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

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:
Comment 1
Comment 2

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.

The purpose of the proposal set forth by Dominic has two goals:

  1. Adjust reward mechanism to lead to favorable tax outcome
  2. Adjust reward mechanism to lead to increased price stability, which in turn is good for the network

Dom presents some really thoughtful ideas on both fronts, yet I fear that implementing his proposal would actually create the precise opposite of his intended outcomes. Dealing with both in order:

  1. Adjust reward mechanism to lead to favorable tax outcome

The more I think about this I believe it is a red herring, i.e. unresolvable and likely untrue. We could argue until we are blue in the face about how the IRS should treat staking but the fact remains that the IRS wants to tax staking in the here and now. That’s the advice I have been given by professional CPAs not by my read of the tax code. There appears to be a legitimate debate about whether taxes should be realized during the accumulation of maturity or during the minting of new ICP. That said, no CPA is going to defend that by creating obfuscations around the timing of minting ICP the IRS will decide to throw up their hands and say, oh well lets just tax it as income upon sales. The more likely outcome will be a painful tax situation for folks who refuse to pay in staking income tax with an obscure argument and have to pay a ton of back taxes. But in any case, even if I am wrong about the IRS, the far more important and interesting question is Dom’s second argument, which could be evaluated totally independently of the first →

  1. Adjust the reward mechanism through dynamic staking rewards which will in turn incentivize stakers to stabilize the price

Here Dom is attempting to kill two birds with one stone. Create a more favorable tax outcome, while also create a more favorable dynamic reward mechanism that leads to price stability. Here I also disagree strongly.

What we desperately want is for people to stake long term and compound their maturity without regard for the price, consistently and over time for as long as possible – i.e. 8 years. I have met some IC folks who just merge maturity once a week – its part of their routine which they do almost automatically.

What we do not want is price obsessed stakers who anxiously decide, should I stake, should I disburse, has the price moved too much, too little etc? The focus on price will become truly unbearable and turn long term investors into short term traders. We want to average joe to invest. But the average joe has a job to go to. They can’t be analyzing price trends and deciding based on that whether to stake or disburse.

We also do not want to add additional complexity to add to the already high level of complexity in the NNS. That would act as a barrier to folks who want to invest, stake, and become a part of the eco-system. Folks also like some level of certainty and take comfort in the % APY that they can get through staking (per the comments above).

So in sum, I believe that while Dom intends to reduce taxes, and increase price stability, I fear that this proposal would lead to the exact opposite outcome. Increased taxes and penalties and more price instability.

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I think they this is a perfect summary of the situation.

And more particularly, the following point underlines the main problem in my opinion :

Indeed, I think this Dominic’s sentence below is epistemologically and then ethically problematic : « 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 ».

Let us forget the pure interest for ICP growth : A lot of stakers are stakers because they know themselves as non traders. What it is called here « intuitive judgements » is trend analysis that very few people are capable of. We are not all traders. A lot of us are long term stakers precisely because they know their own limited capabilities and because they wanted to avoid this stress. But as soon as this proposal would be adopted, everybody would have to improvise himself as trend analyser ? It is impossible. Even the best experts warn people, saying « be very careful, it takes years and decades to make less errors, don’t jam with trading ».
So « intuitive jugements » means here either jugements founded on years of trading experience or gambling judgement.

A lot of warnings are constantly adressed to people by trend experts and governments to sensitize them to the fact that the trading is not a trivial activity. We are warned to be very careful, to not « jam » with trading without skills and that we should stay away from it if we are not shaped to do trading. But this proposal and more particularly this sentence is asking people to not pay attention anymore to these warnings and to overrate their knowledge and skills or to gamble. It is like to say to people : « you have been told you are not traders ? Guess what, you are ! It is for everybody », but indeed they will be gamblers thinking them as enlightened traders, worst case scenario, be cause It is better to know we are gambling when we are, and not we are acting scientifically. It is by thinking themselves as lucky or controlling, then as not gambling that the gamblers lose everything. Let us not forget that some people have addictions, or have a disposition to develop one. People should not be forced to choose between being gamblers or traders. People should not even be incentivized to trade a way or in another, and Dfinity should not begin starting to think ICP through its price. @dominicwilliams has always been saying « we don’t care the price, we only focus on the tech ». But suddenly we think ICP through the price. We should not, plus it is so early. Why don’t we just concentrate on organic growth, 6k ICP have been burnt in only 24hours yersteday. The more ICP (protocol) will be adopted, the more ICP (token) will be burnt. Dfinity or us should not set artificial ways to control the price and we should not think about its price at all. Its high and stable price should be a consequence, not a motivation. It will mechanically grow once more adoption and liberated all the seeds’ ICP. People have to be able to sell their ICP and anytime, but they should not be accompanied by Dfinity or ICP in this side of ICP economy. ICP’s fiat value is not a Dfinity matter. Period.

We are starting to think more in fiat than in ICP with this measure and I think it is bad for the ICP. We should exclusively think in terms of ICP and cycles, furthermore the first year. For me, the parallel price thought is an admission of failure, and we should not. I trust the ICP. I just don’t consider the price, or at least not before years. Why don’t we just trust the adoption will be enough and just spend the whole time to promote the adoption rather than thinking about stabilizing price.

By this measure, we are presupposing here that people will sell their ICP, then we try to frame and rythm this, but we should not presuppose they will sell. Our target should be to work to make people have reasons to save their ICP, make them keep it, NOT make them wait the good time to sell.

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DLDR: Might a reasonable first step towards tax efficiency be to configure payouts / rewards to occur once a week instead of every day, thereby reducing taxable event recording per year from 365 entries to 52?

