MIP to review and redesign Mina tokenomics

MIPs (Mina Improvement Proposals)
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This post is a collaboration with Pete (https://twitter.com/minacryptocom) and Lamps (https://twitter.com/lamps945).

Summary. Mina’s tokenomics has been the concern of many community members, as evident by the number of posts on the MIP channel of Mina Research. The upcoming zkApp hardfork makes the issue even more pressing. In this MIP idea, instead of proposing a tokenomics model directly, we outline the importance, opportunity and difficulty to design a successful model for Mina, and propose that Mina Foundation should commission a thorough review and redesign of Mina’s tokenomics post hardfork, taking in account the critical aspects as outlined in this MIP.

1. Tokenomics is blood and bone to a blockchain

Tokenomics is as important as the consensus algorithm to a blockchain. On one hand, it contributes to the security of the chain by making attacking the chain more costly, on the other hand, it creates incentives for people to participate in the operation of the chain in various roles, from miners/block producers, to ecosystem builders, to users.

2. Pressing need for Mina’s tokenomics to be changed

2.1 Mina’s tokenomics is long outdated

Mina’s current tokenomics was designed prior to the mainnet launch, and supercharged rewards (24% APR) for unlocked tokens was introduced to temporarily incentivize token holders to stake Mina. It worked at the time, but supercharged rewards were planned to be wound down from 24% to 12% (equal to the APR for locked tokens) from Sep 2021 to Sep 2022. This did not get implemented, though, as the launch of smart contract was delayed, and the supercharged rewards continue to run at >20%. This hyper inflation has been a concern for the community for a long time. Even though an MIP has been passed to remove supercharged rewards after the planned hardfork, the inflation will still be 12% [correction, as per data from Gareth, the inflation after removing Supercharged Rewards will be ~8% considering current staking percentages]. In comparison, the inflation rates of major L1 chains, for example, Ethereum, Solana and Cardano, are all <7%.

2.2 upcoming zkApps will overhaul the structure of Mina blockchain

The hardfork will introduce zkApps as well as layer 2s on top of Mina. As a result, the Mina token’s utility will go from solely for paying for transactions, to multi-functions including paying for zkApp transactions, issuing custom tokens, and bridging to other chains and L2s. These added utilities provide a golden opportunity for a tokenomics overhaul. If designed perfectly, it will allow the Mina token to capture these wonderful value creations on top of Mina, which will then attract more talented builders and enthusiastic participants to the ecosystem, thus creating a positive spiral effect to grow the Mina brand, ecosystem and community.

3. Great tokenomics design will have to have leading experts’ input

3.1 Things to consider in the review and redesign:

A perfect tokenomics design needs to take considerations of all the following aspects and perhaps some more:

  • Security of the blockchain
  • Value capture.
  • Incentives, for people to participate in and to build on top of the chain. It can only be achieved by striking a delicate balance between inflation and deflation mechanisms, and token prices.
  • Utility with zkApps, eg custom token issuance (similar to ERC20 tokens using Ether) and settling the zkApp transactions on the base layer.
  • Symbiosis with Layer 2s on top of Mina: ZekoLabs, Anomix etc

3.2 Proposed approach

To achieve all these design goals at the same time is obviously a multidisciplinary task involving many sub fields of computer sciences and economics. While MF and O1 have established themselves at the forefront of CS and zk, in our opinion the design of the tokenomics would benefit significantly from engaging with other leading experts encompassing the broad fields with proved successful experiences. Therefore, through this MIP, we would like to request that Mina Foundation commission a world leading team to conduct a comprehensive review and redesign Mina’s tokenomics. As far as the author’s knowledge, the following teams would be good choices (disclaimer: we are not associated with these teams in any way), but of course Mina Foundation can choose whoever they think appropriate for the task, or gather proposals or suggestions from multiple of them if deemed helpful.

  • Gauntlet (https://www.gauntlet.xyz/ ) led by Tarun Chitra, are a leading expert team for tokenomics design. Coincidentally, Gauntlet also reviewed Mina’s original tokenomics upon mainnet launch in 2021.
  • Delphi Digital. Most famously designed Axie Infinity’s tokenomics in 2021 which was a great success.

4. Initial responses from Mina Foundation and O1 labs:

We have had some positive initial responses from MF and O1 team members, for example Will Cove (MF) and Brandon Kase (O1):

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Thanks for posting so succinctly Lamps! In my opinion as Mina enters a really exciting period much of the discussion so far has been around zkApps and obviously this is just a small part of the big picture.

It’s been inspiring recently to see fresh enthusiasm from the Mina Foundation and I’m sure there has been many discussions internally about all of these things. I realize Tokenomics is complicated and consulting with an independent external contractor could offer a new perspective.

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Strongly agree with this point of view. We urgently need to design a new tokenomic to better capture the value of $mina. Perhaps we can work with a professional tokenomic team to design and write it into a MIP for community review and voting.

