this proposal. I found out same time as everyone else, and I only know what is written on the proposal. I have never even spoken to Dom about taxes

I don’t really consider myself a whale, but I can see a benefit for folks like me living in the US (where admittedly is just one jurisdiction, among many that make up IC community):

Due to current US tax laws, I am forced to spawn and sell my NNS rewards every few days. I cannot afford to merge. I cannot afford to “wait for a better price” and hodl. I cannot even wait for a LOW price and HODL, so I can start the capital gains clock. I have to spawn/sell. Under current interpretation, most CPAs I have spoken to recommend I spawn and sell immediately. This causes a large sell pressure for stakers like me. In short, I do NOT have ability to choose when to sell. Taxes force me to sell.

Everything is based on numbers. There is certainly some number range where having probabilistic, undetermined maturity is not worth it, but considering my biggest drag on staking is taxes (as it decreases ability to compound, forces constant selling, and accumulated tax bill even when I do nothing), there are probably others like me. I would gladly love to have compounding ICP… but alas, tax implications means I cannot afford to pay for it.

Do I know that I represent the majority? Absolutely not.
It’s possible other jurisdictions and people have different situations. I have no intellectually honest way to know.

TLDR: there is a class of (non-whale) people like me for whom this would benefit because it would improve staking significantly. I have no way of knowing if such group is the majority of folks in the community.

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At first reading, the proposal appears to conflate two distinct issues, which is rarely a good thing. The first issue involves taxation and, if I understand the proposal correctly, it makes taxing maturity impossible by making the amount of ICP disbursed by that maturity a function of eventual market conditions, and therefore impossible to precisely compute in advance. This seems an ingenious strategy, and I am strongly in favour of it, although I can imagine tax authorities in some jurisdictions finding a way around the new hurdle if the ICP ecosystem grows prominent enough to warrant careful scrutiny and a crackdown.
The second issue involves price volatility, and the proposal seeks to kill two birds with one stone by not only side-stepping the tax collector but mitigating price fluctuation while doing so. To this end, it pegs the amount of ICP produced from a given amount of maturity to whether the price of ICP is rising or falling. The first problem with the proposal is that, while it acknowledges price volatility, it leaves stakers entirely vulnerable to market whims: to quote the text, “Since these calculations will be made after the delay that occurs when disbursal is triggered, the neuron owner will be incentivized to make intuitive judgments about the markets and the timing of their sales.” Why would anybody ever incentivize investors to make intuitive judgements, which are notoriously fallible? If the rate of disbursal is to be pegged to price volatility at all, it ought to relate to whether the market has been trending up or down at the moment of clicking the disburse ICP button. Why leave stakers vulnerable to a market crash occurring after they have made their decision? Surely, a formula could be worked out based on the previous week’s price gain / fall, so investors can trust firm calculations rather than intuitions about where the market is heading?
Second, the potential maximum penalty of 30% is ridiculously high. Dfinity should not be in the business of trying to smooth market fluctuations, unless those become systemic threats. Any such attempt will convince even more people that IC lacks the true crypto ethos, and will be seriously counterproductive because it will depress the long-term ICP price trend by turning potential investors away from the asset. Why would I invest in something which will end with a lottery with little upside and a potentially large downside?
My suggestion is, decouple the tax dodge from the price control attempt and try to reframe the proposal concentrating exclusively on the first of the two. To this end, my question is, does it matter precisely how uncertain the rewards related to maturity are? Could the reward / penalty be, say, 1% and still serve the same tax purpose? That might be a tolerable threshold for stakers, especially if it is calculated at the moment of hitting the disburse button.

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Yes I should be clear, I was referring to the first, not the second.

That is a fair point.

To be honest, I am still working in my brain through the implications of the second part, so not prepared to have an intelligent opinion.

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8 year staker here, extremely dissatisfied with this proposal

How can he be proposing this for ALL with a straight face

-30% for what -_-

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The idea is to depressurize people to sell because of their tax pressure, but what about the people who have not such a tax pressure because their tax jurisdiction don’t incentivize them to sell ?

This is why I was asking if we could conjugate the force of both models, letting the choice to people. If the majority of stakers have a tax pressure, the minority having not this tax won’t be a threaten to the whole network if they can continue to merge maturity and sell their ICP as they always did.

The democracy will decide, but we may have to be prepared to lose the interest of people who don’t have this tax pressure.

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My question, if according to Dom’s Proposal Feature no.2 (“Maturity Is Staked, Not Merged”):
Quote:" the maturity will increase the voting power of the neuron pro rata, but the staking will not result in new ICP tokens being minted."

Since it is not resulting any ICPs to be produced, under current US tax law, are you still in the position that Taxes still force you to sell ?

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Feature №1: Modulation by Price Trend

I prefer modulation by supply/consumption ratio rather than by price trend.
Modulation by price trend is like fed raise/lower rates based on stock market price, rather than based on fundamental real economy

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Given the current situation leads to effective forced selling for some this is an indirect concern all holders. Whatever is taxed is not reinvested, causing a net selling pressure.

So I agree there’s a compelling reason to adress this issue.

