Tokenomics Proposal [Community Consideration]

I like everything you said except for the ‘without restrictions’ part.

There are valid security concerns with letting someone just transfer their neuron at will. One of the abuse cases described by Dfinity was a scenario where someone capable of acquiring a large amount of ICP staked it for 8 years, voted in favor of a proposal or series of proposals that would harm the network, and then immediately sold it to avoid any financial loss.

I think there should be some sort of delay or waiting period (no voting capability) before a transfer can be completed.

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I fully agree with this. I think the tokenomics model is working just fine. This will take time and I’d prefer ICP to slowly transfer into the hands of long-term stakeholders instead of day traders.

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Hello all, just wanted to introduce myself. My name is John Wiegley and I’m a Principal Engineer at DFINITY, since three years ago. I’ve working with @johan on ideas related to future Tokenomics proposals, and have read all of ideas above with great interest. Please keep the flow of ideas coming, and let me know what you find confusing or worrisome, or what works great for you, in the current model.

Transfer of neurons is a hot issue that gets asked about in many places. There are definitely security issues, as mentioned above, where transferability could detach stakeholders from consequences, leading to negative voting scenarios. However, allowing early exit at penalty is definitely worth thinking about more. It’s something Johan and I have discussed in the past, and even written some proposals to address, and we are still chewing on the idea. How would you imagine something like this working, that does not take away accountability from our current voting system?

John

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Nice to meet you John. I understand that there are security issues with an “early exit,” but I think those issues can largely be mitigated if you impose a severe penalty on those who do exit early. The way I envision this working is imposing some threshold amount for exiting a neuron early (say, 10%), and then increasing the penalty based on how much time is left on the neuron (up to, say, 40%).

I cannot stress enough how important it is to make the penalty severe. As of my writing this, an 8-year neuron makes a return of nearly 30% in a year. If the penalty is not severe (e.g., if it is only 5%), an investor who wants to lock up their tokens for a short time (e.g., 6 months) could lock up their ICP in an 8-year neuron, and exit early for a massive profit. Indeed, if the exit penalty is low enough, no rational investor would lock their tokens in anything but an 8-year neuron.

Separately, the penalty acts as a “tax” for any bad actor who wants to harm the system by (1) buying ICP, (2) voting with the ICP, and (3) selling the ICP immediately after voting. That tax must be severe to deter bad actors.

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I’m curious what the initial reason for opening this thread was? Are there any problems with the tokenomics that the Foundation finds grave?

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One of my biggest concerns is the gravity of the all-or-nothing lockup. I’m curious to know how this system was designed, as in was any empirical evidence used to test human psychology at a 4 year lockup versus an 8 year lockup?

I really wonder if there are differences in human behavior (we want people to choose to maximize the value of ICP and thus the Internet Computer, or vice versa) between 4, 5, 6, 7 or 8 years given it’s an all-or-nothing lockup and that number of years is just so incredibly long on the curve of innovation.

So, one proposal I have is getting rid of the all-or-nothing lockup by unlocking ICP in proportion to the current dissolve delay.

Right now, the dissolve delay mainly affects rate of return (in the maturity calculation) AFAIU, unless the dissolve delay is 0, and then the ICP can be unlocked. What if a portion of the ICP were unlocked as the dissolve delay decreased? So if you hit dissolve on a neuron with an 8 year delay, 1 year in to the dissolving you could unlock 7/8 of the ICP, and this would of course by calculated each day or whatever, similar to how the maturity is calculated now.

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Good question.

I cannot seem to find the exact thread on Dscvr.one. but the inspiration for this thread is that Dom was on a dscvr thread with folks and he both received some feedback and said foundation would propose some changes.

