Tokenomics Proposal [Community Consideration]

Right, the benefit of people staking is that tradable supply drops. So we should expect a rough inverse relationship between returns from interest and returns from the token value.

As interest rates go down, token value should increase since when they’re staked they can’t be traded.

In this respect it’s very similar to bonds: A bond offers high rates of interest when prices are low, to attract investors; but as people bid up the price of the bond, it’s rate goes down, because it doesn’t need to incentivize anymore.

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I’m curious to see how it will actually play out. Demand can still fluctuate wildly and, given that neuron staking funds are locked, it will leave supply relatively stable.

E.g. if the market drops again, demand for icp might drop, but the total amount of staked icp will remain roughly the same (at most, ticking down total vote power at a rate of 1 second worth of voting power per account per second if everyone starts dissolving simultaneously. That’s not real fast.) This is unlike a bond, which can be sold on the market at any time.

Does this mean we should expect fewer flash crashes out of ICP?

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@diegop @jwiegley @Dylan

Great job with the dashboard updates! I really appreciate seeing the node provider, dispersed, and undispersed rewards displayed so clearly. My hope is that the community will stop focusing so much on node provider rewards and start focusing more on inflation created by dissolving neurons as well as the unminted ICP that is sitting in neurons as earned maturity. Those are, by far, more important to the inflation / deflation story than node provider rewards.

I really hope the IC community will think more about how to incentivize staking because it would address the concerns about liquid ICP inflation much faster than burning ICP to pay for compute power. The time lapse dissolve of neurons has an incredible deflationary effect, especially long dissolve delays, because it is irreversible except for the passage of time. The #8yeargang has proven to be highly committed because over 97% of those neurons are not dissolving, which is almost almost equivalent to burning ICP. Every time that dissolve delay slider moves up, it has a deflationary effect. We spend too much time as a community thinking about ICP tokenomics in the same paradigms as other blockchains when the reality is that ICP tokenomics add completely new dynamics, especially the dissolve delay bonus and (potentially) the age bonus.

I know there are other features of the dashboard that are being worked on now, but one that I think would be helpful to the community is a breakdown of neurons by dissolve delay and dissolve status. More specifically, it would be helpful to see that breakdown in terms of both total ICP and total voting power. Taking this type of analytics a bit further, it would be very enlightening to easily see how this data changes over time. Anyway, I’m sure you have some great new features in the works and I’m looking forward to seeing them as they roll out. Once again, great job!

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I’m surprised there’s so much “undisbursed” ICP sitting in neurons as maturity. They’re literally useless there. Not liquid and no compounding. Do people just forget to do something with it? I know I do from time to time, but 73% of all rewards being “undisbursed” is quite high IMO.

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Technically, reward maturity is liquid within 7 days, which is effectively liquid in my opinion. It simply doesn’t exist yet (hasn’t been minted), which means it doesn’t count toward total available supply. TBH, I’m not sure it is healthy overall for maturity to accumulate too much in neurons. It’s probably something the IC community needs to start talking about.

edit: I originally made a comment about taxes that I am redacting since the proper answer is not known and tax professionals may conclude that taxes must be paid on voting reward maturity. @dfisher @jwiegley thanks for asking the question and providing insight.

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@wpb your post on taxes is is very insightful and something I hadn’t thought of. My tax accountants told me staking income has been deemed by the IRS to be income when it is received. But as you described, with maturity the tokens haven’t yet been minted so has the income event occurred yet? Two questions for you:

  1. Do you have professional tax advice from an accounting firm to corroborate your position that ICP staking income should only be recognized when the income becomes liquid and not just when maturity is accumulated?

  2. Is this position even preferable? If there’s income tax to pay from staking and it’s just a question of when (during maturity accumulating or when it becomes liquid) wouldn’t you prefer to pay it sooner if you expect the price to go up over time? Sooner means a lower cost basis since we are all hoping the ICP price will be higher in 8 years from now than today. That’s precisely the reason folks do a 83(b) election…

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edit: Please read this comment with caution because I’m not a tax professional and may be completely wrong about tax implications. I’m not deleting the comment simply because it does at least explain some of the mechanics behind what maturity represents and what happens when you spawn neuron or merge maturity.

Good questions. I have not received professional tax advice and I’m not a tax advisor, so I am making an assumption that taxes don’t have to be paid on reward Maturity until the ICP rewards are minted by either Merge Maturity or Spawn Neuron events. Maturity is just a way of accounting for how much ICP rewards you have earned, but it is not a payment or transaction. It doesn’t seem logical to me to pay taxes on ICP assets that do not exist and have not been recorded on the ledger, but maybe I’m wrong. It would be nice if someone who is a tax professional can comment on this detail.

