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

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?

@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.

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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Yes. Let’s make sure this will be part of the final proposal! (I am serious about that). I suggest we include this simple CHOICE,
for everyone, before the new scheme is implemented.

(and I fairly believe it will be implemented… because it is whale-driven. It is. Maybe it helps out some non/mid-whales in certain conditions… but IMO, it is whale-driven)

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I think there will be no change to the formula to lead to “less uncertainty” during the minting process.

Because, the entire purpose of this magic, is to bring UNCERTAINTY to the final minting process, believing that this uncertainty will be enough to actively TRICK tax authorities

Meaning: The investors NEED the uncertainty to make the entire tax-trick argument work. So, now investors can pledge "Well, this is not income till it is minted, because I (investor) don’t know how much will be minted — it can be +5% down to -30% ICPs ! "

So, the uncertainty is part of the tax-trick. The formula will not change! If it changes, it is not going to be in favor of bringing certainty to the minting process. Do you see? This is all about the tax-trick.

We put this tax-trick to work, fine. But we lose something (a lot IMHO).

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Link to the proposal: Medium post.

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The investors need the uncertainty, question is “how much uncertainty” will satisfy requirement?

In my opinion, it’s unclear and unconfirmed how the coefficient will be calculated to determine the +5/-30. How sensitive it will be to price movements.

Also unclear how much “uncertainty” is needed to avoid upfront taxation.

Also unclear how long the duration of the waiting period will be to disburse the staked maturity into ICP, currently it’s seven days. Not sure if that would change.

Also unclear whether the change to stake maturity instead of merge maturity and mint ICP, would satisfy the uncertainty requirement enough to not require to also have the +5/-30 mechanism.

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I think there is some sound analysis above and Dom’s post, while long was pretty coherent and thorough.

From speaking to investors who already find the staking and token economics difficult to understand I think the price modulation feature is going to have a negative effect on investor confidence. Investors already have issues understanding ICP economics. This is part of the reason we don’t see capital entering the system. Making ICP harder still to understand will exacerbate this problem.

Feature №2: Maturity Is Staked, Not Merged appears to clearly solve the problem at hand for those who want to merge currently. At least in New Zealand, this would result in no tax liability. Big tick.
That said, at least in New Zealand, to avoid tax you would have to set your maturity to “Stake” before you received it as the opportunity to realise it would constitute a potentially taxable event, and the choice to “Stake” it, a transaction.

Feature №3: Maturity Is Disbursed, Not Spawned definitely would be appreciated by NNS users. Right now it’s a two-stage process and feels unnecessarily complicated. This would have no impact on tax liability in New Zealand. It still looks just like a dividend.

At least in NZ, It needs to be clear that you are not in a position to transact or benefit from ownership of an asset. There are lots of words and legalese that can be applied but at the end of the day, you just need to have nothing in hand.

Why not, instead of having some complicated way to show that the Neuron holder isn’t actually in control of their neuron maturity (which is my understanding of Feature №1: Modulation by Price Trend), just make maturity not directly transferable into ICP. Rather, make it represent a right to perform some creative act. For example, Do some proof of work.

This would make neuron maturity untaxable when accrued, as it would not represent receipt of an asset. However, you could “mine down” your maturity, resulting in an event clearly taxed the same as BTC mining. If you want to hold onto your maturity, it’s an unexercised right. Not an extant asset.

It would be trivial for a community entity to make mining seamless, and even less frictive than the current “spawn->disburse” approach. Investors would roll their eyes initially but it is something they, and tax authorities will understand.

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Thinking about possible outcomes of the DW tokenomics proposal.

i) current tokenomics put pressure on large ICP holders, forcing them to constantly sell a fraction of their staking rewards to fill tax obligations.

ii) the new tokenomics proposal will help large ICP stakers to keep their staked ICP in form of voting-power while tricking tax obligations via minting-uncertainty (that is to ‘couple the outcome of minting’ to a 'market trend coefficient of +5 to -30%)

I guess most of us were first caught by the ‘price effect’ thought that could come out of ii)

But, what about Decentralization?

Let’s keep in mind: We are talking about web3.

and about The ICP as the backbone of web3.

From a DECENTRALIZATION perspective:

Current tokenomics (i): will keep motivating large ICP holders to sell a fraction of their stake gains, to fill tax obligations. Meaning: current tokenomics INCENTIVIZE Decentralization. (and that is great!)

The new proposal (ii): will clearly motivate large ICP stakers to keep their stake rewards untouched, and cumulating into voting power. Meaning: the new tokenomics will INCENTIVIZE Centralization.

What do we want from ICP as the leading web3 platform?

Do we want to back large stakers to keep their voting power, and delay (potentially sacrifice) decentralization?

Or

Do we want to reach and motivate web3 Decentralization?

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Hello,
When I read this proposal, I wondered if Mr. X from a country where no prominent member of dFinity or its foundation resides would have a chance with his proposal.
Is governance going to be adapted every time a country adjusts its taxation?
I’m not sure, and that’s a kind of inequality. Beyond the content why do we have to adjust/penalize a system for a few US states?

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Hi, we already had a shorter discussion about this under @dominicwilliams tweet, I basically agree with the expressed worries but also recognised some advantages:
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In order to solve different expectations and needs of stakers from different regions/environments, what about to make the choice optional per neuron?

I mean, under each neuron (WEB GUI) could be a check box to use advanced rewards processing, which, if checked, would change the behaviour as is described in the proposal, otherwise things would stay as are now :slight_smile:

  • in case that the change should be permanent it could be button similar to Join Community Fund

Also thinking, as there might be unlimited number of similar neuron options (as anyone can propose any change), it would be good to put them into some menu, like Neuron Options or Advanced, as orientation in the GUI is becoming quite difficult and prone to mistakes, mainly for new users.

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Doable or not, I like the idea @plsak.

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this is a great idea.

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If this was achievable it would’ve been a cool thing. The option would be activated and it could be an irreversible decision.