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I would not make any changes to this amazing neurons tokenomics, but only few technical upgrades.
As it is design now, it offer the best of all worlds. People can create multiple neurons and set them up with different dissolve delay if they think about claiming back their original token amount. Having 8 years lockup offer more rewards which is normal. Some people, like me, intend to build a yearly income by leaving the 8 years for ever. As it reward bow, in 5 years, with reinvesting all the rewards, it will produce the same amount per year as the original amount to create the neuron. This is huge. Why would you change such a great system?
The upgrades could be:
Have a huge screen warning with full explanations of the impact when upgrading the dissolve delays, with an Accept button.
Would be also very nice to be able to combine neurons with the highest dissolve delays of the two.
It would not be fair to have people to get in the 8 years in order to get maximum rewards and be able to get out before, even with penalty. Everybody would do this for sure.

And I will come back with a optional proof of ownership system. Was thinking about creating a NFT with the account and the owner info where the voting system could give back control of the account to the real owner. This will be necessary to have mass adoption and remove being scare of loosing everything on a simple mistake, or stolen account, etc… This will happen and may ruin or seriously damage a life. But I think Dfinity have enough on their plate for now so this is why I do not push hard for something like this in the near future. This would be huge as people would feel as safe as a bank account where people cannot loose their account in any way.
If blockchain NFT can proof a piece of art to be the original for ever, I cannot see that all IC engineer cannot create a proof of ownership somehow, which is closely the same.

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Hi John
Nice to meet you. Transferability is already built-in into the NNS through following another neuron. If one bad actor wants to “buy” sufficient votes, he could set up a smart-contract of sorts that would require other neurons to follow a specific neuron for a specific time with the promise of “rewarding” such neurons. Am I mistaken?

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I have some non-technical thoughts on ICP tokenomics informed from a few friends I have in other crypto spaces and my own reading on how laypeople perceive tokenomics. There are two big buckets I’d like to bring up and hopefully whoever replies can cure my ignorance.

Firs I think what confuses me is how to quantify the gap between new ICP being created and ICP being burned for cycles. If you look at https://ic.rocks/charts, the rate of new ICP being burned vs minted isn’t even on the same planet The outlier best day in August is 600 ICP burned and the day with the least amount of ICP Minted was ~11,000. With some days being less than 1 ICP burned daily.

Even with the cherry picked best values so far for inflation, that’s an 18x amount of ICP that would need need to be burned daily to get to deflationary. However, that goal post will keep moving as more node providers come online. Because of that, part of me feels like fairly high inflation will happen forever. A lot of people in the crypto world are obsessed with inflation rates, they view cryptocurrency as a hedge to inflation and view it in opposition to fiat monetary policy. ICP does not appear to currently work this way, which I think turns off a lot of people. I say this as someone who is a big fan of ICP and thinks that 100x usage of the mainnet is realistic.

Even then, the numbers don’t add up one way or another. Are most rewards given to neurons or to data centers? How is the rate for rewards to data centers made? Is there an idea of what % of ICP will be minted from neurons vs rewards to data centers? I assume Dfinity has at least an estimate of that and could clarify the direction of new ICP being minted in the short-medium term. If it’s largely just from neurons then acceleration of minting will inevitably slow down and it’s not a concern, if it’s largely from data centers, then there should be more clear info on how they are rewarded and how those rewards will work over time.

The second bucket is the big elephant in the room for some people. The allocation of ICP tokens is kind of a mystery. Talking to a couple people I was able to find the Genesis allocation, but it seems clear that the current allocation is a big question mark. This big question mark is clear from messaging a few different people within the community, and I think where a large source of FUD is created from, and could be stopped with clearer communication/more transparency.

In a recent interview Dominic Williams stated “For the record, the Dfinity Foundation did not sell a single ICP for five weeks after Genesis. And in fact, founder and founder levels, employees were locked up for the first week, so clearly didn’t we cause the fall in price, or the rise.” This leads to even more confusion in my opinion. It’s not clear what percentage of ICP is held by the foundation or employees currently, and if so, what percentage is locked up in neurons and for how long of a delay? What happened after 5 weeks? I assume this is just an off the cuff statement, but it’s a pretty specific time frame and odd not to just say founders, founder levels and employees largely had/have their ICP staked away.

