Long Term R&D: Tokenomics (proposal)

1. Summary

This is a motion proposal for the long-term R&D of the DFINITY Foundation, as part of the follow-up to this post: Motion Proposals on Long Term R&D Plans (Please read this post for context).

This project’s objective

  1. This project is about monitoring, designing, and reacting to the economics of the IC’s ecosystem. Example areas include:
  • a. adaptive inflation and deflation control
  • b. market-based remuneration parameter changes (node providers, neuron rewards, …)
  • c. modeling of ICP market and its movements
  • d. staking and neuron reward management functionality
  • e. proposals, voting and reward modeling and tuning

2. Discussion lead

John Wiegley

3. How this R&D proposal is different from previous types

Previous motion proposals have revolved around specific features and tended to have clear, finite goals that are delivered and completed. They tended to be measured in days, weeks, or months.

These motion proposals are different and are defining the long-term plan that the foundation will use, e.g., for hiring and organizational build-out. They have the following traits and patterns:

  1. Their scope is years, not weeks or months as in previous NNS motions
  2. They have a broad direction but are active areas of R&D so they do not have an obvious line of execution.
  3. They involve deep research in cryptography, networking, distributed systems, language, virtual machines, operating systems.
  4. They are meant to match the strengths of where the DFINITY foundation’s expertise is best suited.
  5. Work on these proposals will not start immediately.
  6. There will be many follow-up discussions and proposals on each topic when work is underway and smaller milestones and tasks get defined.

An example may be the R&D for “Scalability” where there will be a team investigating and improving the scalability of the IC at various stages. Different bottlenecks will surface and different goals will be met.

3. How this R&D proposal is similar to what we have seen

We want to double down on the behaviors we think have worked well. These include:

  1. Publicly identifying owners of subject areas to engage and discuss their thinking with the community
  2. Providing periodic updates to the community as things evolve, milestones reached, proposals are needed, etc…
  3. Presenting more and more R&D thinking early and openly.

This has worked well for the last 6 months so we want to repeat this pattern.

4. Next Steps

Developer forum intro posted
1-pager from the discussion lead posted
NNS Motion proposal submitted

5. What we are asking the community

  • Ask questions
  • Read 1-pager
  • Give feedback
  • Vote on the motion proposal

Frankly, we do not expect many nitty-gritty details because these are meant to address projects that go on for long time horizons.

The DFINITY foundation’s only goal is to improve the adoption of the IC so we want to sanity-check the projects we see necessary for growing the IC by having you (the ICP community) tell us what you all think of these active R&D threads we have.

6. What this means for the existing Roadmap or Projects

In terms of the current roadmap and proposals executed, those are still being worked on and have priority.

An intellectually honest way to look at this long-term R&D project is to see them as the upstream or “primordial soup” from which more baked projects emerge from. With this lens, these proposals are akin to asking, “what kind of specialties or strengths do we want to make sure DFINITY foundation has built up?”

Most (if not all) projects that the DFINITY foundation has executed or is executing are borne from long-running R&D threads. Even when community feedback tells the foundation, “we need X” or “Y does not work”, it is typically the team with the most relevant R&D area that picks up the short-term feature or project.

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Please note:

Some folks gave asked if they should vote to “reject” any of the Long Term R&D projects as a way to signal prioritization. The answer is simple: “No, please, ACCEPT” :wink:

These long-term R&D projects are the DFINITY’s foundation’s thesis at R&D threads it should have across years (3 years is the number we sometimes use internally). We are asking the community to ACCEPT (pending 1-pager and more community feedback of course). Prioritization can come at a separate step.

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Here is the text of this motion proposal, thus far:

Tokenomics Project Proposal

1. Objective

Evolve Tokenomics on the Internet Computer to best incentivize participation, both for those locking up their tokens to participate in voting activities, and those who will use tokens to purchase cycles and/or support various market activities.

