Staking rewards are, and will be for the foreseeable future, the primary driver of token inflation in the IC. They are central to Dfinity’s ingenious concept of liquid democracy and will gradually trend lower each year, approaching an annual aggregate 5% rate as time goes by. But 5% per year excluding node rewards is a fairly high inflation rate.
Would it be possible, once the ecosystem is sufficiently mature, to rethink its functioning in a way that retains the benefits of liquid democracy while doing away with staking rewards? Obviously, any move in that direction will kick in a minimum of 8 years after a resolution is passed, so that people who have staked for 8 years do not feel cheated. However, if investors know that staking reward-related inflation will cease eight or ten years down the line, it will have an immediate impact on their calculations.
Since there is so much debate around forms of voting and democracy within the blockchain space (Vitalik Buterin being among the most prominent contributors to deep thinking in this regard), perhaps we in the Dfinity ecosystem can begin a conversation about alternate ways to secure the system’s democratic credentials? I am afraid I don’t have any precise suggestions to offer right now. I’m just putting this out there in the hope that a lot of people knocking ideas around can come up with an interesting solution. Even if we reach some consensus two years down the line, which would mean the effects starts a decade from now, it will be more than worthwhile.
Just because voting rewards will be 5% does not mean that inflation will be 5%. The system works as follows: in order to pay for computation, you need to burn ICP and receive cycles (which are burned when use to pay for computation); node providers are paid with newly minted ICP that is benchmarked to some dollar amount. Right now, node providers are paid a decent amount more than is burned to pay for computation. But if the IC is successful, that will not always be the case. The NNS can slightly tweak the cost of computation so that more ICP is burned to pay for computation than is minted to pay nodes. Were that to happen, the true “inflation” would be voting rewards minus the net ICP burned. We shouldn’t worry about doing that, however, until we have serious traction.
Separately, voting rewards are necessary. Without rewards, there is no incentive to stake ICP and vote. The staking aspect is important because without it a bad actor could (1) buy ICP, (2) vote in a way that harms the IC, and (3) sell the ICP immediately after the vote is over. In other words, staking adds a serious cost to attacking the IC because the attacker would have to lock up their ICP.
Assuming arguendo that we could remove staking (we shouldn’t for the reason outlined above), we would still need an incentive to vote. Without an incentive to vote, voting rates would be extremely low because it costs at least some time and effort to vote, and you face no penalty for failing to vote. The lower the voting rates, the lower the amount it costs to attack the network. The combination of low voting rates and not needing to lock up tokens could make the IC seriously vulnerable to an attack.
“Without rewards, there is no incentive to stake ICP and vote.”
This is not true. We will still have the same incentive to vote as we do to vote in local, state and national elections, which we do without reward.
As far as finding incentives to vote beyond staking rewards, that is precisely what I hope this discussion will be about. I do understand the justification for the current system, it is a compelling one. Doesn’t mean it’s the only possible one or the best one in the very long run.
I have though of one very easy way of curbing long-term inflation. Just cap the maximum reward at 10% and the lowest reward at 5%. The floor and ceiling become identical. That way, people still have a very compelling reason to stake and vote, but the rewards of those who do not stake are not transferred to those who do, but burned. If staking reaches the 90% goal, this will not curb overall inflation much, but I personally don’t think it will reach that level, nor would it be a good thing if it does, for reasons I have spelled out elsewhere (in brief, the ‘float’ will be too low, inviting market manipulation by whales).
Of course, the cap can only be introduced far down the line, because of promises already made to long-term stakers. But it could have a significant impact if announced soon.
Final anualy voting rewards to about 3% is ideal.