TLDR I think that it should be made clear what amount of ICP is held by the Foundation, the Association and from Founder level employees, otherwise it’s going to inevitably create FUD from misinformed or malicious people. Additionally, most people in the larger cryptospace view cryptocurrency in relation to fiat, and the way ICP does inflation and deflation, while quite brilliant in my opinion, doesn’t really give a clear signal to what inflation currently is and how it will go down, given it doesn’t seem transparent how new data centers get added, or their rewards. It’s easy to just say over time more ICP will be burned into cycles, but the math doesn’t add up as how I currently understand it. While I am not advocating some massive deflation, from my readings it is clear the larger crypto community prefers projects that are either deflationary in nature, or with an inflation rate below recent trends of USD.

Lastly, I’d like to just thank everyone at Dfinity and whoever reads this post. Diego and company have done an amazing job on the subreddit, but I felt since this post took quite a bit of time, it made sense to post it here. My apologies if this is pretty open ended, is says you can help by asking questions so I asked many!

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@jwiegley @johan @diegop thank you for asking the community to offer ideas related to tokenomics. I think you are doing an excellent job of seeking feedback and responding to concerns.

In my opinion we should not make significant changes the tokenomics. I don’t really like the idea of making it easy to transfer neurons or allowing shorter unstake periods with penalties. The rules are clear in the Dfinity publications on this topic and every investor should DYOR to know what they are signing up for when they stake ICP. This project is way too young to be making those kinds of changes to the tokenomics and I would prefer to give it more time.

I think there are better ways to make it attractive to stake ICP. A stated goal is to achieve 90% staking. I would like to see metrics published by Dfinity foundation that can be tracked to understand progress toward that 90% goal. If we are not measurably moving in that direction, then think about what can be done to make it more attractive to stake ICP and participate in governance. Do this by rewarding existing participants in governance. Two examples of this come to mind.

First, there is a deadline for claiming ICP minted at genesis. Make a concerted effort to ensure that every genesis recipient has fair opportunity to claim their ICP. However, the ICP that remains unclaimed (which is currently significant) could be redistributed to investors who have already staked long term. Any current neuron with a dissolve delay more than 4 years means the investor has signaled intent for long term participation of governance, which is the stated goal of the tokenomics of ICP. Every neuron with a dissolve delay of more than 4 years was configured that way by individual investors after genesis. Reward those investors. Redistribute the ICP proportional to the existing voting power of neurons. Redistribute the ICP into locked and voting neurons with an 8 year dissolve delay. Set a deadline for when the redistribution will occur and publicize it widely well in advance. Generate a buzz. KYC, if needed. I think this will cause a sudden rush to stake liquid ICP and for investors to increase dissolve delay of their existing neurons.

The second example is related to the fact that the Dfinity foundation is a large holder of ICP. I don’t know how much of it is currently staked, but if some of it is not staked long term then consider staking it and redistributing the monthly rewards to other long term stakers. Do this every month for the next 4 years. Make it a significant perk for long term investors to participate in governance.

Both of these ideas accomplish multiple stated goals in the tokenomics without substantially changing the tokenomics. This is a way to make it significantly more attractive for investors to stake ICP and participate in governance. This accelerates the rate at which decentralization of the internet computer will occur. This takes liquid ICP off the market, which will cause a price increase. This moves us toward the 90% ICP staking goal faster.

I do not believe that the tokenomics need to change. I do believe that we need to give it more time for the tokenomics take effect as designed. If anything needs to be done, then make it more attractive to achieve the 90% staking goal faster.

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Shouldn’t the actual value/code running on ICP accomplish this? You need to burn ICP for cycles. Adoption will bring a natural deflationary side

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Agree with what you said. Regarding the second point, ic.rocks should be accurate. Although the neuron 4000-4000 is a mystery to me.

Seconding this. Tokenomics as designed and publicized were a big draw for me as an early investor, and all of the tokenomics parameters seem very nicely-calibrated for the IC in steady-state. As Wenzel notes, neuron transfer is worrisome for the security reasons outlined in previously published Dfinity materials.