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Just to clarify this headline number, the inflation rate of the network is historically been ~12% and will be closer to ~8% post-hard-fork and further decreasing every epoch, assuming the same staking participation rate. The differences are that not all stake is currently unlocked, and not all stake is participating.

I think many misjudge the increase in circulating supply (which is much larger) to be the inflation rate.

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Thanks Gareth. Just to make sure I understand it right - is the theoretical upper limit of inflation 12% if assumed 100% staking rate? And 8% is based on the current staking rate?

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No, assuming the hard fork happened today, the max limit would be ~8.8%. This is because we have a fixed coinbase and an increasing total supply, so the inflation rate is naturally decreasing.

You can confirm this as max of 7140 slots and 75% fill rate so 5355 max blocks. 5355 x 720 = 3.8556 million MINA increase an epoch. The current supply is 1.0724 billion, so that’s an increase of 0.00359517041% an epoch, annualized that’s 8.8%.

For the last epoch 61 we had an active stake of 77.71% - 829 million contributed to block production out of 1.047 billion in the staking ledger. That resulted in a fill rate of 60.81% so assuming the same that’d be an inflation rate of ~8.0%. Given as the hard fork is at least a few epochs away we’ll realistically be sub 8% by that time.

In case you haven’t seen it, there are a lot of charts and more details in the call posted here Reduce supercharged rewards in line with initial tokenomics - #35 by garethtdavies

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I should also note I am strongly in favor of a long-term tokenomics plan, I just wanted to clear up misconceptions about the current implementation first (confusion mainly because the tokenomics post was never actually implemented as designed and the post not revised).

I also strongly believe the strong negative associations with Mina’s inflation rate are more to do with an initial low-circulating, high FDV with a lot of token unlocks. This dwarwed the increase in supply due to block rewards. Sadly, as per the chart here, this will continue until around the 4 year mark.

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My TLDR is that removing supercharged rewards was the best first step, and other changes can follow after the hard fork. I think Evan’s initial post is an excellent starting point. For example, a fee-burning mechanism adds significant complexity and could delay the hard fork when there is no evidence we will ever have meaningful fees to burn. Further reducing the coinbase at this time would certainly impact smaller block producers at a time when resource requirements are likely to increase. An 8% inflation rate seems reasonable given the infancy of the protocol, and presumably, we won’t be waiting 3 years between hard forks, and further modifications can be implemented at a more frequent cadence.

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[speaking from personal perspective and not representing O(1) Labs’ view]
I am supportive of investing more time and energy into revamping Mina’s tokenomics. Both Gauntlet and Delphi are well reputed teams so supportive of working with them too. To me there are two aspects however to any research and proposal:

  1. Model: Do we stick to current fixed inflation; or have something more sophisticated and dynamic like Ethereum’s. Personally I would be strongly in favor of a fee burn model that allows the supply to go deflationary based on increasing usage of block space.
  2. Implementation: How does the Model above get implemented into the protocol. e.g. if kept at fixed inflation, is there a need for protocol to dynamically adjust block rewards to actually target fixed inflation (based on fill rate / slot time / other factors); or is the community ok with something more simple like what there is today.

Thanks @lamps for kicking off this thread. Very valuable and timely.

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Thanks for kicking off this discussion @lamps & @garethtdavies for the fantastic insights!

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Hey, yeah I would be supportive of this too.

My personal take (not formally speaking on behalf of MF either) would be reducing block rewards to 500, plus 33% fee burning, I think that would be a good step forward for the next HF after zkApps (pending perhaps seeing if fee burning is complex to implement). Some thoughts on why for each of these too. (Ultimately, I’d like to emphasize that this is up to the Mina community and would love to see an MIP on it)

  • 500 block reward - We want to make sure staking participation stays strong for network security, so a modest decrease from the current 720 probably makes sense. ~5% annual inflation towards network security has some precedence on other networks too such as Ethereum.

  • 33% fee burning - this probably won’t do very much until network activity goes up, but having this agreed and implemented would be a strong statement I think about what to expect from the tokenomics, vs it just being planned or being discussed. This also now has some precedence with Ethereum too with their fee market & burning.

I’d also be supportive of some kind of tokenomics work / report too on different options and tradeoffs, given its a big decision I think. I’d be curious if there are any groups that have looked at L1s in particular, as opposed to most of their work being on the DeFi side.

Ecosystem partners are heads down on the upcoming hardfork, but I think as a next step, after the hardfork MF could put forward an RFP, and the community could decide via an on-chain-vote on selecting the right service provider if folks want to go that route?

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I support this suggestion. I think it makes sense to wait till the hardfork to move forward, especially given the context that Gareth shared above.