2. Background

On May 10, 2021, the Internet Computer was launched, along with a ledger and governance system (NNS), and ICP tokens were brought to life.

With the launch of these two principle canisters: the ledger and the NNS: a series of choices were made concerning lock up, voting rewards, how and when minting can happen, initial supply, etc., all of which have an impact on the overall economy of the Internet Computer.

3. Why this is important

Every free market consists of multiple economic pressures, many of which cannot be predicted ahead of time, especially when novel influences are present. At the launch of the Internet Computer, certain factors were decided on as representing the “best start” to launch the network and begin inviting participation.

Over time, the community has gained valuable information as to inflation and burn rates, popularity of staking, accumulation of fees, open market valuation, etc. It becomes important, then, to re-assess the original choices in light of these factors, to determine whether adjustments should be made to further incentivize participation. In short, the tokenomics describe a dynamic system with multiple gauges for the community to observe and levers for the community to pull.

4. Topics under this project

While not an exhaustive list, the Tokenomics project will consider many topics, including the following:

  • Adaptive inflation and deflation control;
  • Remuneration parameter changes (node providers, neuron rewards, …);
  • Modeling of the ICP market and its movements, to better assess the impact of future changes to the tokenomics;
  • Staking forms and neuron reward parameters and management functionality;
  • Proposals, voting and reward modeling and tuning.

In brief, the Foundation wants to help the community to create a clear and transparent view as to what all the existing parameters are; their real-world impact on market data; and a clearer understanding as to how future proposals may alter that impact positively or negatively. For example, if reward rates are increased for short-term stakers, or if rewards are allowed for neurons with less than six months remaining dissolve delay, would this be likely to increase the percentage of staked supply? Would it lead to more neurons being created?

5. Key milestones (and technical solution if known)

Some of the key milestones for this project include:

  • Improve documentation, terminology and educational materials, in order to facilitate a clear and broad understanding of how the Internet Computer’s tokenomics works, what led to the current choice of parameters, and what aspects are likely to need tuning in the future. This also requires increasing transparency and allowing participants to better understand the flow of supply and how past choices may have affected future outcomes.
  • Develop economic models that can offer insight into the possible outcomes of parameter changes.
  • Define measurable objectives for our tokenomics with respect to inflation, amount of liquid supply, staking participation, and market volume. This creates a baseline against which we can measure the “health” of our current tokenomics.
  • Create a series of motion proposals, based on community interaction and findings from the above, to fine-tune the tokenomics until we reach the desired goals of utility and equilibrium.
  • Mechanisms to help regulate the liquidity and supply of ICP, new staking options and other economic instruments that allow the Internet Computer to offer a thriving market for all participants.

6. Discussion leads

John Wiegley @jwiegley, Johan Granstrom @johan, Lara Schmid @lara, Igor Lilic @ililic, Timo Hanke @timo

7. Why the DFINITY Foundation should make this a long-running R&D project

This should be a long-running project because tokenomics is the beating heart of the Internet Computer economy. If we overheat and supply increases too quickly, it can cause a depression in price that scares away investors; or if we freeze up and exhaust supply, it could lead to low volumes and high volatility that are unattractive to businesses seeking to stockpile ICP for their computing needs. The right balance of supply, engagement and volume, will lead to a healthy economy that works well for its participants, and not only for long and short speculators.

8. Skills and Expertise necessary to accomplish this (maybe teams?)

Some background in finance and economics is necessary, as well as a technical understanding of decentralized markets and how canisters like the Ledger and NNS are used to create such a market. There are many variables at play in this highly dynamic system, so insight into the long-term impact of economic decisions becomes critical to making well-timed decisions. This is a project that will likely have a lot of community participation.

9. Open Research questions

  • How best to model and forecast the economic parameters specific to the Internet Computer remains an open question.
  • With respect to ledger behavior and the operation of token markets, we can look to existing projects for guidance and inspiration.
  • Explore existing and analogous financial structures (options, futures, CFDs, bonds, etc), DeFi opportunities, and smart contract mechanisms to best support the economy and ecosystem of the Internet Computer.
  • For each structure created and employed at the level of the NNS, how can it best be offered to communities on the Internet Computer, in order to help build “community economies” in an adaptable way?