However, the proposal is not a net gain for everyone if it turns people away from investing (decreasing demand).

I agree with this:

and

And if I understand the proposal correctly it effectively erases compounding effects. But maybe that’s a misunderstanding. Dom writes: “Once staked inside, the maturity will increase the voting power of the neuron pro rata, but the staking will not result in new ICP tokens being minted.” Are rewards also increased along with voting power (meaning maturity is earned on existing maturity)? If not, that is also an issue, in my view.

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If anyone is confident about this being in the best interest of ALL stakeholders, let me suggest the following litmus test as a part of ANY proposal.

All neuron holders of ANY years of locking will have their locks unlocked PRIOR TO this new scheme of staking. The neuron holders can then decide whether or not to participate in this new scheme.

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Can anyone share a link to this proposal?

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@mparikh I always, our spirits are connected. I had the same idea this night.

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Quote: “And if I understand the proposal correctly it effectively erases compounding effects”

My understanding, if you do not want lose compounding effect, you have to disburse the maturity to generate ICP. After that increase stake manually.
The Second feature of the proposal only impacting US holders, for those who do not have this tax rules in their country, may not have effect, except a bit more hassles to compound the reward.

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First blush:

As a user it seems more complicated. I can’t explain this to my wife’s grandmother.

As a USA tax payer I’m dubious that they’ll take Doms word for it, but I love the thought and attention to detail. It will probably end up depending on who is in the seat of the IRS chair in the future.

From and ICDevs perspective we’ll take your donations, reduce your tax burden, and turbo charge the IC ecosystem in any way we can.

From an investor standpoint, people like to invest in things that are modelable and this seems less modelable. I’m not sure we should cater to taxes at the cost of investability.

I know I don’t like paying taxes!

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It would seem to me that reducing this penalty for well aged neurons would be ideal and maintain the incentives to stake for 8 years.

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Alright. Still being able to compound is positive. Extra hassle obviously is not, and more importantly:
the lottery effect you’d get every time you disburse to compound is bothersome - especially considering the downside is larger (-30%) than the upside (+5%). Unless you’re amazingly able to consistently foresee market trends you’d lose out over time, while compounding.

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My thoughts on each of these three features:

Feature 1: modulating by price trend (price lottery)

Confirmation is needed whether both of these new mechanisms are required to not have to pay taxes upfront (both the new maturity system and also the disbursal lottery). Or whether they can be taken individually and still achieve goal of not paying taxes upfront.

My guess is the uncertainty of the icp disbursal amount depending on market trend after disbursal starts (ie price trend lottery) is required to make case to tax authorities that ICP from merging should not be considered income, thereby requiring the uncertainty of price trend after disbursal to lock in ICP amount.

If disbursal lottery is not necessary to achieve the goal of avoiding upfront taxation, and the new merge system is sufficient on it’s own, then the price trend lottery mechanic is being used solely as a mechanism to stabilize price. Which should perhaps be considered as a separate proposal and not conflated with goal of not paying taxes upfront.

Does this range of +5 %to -30% need to be so big in order to get this benefit of uncertainty?

Feature 2 maturity is staked not merged

If i were to get a +5% bonus by disbursing in an uptrend would that be preferable to just holding and accumulating my staked maturity? If that’s the case, this proposal might have unintended effect of causing more disbursal. Especially if i am in a jurisdiction who isn’t taxed on cap gains.

Feature no. 3 maturity is disbursed not spawned

Why not change the disbursal duration to a few minutes, to avoid the opportunity for trend change to risk a difference in disbursal lottery?

Does making the price coefficient more or less difficult to predict and time result in greater or lesser chance of the tax authorities viewing the ICP taxable upfront?

Is the disbursal delay still 7 days? Because the market trend can change a lot in seven days, from the time of starting to disburse to eventually locking in the disbursal bonus/penalty.

Would the formula used for the price trend indicator prevent this type of fluctuations in the bonus amount? To create more certainty in the bonus amount at the time the disbursal starts?

Would potentially create a lot of uncertainty even if you started the disbursal process during an uptrend. Would like clarification on how much this could potentially fluctuate if he disbursal started during an uptrend but then the market changed rapidly and user ended up getting penalized.

A few questions that arise:

How easy would it be to predict or manipulate this “price trend coefficient” in order to achieve maximum disbursal bonus/penalty? Would it be preferable to have a longer time frame coefficient timeframe in order to make it easier/more difficult to predict?

Is the disbursal delay still seven days to disburse staked maturity? Would it be preferable to increase/decrease this?

Can the staked maturity be disbursed on it’s own without needing to disburse the entire neuron?

Can compounding effects be achieved in this new system? Would compounding require constant disbursal (with associated delay and price lottery risk), conversion to ICP and then re adding the newly minted ICP to neuron? Or could compounding be achieved simply by staking the maturity instead of merging the maturity.

For people with 50 neurons it becomes even more of a time investment to constantly stake, disburse, and then add ICP back into original neuron for fifty neurons. If that’s what is required to benefit from compounding. I wonder if an autostake maturity feature could be developed alongside this.

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