Tokenomics series: Projection of cycle demand and required network capacity of the IC

I’ve been contemplating some issues with the token mechanics between surplus network capacity and network consumption in the Internet Computer Protocol. Looking at it from the supply side, we see node providers being compensated in ICP based on an official market exchange rate of 1 XDR (USD 1.3-1.4) equating to 1 XTC. However, there seems to be a disconnect when we analyze the demand side.

There’s an abundance of cheaper cycles that don’t match the official exchange rate established by the protocol. In the current situation, the protocol’s official exchange rate is 1 ICP for 3-4 trillion cycles, yet the market price is at 13-14 trillion cycles, meaning that 1 XTC is approximately USD 0.3. This discrepancy is amplified by the unofficial cycles (XTC) market, which worsens the ICP’s surplus capacity issue by another factor of three.

I’ve been pondering on is whether the ICP should implement a decaying function for cycles that remain too long in a cycle wallet canister. This could act as a deterrent against simply hoarding cycles for trading speculation when the ICP price is high, unless those cycles are used to top up dapp canisters, which would make them untransferable.

It’s worth noting that this decaying function should apply only to cycles in the wallet (where cycles remain transferable), and not to cycles in the application canister (where they cannot be transferred). The aim here is to bring the ICP to Cycles exchange function back in line with the published rate. I’m curious to hear your thoughts on this proposed solution?

While I understand this idea might not be popular due to the potential impact on those holding large amounts of cycles in their wallets, I believe it could be beneficial for the tokenomics in the long run. By implementing a decaying function on cycles held in wallets, we might stimulate increased demand for ICP, especially during periods of low price. This could, in effect, stabilize the market and create a healthier economic ecosystem within the Internet Computer Protocol. It’s a delicate balance to strike, but one that could pay dividends in terms of long-term stability and growth.

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