10. Examples where community can integrate into project

Discussions on the DFINITY Forum is probably the best place to begin integrating into this project, as well as open source projects for any modeling systems that are created to aid with analysis.

11. What we are asking the community

Please submit your questions, experiences, concerns, frustrations, hopes and fears, since it is the decisions of the market population that ultimately determine whether a Tokenomics proposal will succeed or not.

  • Review comments, ask questions, give feedback

  • Vote accept or reject on NNS Motion

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Yulin Liu (according to himself the original ICP tokenomics designer) in Twiter claims that current node provider flat USD monthly rewards require an increasing amount of new ICP minting if the price of ICP drops leading ICP to Death Inflation Spiral:

He assume that each node receives $100k/month

How much of his assumptions and conclusions are correct?
Is there a viable alternative to the flat monthly reward?

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I thought people here would appreciate this new page. The dashboard team worked last few weeks to make sure it is a helpful piece of info for the community in making decisions for voting, etc… Feedback is always welcomed.

https://dashboard.internetcomputer.org/circulation

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I almost forgot! The dashboard team also just shipped a neuron page as well. Here is an example: Internet Computer Network Status

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Seems he deleted the tweet but I can see the preview you posted. I believe this is off by an order of magnitude at least. I do think these numbers should be easier to find, not just in the NNS waiting for dashboards to be built around them. That is fair feedback and i know folks are working on that.

I think there is a nuanced way to answer your question:

“Do I think that death spirals COULD happen?”

Yes, I do.

“Do I think IC is near death spiral?”

No, i do not. Node providers are very, very small minority of ICP minted. They don’t move the needle as you can see from dashboards. The NNs rewards (which are decreasing every day) are the majority. It’s not an exact science, but I think we are far from it.

“Is this something to keep an eye on?”

Definitely. It’s a dynamic system, so it could go that way. If, for example, 10 million nodes came online tomorrow without the balancing amount of cycles demand to counter it, then that certainly is risky. This is why an informed ICP community that votes in NNS motions about these levers is key.

Was that helpful?

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Very helpful. Thank you

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I will vote yes to this proposal. The tokenomics are the most interesting feature of ICP. I look forward to learning more and watching it evolve to meet the needs of the IC community and ecosystem.

This is the first time in my career that I wish my graduate degree was related to finance, economics, or decentralized markets. It would be so fascinating to engage in this R&D effort from the inside instead of having to watch from the outside. Anyway, this proposal sounds amazing and I’m sure we will have many great features that will come from it. Count me in for any activities and input you need from the IC community.

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Proposal is live: Internet Computer Network Status

First of all, my consideration did not take into account the technical aspect. In order to make the token economy more transparent, we need to do two things:

  1. We need to be transparent about the inflation rate and understand the data center, neuron governance, foundation issuance, community, etc.

Only after completing the above, the user will stake the ICP.

  1. Destruction mechanism: In addition to additional issuance, we must also consider the burn to make ICP more valuable.

  2. How to reduce ICP circulation? Forms such as DeFi, or liberalize governance rights, are tied to ICP, so that more people can stake ICP.

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What about start this long discussion to come from the brilliant article and the proposal that @wpb, @Kyle_Langham and @ayjayem had drafted and about which @dominicwilliams himself was enthusiast :

I know we are here for a very long term projection, but maybe this short term proposition could make us able to set a good basis for more projective thought ?

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In terms of tokenomics, I believe that managing the supply of ICP available for liquidity pools for markets/applications and to developers to burn for computation will be one of the most important issues for the governance community long term. For me, my goals are (in order of importance):

  1. Ensure the market has enough liquid ICP to maintain ecosystem effeciency.
  2. Encourage long term thinking within the governance members and the general IC community.
  3. Encourage price appreciation of the ICP token.