Question 2 is really a tax strategy decision for each individual. Personally I don’t want my maturity to accumulate in a neuron for many reasons including the reason you outlined. Right now I am more interested in compounding voting rewards so they grow faster and I can increase governance participation. Many years down the road, I anticipate having a preference for liquidating rewards on a monthly basis. Hence, I can’t relate to the decisions that are being made to allow maturity to grow significantly.

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@wpb Just so you know, my own tax attorney has informed me that their best interpretation of the IRS’s wishes (in the United States) is that simple accrual of maturity (happening each day) is the taxable event, and not the moment of minting by spawning or merging.

I’m not a tax attorney, and this is not a definitive answer or tax advice, just an indication that you may want to consult expert advice before suggesting any particular interpretation. We just don’t know yet how the IRS will regard staking on the IC, and unfortunately we may not know until the first person who is audited can report back to us.

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I’m guessing that the untapped maturity is mostly from seed round investors who are managing dozens of neurons through command line. For them, it might just be more of a hassle than it’s worth to spawn the maturity.

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I’m sure that this thread is the wrong place, but I don’t know where to ask this question.
Sorry I’m not an expert and fairly new to ICP (invested since August)
I hope this is ok :slight_smile:

I’m analyzing the reasons of the continuing price erosion and I think one point is that the circulating supply inflates more than the total supply. I use the data from the circulation dashboard (sorry can’t insert a link somehow)

And it clearly shows that since Genesis the total supply has increased by 6,330,330 (~ 1.4%) but the circulating supply has increased by 67,759,778 (~55,1%) which is ten times larger than the inflation rate of the total supply. And I think the circulating supply has a much bigger impact on price development.

Are there any information why the inflation rate of the circulating supply is so much higher than the inflation rate of the total supply?

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Inflation of the circulating supply is higher because of the monthly neuron unlocks. Every month a neuron with around 4 million ICP gets unlocked and slowly released into the market. The last one dissolved on Dec 10th and these will continue monthly for some time. I’m not exactly sure how many neurons are left, maybe someone else has that info. I wish I knew this before staking but it was a lot of documentation to read.

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I think you and @RatherIcy might appreciate this article. Yikes! Lots of ICP coming to market - by Kyle Langham

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Thank you you two @RatherIcy and @LightningLad91! That clarified already a lot and the article is a very good reading.
I searched for the dissolving neurons in the next years and as I see it there will dissolve neurons every month in the next two years with each 1-4 million ICP (neuron 4009-40037). I will do further analysis but my intuition says that we should expect a price halving till the end of 2022 if the demand does not increase substantially since there will come a lot of ICP into the market and the reputation of the project is already struggling with the bad price development since Genesis.
But after that period better times should come.

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Another factor worth considering is the fact that Node Providers are paid monthly ICP in fiat equivalent, meaning if the price declines more ICP are minted to cover node costs. The good thing is, if demand for ICP increases those rewards will decrease.

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Check out the Total Rewards chart in the dashboard link below to see how small node provider rewards are in the inflation story. ICP price would need to be in the low single digits before it starts to compete with voting reward inflation. By far the biggest contributor to inflation of circulating supply is the dissolving of genesis neurons.

https://dashboard.internetcomputer.org/circulation

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Im very, very much in favor of any mechanism that reduces supply side and increases demand side. at current state there is so much supply and so little demand. in hindsight, this scenario should have been foreseen and addressed before the genesis event! Now its where it is and Im very much in favor of changing current tokenomics!

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I would like to highlight an important risk raised previously, but which is becoming increasingly urgent. The risk is that of controllers of neurons with many followers (“high-follower-neurons”) selling their neurons - and in effect, followers - one way or another. This possibility (or perhaps likelihood), ultimately undermines liquid democracy and the decentralization of governance on the IC, and I believe needs to be addressed quickly.

The post noted below outlines this risk. Appreciate review and comment.

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Son terra luna çöküşü, sınırsız token ihracı ile enflasyonun degerleri nasıl yok ettiğini gördük. Şu an itibarı ile krpto piyasasının en itibarlı tokenomik modeli etherıumun modelidir. Mümkün ise sıfır enflasyon ile sistemin sürdürülmesi. Çünkü enflasyon degeri aşındırmaktadır. Agın çalışması için jetona da ihtiyaç var. O halde etherium bu dengeyi nasıl kurmuş ise, orta vadede İCP de bu dengeyi kurabilir ise jetonlar deger kazanır.

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