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UPDATE: May 27, 2024
Moderator’s note by @diegop
TLDR: I am locking this thread, but not because of any bad behavior, but because I have gotten a lot of feedback that its too large to properly digest properly. Too many ideas and comments. New ideas can come from new threads.
In fact, one main comment which many people missed was this one:
In this comment, @bjoernek is writing on behalf of DFINITY explaining why DFINITY got the feedback Dom was looking for, and DFINITY decided to not pursue the proposal further.
There is even a new thread about it here: Analysis of Proposals on Neuron Dissolve Delays and Exchange Maturity
Anything beyond the line below is by the original author: Dom.
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Hello everyone. I want to propose two changes we could make to NNS governance with the aim of optimizing network tokenomics.
These two changes are not slam dunks, but they could provide some significant advantages, and our purpose should be to continue improving tokenomics, in the same way that we constantly make the network faster, more efficient and more capable as we move into the future.
The ideas are standalone, so we could take both, one, or neither!
IMPORTANT/UPDATE: Forum discussions on May 6th updated Proposal 1 below. Some people are not reading through the replies thread! The proposal was modified so that 8 Year neurons would NOT be forcibly reduced into 5 Year neurons (and in fact, would have some adjustability too). In the modified proposal, it would only become impossible to set dissolve delays >5Y in the FUTURE, and delays on existing neurons would only be brought down if their owners wished (at their choice). Please make sure you read all replies and the state of play before assuming. As soon as I’ve got time, I will create proper forum proposals that split 1 & 2 below and which contain all updates and then fresh discussions can begin from there. This will take a week or so due to other commitments. What’s fantastic is that everybody cares so much and we can have these frank discussions about ideas as a community. Big thank you!
PROPOSAL 1: Reducing neuron dissolve delays to reduce inflation
General context: ICP has fought its way through significant sell pressure pretty well. Future step downs in sell pressure are also coming. Our belief is that major VCs who bought in early will be exhausted this year, which will put the network in an enviable position – the other major networks remain mostly held by such parties behind the scenes, often in the range of 75-85% (yes, you read those insane numbers correctly!). ICP holders are already vastly more decentralized, and the more so it becomes, the better.
Nonetheless, finding ways to allow the network to breathe still make a lot of sense, and one of the ways we can address that is by reducing inflation. Today, the primary source of protocol inflation is governance staking. The question is, can this be reduced by updating the protocol, without breaking promises the network has made to those who have staked. The answer is, yes, potentially:
Outline of proposal:
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Reduce the dissolve delays of all neurons by 5/8th (to 62.5% of what they is today)
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The age property of neurons would stay the same (age increases over time, benefiting voting power, and is set to zero whenever a neuron is placed into dissolve mode).
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The minimum dissolve delay at which a neuron can gain maturity by voting, would be reduced to a round 3 months.
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The overall notional voting reward distributed by the network, which is logically distributed by votes to determine how maturity increases, would be reduced, such that the rate at which a neuron’s maturity grows, given some amount of locked ICP, dissolve delay and age, would remain almost identical to that today.
The main benefit to tokenomics is that this would reduce the amount of new maturity that neurons gain by just under 20%, which is definitely significant (the immediate ICP impact would be less, since many do not use their neuron maturity to create new ICP, but especially over the long-term, this would definitely have an effect).
This would mean that if you have 8 year neurons today, and this change were made, then you would find you now had 5 year neurons, and the maturity would grow at the same rate as for 5 year neurons today (given the stake and age).
Those with 6 month neurons (currently the threshold for gaining maturity by voting), would then have 3.75 year neurons, but they would still gain maturity, since the minimum threshold for gaining maturity would be reduced to 3 months – which will also be useful for those wishing to try out governance staking for the first time.
5 years is still a very considerable time to make a commitment, but it’s not as mind-bending as 8 years, which makes the system more friendly.
But what about the hardcore “8 Year Gang”!! Would this have to become the “5 Year Gang” since they have now have 5 year neurons!!!?
My suggestion is that if you identity as “8 Year Gang” (and all mine are 8 years) then you would continue to identify as before and the moniker says the same.
For example, Porsche is going electric, but the fastest Taycan is still the “Taycan Turbo S” even though electric cars don’t need turbos. The “8 Year Gang” can continue in the same way. It’s really about commitment to the future.
PROPOSAL 2: Swapping locked ICP for unstaked maturity.
You should always get your own tax advice, but, by design maturity is an attribute of a neuron, not a cryptocurrency that lives on a ledger like ICP that can be transferred and sold. Furthermore, the amount of newly minted ICP that a neuron can produce by applying its maturity is indeterminate, and subject to modulation by external factors like price trends, and even updates to the NNS, further indicating that maturity is part of the value of a neuron and has indeterminate value.
This design means that when a neuron gains maturity, this is not realized income (again get your own advice). However, it is hard to argue that when the owner of a neuron uses its maturity to produce new ICP by spawning, then this represents the generation of income, since the newly generated ICP can be transferred and sold, and has a more-or-less determinate value, and in most jurisdictions (unless you live in Monaco, UAE, Puerto Rico, etc) income tax will be due on the new cryptocurrency you have produced.
The maturity of voting neurons increases near continuously, and its nature arguably provides administrative advantages compared to traditional staking, which regularly pays out cryptocurrency, forcing constant accounting. Nonetheless, there are some disadvantages.
Perhaps the largest one is that maturity is an attribute of a neuron, and not a cryptocurrency! This means that it can’t be used in things like DeFi. There is a lot of maturity sitting on neurons that might usefully be deployed if it were unlocked ICP! We might try to fix this.
Outline of proposal: When a neuron has unstaked maturity, then the owner can swap that unstaked maturity for ICP that is locked inside i.e. such that the unstaked maturity becomes locked inside, and the ICP is freed (currently maturity can already be staked, so this is not a big leap).
Example benefits:
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Unlocking your pre-existing ICP is tax neutral, so the owner could, for example, transfer the newly unlocked pre-existing ICP into a DeFi service and borrow against it. This might unlock more liquidity for DeFi.
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If a neuron owner needs to realize x fiat gains for a financial purpose, they could sell their newly unlocked pre-existing ICP, paying capital gains, rather than applying maturity to generate new ICP for sale, which is subject to income tax. Since in e.g. in places like the UK, capital gains is 20%, while income tax 50%, this would make it possible to sell less ICP to realize the required fiat gains. This might result in less forced sales.
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If a neuron owner wishes to have unlocked ICP to swap for some other token, and would otherwise have to apply unlocked neuron maturity to produce new ICP, then benefits as per advantage (2) above.
These two proposals are quite nuanced, and interested to hear thoughts.