I’m excited that we are beginning this discussion. The first order of business is to build out our token analytic infrastructure to measure accurately where we are at today and have a baseline to measure future developments against. There are certainly metrics we, the governance community, should be watching regularly, some of which already exist on ICA’s dashboard (burn, fee, proposal metrics, ect.) and some of which need to be developed by the community (NNS trends, canister metrics)

In addition, there’s data access issues that need to be addressed by the Dfinity team to ensure the governance community can access the required data for making informed decisions. An indexing of all neurons comes top of my mind.

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Can you please elaborate as to what kind of data you were thinking? (or low hanging fruit)

Also what is the intent behind indexing the neurons? I have heard a few things, but i am curious what the main motivator is in your mind.

Thanks!

Hi Diego,

Thanks for following up! The low hanging fruit I think that is most important at this stage are:

  • Indexing of neurons - currently the only way to know if a neuron exists is to check one-by-one by neuron id, something that would require a TON of computational power. The result of this is ic_rocks and ICA’s dashboard only “know” about a subset of actual neurons. The “unknown” neurons make up about 25% of voting power for ic_rocks and about 45% of voting power on ICA’s dashboard (these numbers used to be much smaller, but the heavy staking on 31DEC occurred in neurons that neither ic_rocks nor ICA have discovered yet). Therefore, our ability to understand the NNS in terms of staking (dissolve delays, age bonuses, etc) are vastly limited, particularly since the “unknown” neurons are heavily skewed towards certain segments of the community (for example, non-genesis)

  • I know this will be a hot topic, and I don’t wish to kick off a firestorm of FUD, but it would be useful to know the types of participants in neurons 1000-1141, 2000-2055, 4000-4037

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First and foremost, know that I have pinged the NNS and Research teams as they understand and know this. They are the experts.

Meanwhile, just my 2 cents:

Sounds reasonable. At first, I was hesitant on this, but after some reflection, it seems like the data is already available (through brute force and very loose obfuscation), and I am of the mind that if data is roughly available, may as well make it easy (so not only super sophisticated people get it).

Potentially dumb question: do you see any privacy issue from this? I am not aware of any, but I want to make sure i ask my regular set of questions (usability, security, privacy, scalability, etc…).

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Can you explain what you mean by the “types”? I have no special insight but this seems (at first glance) like a human problem, is it not? (e.g. the neurons mentioned being controlled by humans not taking the time to identify themselves to the wider public).

I am aware I am oversimplifying your point, so if you clarify what you mean by types, it will help me understand a bit more. Thank you!

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I think the idea of providing an index is a very good one.

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Thanks for the reply Diego!

I can’t think of any privacy issues from indexing, particularly considering that it would just make visible things that are already visible to the majority of neurons.

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Hi Diego,

First, I don’t think I’ve ever complimented you on how well you engage this community. Thanks for all that you do for us!

Sorry, my original post lacked clarity. By “types” I am referring to the token allocations categories (seed, presale, node operators, etc) in the Messari article (Messari - Bitcoin & crypto price, news, charts, and research). It is clear which neurons are associated with early contributors, seed round, ICA and Node Operators. But Strategic Partnerships, Presale, Community Airdrops, team members and Dfinity Foundation seem distributed across the neurons mentioned in my original post in a way that makes it challenging to figure out which “types” these neurons are meant for. In the long term, this doesn’t matter that much, but in the shorter term it would be important to know which of these groups of stakeholders are thinking long term (keeping neurons locked, etc) and which are dissolving and/or liquidating their ICP.

I’m probably not explaining this well, so maybe it would make sense if I give an example of what I’m hoping for… something like a statement of “Neurons 1000-1141 are strategic partnerships and initial community and developers”, Neuron 4000 is the Dfinity organization, Neurons 4001 - 4037 are Presale and Team Members"; for example.

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