If the goal is to get to 90% staking and encourage decentralization, then that’s where the focus should be - how do we make staking and participating in governance more attractive?

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Hi @wpb
I read carefully your post and agree for most part. I also, have expressed not to make any important changes as we got in with the actual rules.
My question to you is Why do you say the goal is to have 90% stake in the neurons?
If this is to create an artificial value to ICP by creating low ICP available supply, I do not think this is a good strategy.
With mass adoption and IC technical success that it should have, having many ICP in circulation, thus creating large volume for trading, is a better option on the long run. Have some ICP available for large institution to get in and hold long term.
Creating artificial value by locking the vast majority , on hype or whatever else, is never a good way on long term. And the way I see it, Dfinity (and yourself and myself) are looking for a very long term. So long that I have no intention to unlock my 8 years ever. This is how much I believe in the IC project.

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Good question. Dfinity stated the goal in the article linked below in the section toward the end titled Calculating Voting Rewards. In my opinion, this goal is foundational to the tokenomics design. This article had the biggest influence on my decision to invest and stake because it lays out the tokenomics rules and goals in detail.

“Calculating Voting Rewards, Overview
We begin by deciding that 90 percent of the total supply of ICP should be locked in neurons. Then we estimate what returns, in the form of newly minted ICP, must be provided to those locking their ICP to incentivize 90 percent participation. This allows us to calculate the total rewards that must be paid if we are successful. We then decide to distribute this quantity of newly minted ICP regardless of the current level of participation, such that participants will receive larger rewards until participation reaches 90 percent, allowing the markets to persuade those who are not currently participating to participate.”

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I, also have read that document before investing. I think we have 2 different interpretation for the 90%.
As they wrote “We begin by deciding that 90 percent of the total supply of ICP should be locked in neurons”. I read it as they have made their calculation while thinking the probability that 90% of ICP will be locked at some time. But I do not read it as this is a goal. It was an assumption to me. But I can be wrong.
Still, I think having a good supply for the market is good for stability and avoid manipulation. If only 10% of the supply is available on the market and 2 or 3 whales are part of that 10%, they will do whatever they want with the price.
Market will decide at the end. Will be interesting to see in 2 - 3 years

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Hmmm. I suppose you are right. I hadn’t considered that idea previously and I would not want that to happen. Vote following through liquid democracy should be a personal and independent decision, not a contractual obligation for some service provided. I suppose this is a good reason it should not be visible which neurons are following which neurons, which is not possible today. I believe this is why ic.rocks and others cannot determine the liquid voting power of specific neurons.

This is a good place to introduce another request for the Dfinity foundation. I don’t know if anyone else has already defined a term for this yet, but for now I will call it liquid voting power. Liquid voting power is the overall total voting power of a neuron inclusive of its own voting power and the total voting power it obtains from all vote followers in the liquid democracy model.

I think it is important to be able to track the liquid voting power of neurons. I think only Dfinity foundation can/should make this metric visible. The stated goal is decentralization over time. This will happen. The only time in IC history that individual neurons should have greater than 51% liquid voting power should be Dfinity foundation in the early days. As decentralization occurs, we will need metrics that enable visibility to which neurons are gaining enough liquid voting power to control the NNS.

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Seconding this. I came here thinking I wanted neurons to be freely traded, but after reading some of the other comments I agree that the security concerns make sense. I don’t like the idea of being able to unlock staked neurons early, even for a penalty. I would much prefer to see a streamlined way to transfer ownership of an existing neuron to a beneficiary in the event of a death, sickness, etc. I think many people in the community, myself included, are not planning to dissolve our neurons ever. We definitely do not want to rely on passing down Yubi keys.

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Just wanted to add my support for Wenzel’s proposal. I think being able to monitor the Liquid Voting Power (LVP?) of a neuron would be useful for a lot of reasons.

It would be really interesting to watch an organization’s LVP move up or down in real time. Especially as the network matures and more influencers become active in the community.

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