IMO the KEY ISSUE relating to staking rewards is the frequency of payouts as highlighted by Diego

This is a win / win because it benefits the most tax vulnerable without punishing the tax free. (The End of Year difference between compounding daily payouts and weekly payouts of APR 20% on $100,000 capital is about $40. If one has 100k in ICP and is worried about $40… GO HOME! This is a useful tool https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php )

As for the whole business about penalising peeps who sell in a falling market by up to 30%… really? I mean, let’s be brutally frank… for those who have an income of $50,000 + per year there is some choice for putting off / delaying income for tax reasons, but if we are talking about truly global adoption we MUST NOT punish people for whom a dollar a day is ESSENTIAL INCOME.

And what about businesses/developers looking to model cash flow for delivering services via the InternetComputer? Imagine this discussion, “Shall we will keep 5% of all revenue in ICP to stake, participate in governance decisions and earn rewards as part of our cash flow model?”, “How much will we earn each year?” “Errr… IDK?”

I am all up for tax efficiencies and robust tokenomics, but they must be simple, not complex.

Can we please focus on improving the image of ICP across the broader crypto and non-crypto communities in order to drive adoption.

::EDIT::
Final thought: We are just beginning to see the number of ICPs burnt through application use increase… kudos to all OG IC Devs! As I see it, this is a core element of IC tokenomics. Shouldn’t we let this run for a bit and observe the impact on value before introducing additional mechanisms?

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More than 6000 ICP burnt in just 24 hours the 28th January, so almost 17% of the total burnt since the launching. It is crazy. I totally agree. We just need patience and to be more confident here.

We had told to @wpb, @Kyle_Langham and @ayjayem that more data were needed at least during six months more before any tokenomics changing, but I see Dominic’s proposal a much more massively changing than these fellows’ proposal meant to incentivize the staking. I think that we must incentivize the staking rather than the trading skills.

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As it stands now I do not know how to asses this post / statement.

  1. As this is a change to the tokenomics of the network I am interested what is the basic assumption, and how does that benefit the network. It is vaguely stated as “diminishing the selling pressure” by how much? for how long? how does IC benefit from this?
  2. To answer these some simulations should be made.
  3. Once simulations are made gather feedback.
  4. After feedback probably some modifications.
  5. After modifications some tests. Real life rarely works as indicated by simulations.
  6. Once tests are concluded GRADUAL implementation of something that proves better for the network.

Ultimately the decision I asses is how does this benefit the network. Not the price movement, not the tokenomics per se, not the tax implications.

I think we can have a practical discussion after we can evaluate some scenarios where we can see how the network benefits from this, and asses the pros and cons.

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Why do we need to “diminishing the selling pressure” ?

The distribution scheme was known MUCH BEFORE genesis. It was bound to create selling pressure when more significantly tokens are created at certain points in time ( as currently).

We could just stop minting tokens to be distributed to neurons such as 4009 etc. That will surely stop the selling pressure.

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I think it is also worthwhile asking in this regard if Dominic Williams has something like a fiduciary responsibility to ICP stakeholders, and what exactly that involves. He has helmed an ambitious project for years and has obviously been a good enough leader to produce some astonishing results. However, his Twitter personality has done the IC no favours at a time in its development when marketing is almost as important as tech. There is no shortage of technically brilliant products and services that failed for lack of astute marketing.
I think a proposal of the present kind can make for a medium post to be discussed on this forum and on sub-reddits filled with truly interested people. But should it be put out on Twitter, to a wide audience that has no understanding of exactly how much power Williams holds to push through the ideas, some of them distinctly half-baked, contained in the proposal?
One of the persons charged with communicating Dfinity’s vision to the public at large, who is doing a very good job of it, states on this thread that he hadn’t even heard of this proposal before it was publicised on Twitter. Should there not be a vetting process, with internal debates before ill-thought through ideas are thrown out for everyone to read? Perhaps it is time Dfinity gets its communications strategy in order and ensures everyone within the Foundation sticks to the script, no matter how lofty their positions within the hierarchy.

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The current overall daily average reward is 1.6 ICP. In order for someone to achieve that average, one would need to have at least 2500 ICP(roughly) locked up for eight years. For illustration, that 2500 ICP even at $20 today = $50,000.

If you have much more than the average locked up( say 10000 ICP) yes, your reward will be much more than the average. And yes, depending on where you live, taxes are inevitable. So you will need to spawn your maturity to pay taxes.

If , on the other hand, you have much less than the average locked up ( say 250 ICP instead of 2500 ICP), your daily average reward is considerably less than the overall all daily average. You will still have taxes (assuming same locality )but significantly less than someone who has 10000 ICP locked up.

Edit: and yes, i understand that the proposal is about trying to get to tax avoidance. However, as others have pointed, all of the arguments (i.e. “the mouth of a mine” ) needs to be clearly seen through the lenses of a tax advisor or financial advisor. I am neither of them.

A proposal of this magnitude affecting literally billions of dollars of investment should go through a thorough analysis by reputable financial company.

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What if we use something similar to Curve DAO tokenomics?

For example:

The protocol mints ICP rewards into a rewards pool for each motion.
Neurons that voted on that motion can claim their rewards in proportion to voting power.
Income tax is realized when the user claims (maybe, not a tax expert).

If that doesn’t work, then I think we should try to figure out a way to convert the NNS to a buy-and-burn model, similar to MakerDAO. But it’s complicated due to the NNS’s conditional rewards and lockups. Maybe there is a way to have a voting power token where neurons that dont vote get slashed, but the protocol increases the value of the tokens with inflation rewards via a buy-and-burn auction.

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