Neuron Instant Dissolve + Slashing

(originally posted in ICPMN telegram)

what do you all think of an nns mechanism that would allow a neuron to instantly dissolve, at the cost of being slashed?

something like a 10% slash for a 6 month neuron, up to a 50% slash for an 8 year neuron

would reduce total supply while allowing some flexibility


As a practical solution, @daeitus, I like it, since everyone could theoretically come out ahead in almost every scenario, at least before taxes. My bigger concern is whether this emergency accessibility to locked up tokens could be characterized as “dominion” (i.e., access and control) over the increases in ICP from governance rewards, even when no emergency dissolving is actually triggered. If so, those rewards could then become taxable as they are accumulated/earned, at least up to their slashed value.

This could have disastrous consequences on the future valuation and tokenomics of locked up ICP. Unless the IRS and other tax authorities explicitly confirm that this change would not transform governance rewards into taxable income in the year of accumulation, I could not support this otherwise good suggestion. See this article from Dominic about these tricky tax considerations for more details:

I see, thanks for the detailed response. I am not a fan of shaping tokenomics based on hypothetical tax scenarios in specific countries. I see it as the tail wagging the dog and a waste of dfinity’s resources.

However, given the great potential of slashing as a deflationary force, would subjecting slashed neurons to the current modulation regime solve “dominion” concerns? That is, treating them as minted ICP and applying the +/- 5% modifier?


I’m not sure, since the IRS has not explicitly ruled on whether any changes (such as conditional access with penalties) could trigger the dominion/control criterion. However, I think one way to solve this would be to allow investors to choose between irrevocable staking over the entire dissolve period (as exists now) or revocable staking with a severe slash in ICP if dissolved early. That way, everyone could get what they want while also allowing for some significant slashing / deflation from revoking a staking commitment.

Why relate only to the US fiscal jurisdiction?

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There are at least a couple of reasons to reference U.S. tax law: 1) a large portion of ICP investors are in the U.S., and they have already run into this very significant and legally risky issue; and 2) the criteria for separating principal owned from taxable interest/dividends/etc. earned on that principal are fairly common across many tax jurisdictions. So, to this latter point, if governance rewards are taxable in the U.S. as a form of interest or other earned income on the original principal, it is quite likely that this issue will come up in multiple other jurisdictions in the future. In general, tax authorities will not treat any accumulation in principal value as separate if that value cannot be accessed and controlled separately from the principal.

Likewise, there is usually a fundamental “ability to pay” condition that most tax authorities follow, which is why they also tend not to tax accrued capital gains until an asset is sold. Selling an asset is usually the only way to access and control those accrued capital gains. So, circling back to the original suggested idea above, if 100% of all ICP owners are forced to have some way to access and control the governance rewards that they get, even if it comes at a significant slashing cost, it is quite likely that multiple tax jurisdictions – not just the U.S. – could find a way to tax these incremental rewards as they happen.

That’s why I followed up the original suggestion by adding my own suggestion: Why not also offer new neurons a revocable staking option, where a long-term staking (and dissolve time) commitment could be broken for personal emergencies? This breaking of a commitment would obviously come with a significant slashing cost to erase (at a minimum) their incremental gains from making that commitment, which they could not uphold for whatever reason.

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