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Great to hear all the discussions…

If we went down the external contractor approach, even if it’s in terms of validating ideas, I guess someone should approach the relevant teams to see if it’s something they would be interested in doing.

If they were, then I think for them to make a short proposal for their participation in order to give voters some context would make sense too.

Do you think this is this something Mina Foundation could do, or could someone from the community investigate the feasibility on their behalf?

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Hi guys. Thanks for start this important discussion.
Im not sure if a new tokenomics is necessary. Dont forget it, there was FUD that caused by Mina tokenomics in the community in last years. I wrote an article about it and I compared Mina and other major tokens tokenomics. Community doesnt understand everything and I think they will misinterpret this decision. They will say “Like as we said, Mina Protocol had a shitty tokenomics, they need a huge change and deal with Delphi to do it.” This will also undermine the communitys trust to the team.
Is Mina’s current tokenomics is really bad? I dont think so. Because the changes we discussing are not huge enough and game-changing enough. But maybe we need both (fee burning mechanism and decrase staking rewards).
So really will be there a huge change?
Will fee burn model really work on Mina blockchain? As you know, Mina has a unique structure. zkApps and smart contracts load doesnt strain the network because Mina uses offchain computation and there will be no expensive gas fees like Ethereum’s.
When I checked total of all times paid fee on MinaExplorer, I’ve seen all users paid a total of about 50-100k MINA fee for last 2.5 years. Of course after the hard fork and zkApps that count will increase but still, a significant amount of fees will not be burned.
Nevertheless, the fee burning feature can be utilized as a marketing strategy. But I’d prefer it to be done as an update by the Mina Foundation, simply adding the fee burning mechanism on the network, instead of making it a major tokenomics change that relies on external help and involves ‘fixing the flawed structure’.
Working with professional resources is important and the right way to go, but Im not sure if such a thing is necessary unless team change the entire tokenomics. Do you think it would require a complete change in the whole tokenomics?

Starting from March 2025, the inflation rate will decrease to 7%, like as the inflation rates of other coins you mentioned above. However, if it needs to be even lower, we should discuss whether its attractive enough for validators. Currently, even with the existing high reward rates and high staking rates, I dont think its profitable except the Mina Foundation and O1Labs delegation. Of course, the main factor here is the low token price. But remember, if the price increases and stake rewards decrease, it will make to MINA tokens circulating more quickly, potentially making it a short-term investment asset. This would result in most of the balance being traded on exchanges and benefiting exchange validators. On the other hand, other validators, would see reduced liquidity in validator pools and a drop in staking income.

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Thanks @talha . 1). The idea is to get experts to review. If the current one is good, then no changes needed, but an official report would help clear the misinterpretation in the community imo. 2). Many of the misinterpretation came from the policies that was outlined but never implemented, without any explanations given, that was on MF I think. 3). zkApps presents new changes and dynamics to interact with tokens, and there could be designs that address this better than the current status quo, it would be a pity not to make use of them.

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Thanks @evan , good to have your first post in two years on this. :slight_smile:

I think what you suggested make sense, but I’m wondering whether there could be designs that are native to Mina and zkApps. E.g the gas fees will be the same regardless of computation size, that’s completely different from Ethereum and should a fee burn mechanism consider that? Is there a way to capture the value addition on custom tokens issued on top of Mina, and what about L2s?

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Thanks Gareth, I’ve added correction of the inflation figure to the post.

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Thanks for your support Emre. I would suggest that MF adds these as part of the considerations for the review and redesign work request.

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I think we also need to think about this as a set of parameters that can be set by a “governing council”, likely informed by a community vote. There could be a specific group of people elected to be able to oversee protocol parameters like this.

Whether it is just a simple coinbase amount change, or something more complex, talking about them as parameters that can be set through an open governance process may also drive implementation decisions that make this simpler in the future.

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I believe improving value accrual for the token is the right decision since it strengthens the security of the network and works as marketing campaign which will bring attention from investors, entrepreneurs and developers and to do it the right way would be wise to ask for external experts inputs. This experts will help fine tune the goal of the “revamp” and stress test it, but prior we as community should gather and make clear what we want since there are a lot of different things we can do I guess.

I’ll give an example, do we want to just get a plain token accrual mechanism like Ethereum has (burn fees/mint staking rewards) or are we interested in a model that helps to perpetually fund the ecosystem like polkadot has where part of the inflation goes to the treasury and is used to fund the ecosystem development using an on-chain vote? I believe this kind of decision needs to be communicated to the prospective advisors for them to model since there is no right or wrong option.

Just my 2cents, hope to spark a debate about what are we really looking for.

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Thank you for your great ideas, suggestions, and recommendations!

Due to the priority works on the Testworld Mission 2.0 and the upcoming upgrade, we expect further updates to be shared in a few weeks.

Ecosystem partners will prioritize this after the successful delivery of the upcoming upgrade. Thank you for your patience.

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