3 days ago, @Accumulating.icp created a forum thread in which he performed an in depth analysis of the possibility of an $ICP token price spiral taking place as a result of inflationary pressures brought on by node provider rewards payments. That thread can be found here. This analysis has brought attention to just how serious the situation is. As far as I can tell, the Dfinity team has demonstrated very little appetite for providing opinions or commentary of the analysis performed despite several requests to do so. This leads me to believe they are very much aware of this issue and are doing their best to avoid commenting in an attempt to avoid validating the legitimacy of the concerns (which would consequently cause mass panic) while simultaneously not invalidating the concerns (allowing us to continue brainstorming solutions).
Over the last week, weâve seen the price of $ICP decouple from the its competitor data storage blockchain: Filecoin. It has dropped ranks from 32nd by market cap to 37th by market cap. The market cap of $ICP has gone from $1.5B to $1.3B in the last week and has refused to recover along with the rest of the crypto market. Iâm of the opinion that this decoupling is the beginning of an $ICP capital divestment as investors are losing confidence in $ICPâs ability to resolve the issue of inflationary pressures brought on by node providers rewards.
For the last three days, a group consisting of both developers and node providers have held deliberations on protocol changes that can be enacted quickly in order to eliminate the risk of a price spiral taking place. weâve converged to a proposition that best acknowledges the needs of all parties involved with the parties being the 1.) NNS and 2.) the Node Providers.
The purpose of this thread is to determine the parameters of the proposed changes to the node provider rewards dispersal protocols that are listed below under the title âThe Proposalâ.
The following proposed changes are intended to be made to the NNS for the purpose of mitigating the risk of the internet computer protocol ecosystemâs token collapsing as a result of inflationary pressures brought on by node provider rewards dispersals:
The Proposal:
1.) A fixed value, denominated in fiat, is assigned as the amount due to be paid to node providers upon each rewards dispersal. Node Provider rewards are dispersed in $ICP (This is currently how node provider rewards are determined and dispersed). The fiat value that node providers are due to be paid is the first parameters that this thread is intended to discuss.
2.) There is a cap placed on the amount of ICP that may be dispersed as payment to node providers. (This cap currently exist within the node provider rewards dispersal protocol, but is set to a rate that is too high to prevent a price spiral). The value of this cap is the second and final parameter that is thread intends to discuss.
3.) Any value that hasnât been dispersed to node providers (as a result of the cap implemented on ICP node provider rewards dispersals) is tracked as 0% interest debt that is owed to the node providers by the network. This debt is later serviced when the price of ICP has risen enough to permit the NNS to be able to service the debt while staying within the nodes rewards dispersal cap that we decide on.
I will now explain why this proposition was selected as a solution to the issue at hand:
1.) It addresses the issue of run-away inflation as a result of Node Provider payment obligations. It does so by placing a cap on the maximum amount of ICP that is to be dispersed as payment to node providers.
2.) It addresses the issue of neuron stakers being diluted by rewards paid out to node providers. It does so, again, by placing a cap on the maximum amount of ICP that is to be dispersed as payment to node providers.
3.) It transfers a reasonable amount of risk from the NNS over to the individual node providers, subsequently decentralizing risk. It does so by allowing the NNS to receive services from node providers, undisrupted, even when the value of ICP is too low to cover full costs to Node Providers while staying within the rewards cap. The NNS tracks the value owed to Node Providers as accounts payable. This is done at a 0% interest rate and with no hard deadline in which the NNS is obligated to repay node providers. Thus, affording the NNS time to allow the price of ICP to recover.
4.) It takes into account the fixed overhead costs of node providers. It ensures that they are sufficiently compensated in a manner that preserves economic incentive for them to continue to contribute to the network.
5.) It assures node providers have sufficient âskin in the gameâ. Not by locking up their rewards into a neuron, thereby potentially leaving them unable to pay their overhead costs in the short term. Instead it mandates that node providers invest in the form of providing a 0% interest line of credit to the NNS in times of economic strain. This incentivizes node providers to minimize the amount of sell pressure they contribute to the price of $ICP as they will cease to receive immediate payment for their services if they cause too much price depreciation as a result of over selling their rewards.
This proposal achieves the following:
1.) Decentralization of risk. Currently, risk is centralized to the NNS. If the price of ICP drops below a certain threshold, the result is an inflationary collapse of the entire NNS. If this happens, everyone is screwed, all at once. By placing a cap on inflation generated from node reward dispersals while tracking the balance owed to node providers and later paying that balance down as the price of $ICP rises, node providers are allowed the autonomy that they need in order to balance their own respective balance sheets in accordance to their specific geographical and political environment. On the other hand, if we force node providers to receive their rewards as staked neurons, it raises the already high barrier to entry for new nodes wanting to contribute to the network; anyone wanting to be a node provider would have to have enough money to run an entire data center at a deficit for however long it takes for their first neuron to unlock. This is a huge barrier to entry to becoming a node provider and one that Iâm firmly against imposing.
2.) Maintain incentives for node providers to continue to contribute to the network. Iâve considered the perspective of node providers and came to the conclusion that anyone whose willing to buy specific hardware to contribute to the network has at least some level of trust in the network. By implementing a system in which the node providers provide services to the network on credit during times of macroeconomic strain we presume that node providers trust the network enough to issue a 0% interest line a credit. This presumption is not all that farfetched and I assert that it is the presumption that is least likely to negatively impact the incentivization of both current and future node providers.
This proposal does NOT aim to resolve the overarching integral issue of insufficient network activity being the root cause of the NNSâs inability to balance the inflationary pressure brought on by node provider rewards against the deflationary pressures brought on by sufficient network activity. This overarching issue can only be resolved by increased network activity or by an increase in ICP price. Both of which will require time to allow devs to work and to allow macroeconomic conditions to improve. This proposals aims to serve as a set of protocols to be enacted for the purpose of allowing the ecosystem to carry on undisturbed during times in which $ICP price is depressed as a result of the macroeconomic debt/credit cycle.
@Kyle_Langham, your input in this discussion will be much needed as you and @Accumulating.icp have demonstrated yourselves to be the most knowledgable among the community regarding the analytical data that we will be needing to factor in as we determine what parameters are best.
as for @bjoernek , @domwoe and any other developers at dfinity, you allâs participation in this discussion will be vital, as you all are most familiar(or youâre most capable of directing us to the dev that is most familiar) with the portion of the code that would need to be changed in order to implement the parameter changes that we decide on.
as a last word, I would like to remind everyone that an inflationary death spiral could happen suddenly, and could unfold quicker than any of us would have time to respond. There needs to be a sense of urgency regarding this issue. We donât know how many $ICP whales are out there on the brink of selling their bag which would consequently trigger the beginning of the end.
