Tokenomics Review and Recommendation: Introduction of Token Locking and Treasury Funding for MINA

MIPs (Mina Improvement Proposals)
21

My question is what is the persona of a user who will choose not to stake, but continue to hold Mina anyways. Won’t any “free rider” who hears about this change just sell their Mina immediately? Then it will be held by an exchange or a committed holder, who will in either case be likely to stake the majority of the tokens. In the projections that have the staking rate going down, who owns the tokens that are not being staked, and why aren’t they staking them? It just doesn’t seem realistic to me that anyone would hold the token and not stake.

Correct me if I’m wrong, but won’t rewards stay about the same as they are now for “committed participants”?

This doesn’t get to the root of my question. Make it 200 Mina per block then. The point is the new proposal doesn’t change the amount of tokens minted, but it lowers the amount of tokens going to stakers. The simplest way of doing that is just to directly send the amount of tokens needed directly to MF, and leave the fundamental logic of staking alone. It sounds like what you’re saying is the locking mechanism is a way to pay “committed holders” approximately what the old APY was, and pay “free riders” nothing, as opposed to paying everyone less at the same rate. Is that basically the pitch?

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22

I was quite surprised that this report’s main focus seemed to be the formation of a treasury.

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23

Thanks for being specific, and I have to start by saying that your points are valid, and make sense. here are my answers:
On the Target persona, although there was no “targeting” here, we can assume the answer would be the free-riders. I agree that some of them might sell if they stop receiving rewards, but I don’t think this applies to all of them.
For the rewards or APY%, we are not at a decision stage yet, we only did a few simulations/scenarios, I believe these decisions will be submitted to votes.
Finally, the pitch includes that argument, and the goal to be clear is at minimum keeping current APY levels. That being said, the locking of staked tokens is also required in order to upgrade the consensus mechanism to reach instant finality.

24

Before even starting to discuss this proposal, it would be good to understand how the voting process will be organized. Will any token holder be able to vote on the proposal, regardless of the amount of tokens they have on their balance, like it realized in Cosmos based chains?

Or voting will be available only to validators?
In the first case there is a good chance to see the results that reflect the real sentiment of the stakeholders, in the second case there are literally few independent validators that do not depend on the Foundation and O1’s delegations and can afford to speak freely.

Implementation will only happen after approval by the community

Please describe the measures you implement to ensure that voting is transparent, the votes are not hijacked or manipulated.

Thank you!

25

To be honest I’m skeptical about how much the changes proposed in the report could help with Mina value accrual, which I think is the main goal here.

At the end of the day the proposed changes would just increase the expressiveness of stakers’ bullishness on Mina a little, since this is usually better handled by financial instruments (either tradfi or defi), and I’m sure eventually there will be plenty of these for Mina, that will end up basically muting any of the proposed changes in the report. And these changes could potentially introduce some unwanted consequences like the enshrining of some Lido-like entity (from users wanting “liquid staking”) that in my opinion would be more a liability for the protocol than an asset.

The main source of value accrual for any token is people wanting to acquire it and hold it, which is not achieved by high APY for stakers per se, since that just translates into high inflation and dilution of anyone not staking. So people not willing to lock their tokens will just sell and less people will be willing to get into MINA positions, reducing the price and negating any increase in APY for long term stakers.

One of the most attractive things about cryptocurrencies like Bitcoin or Ethereum is their predictable monetary policy with low inflation, so I think that what Mina really needs on the tokenomics side is transitioning into a disinflationary asset, guaranteeing a decreasing inflation over time, reaching low inflation as soon as possible, which would make it more attractive for people as a long term store of value. And even if this would reduce the nominal APY for stakers, that wouldn’t mean that they would be getting less rewards, since they would be receiving a smaller amount but of a more valuable token.

Bootstrapping MINA as a store of value is critical to trigger a virtuous circle of people being more willing to keep their money within the Mina ecosystem, increasing economic activity, user growth and retention; improving the composability between native zkApps and the incentives to deploy on Mina, which would improve the user experience, attracting even more users and so on.

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26
  1. Locking or Unlocking should be determined by the voting result, both have advantages and disadvantages. Although locking mechanism could reduce the circulation, but now people in crypto market more like token with full circulation, that’s why meme is more popular than VC tokens. Meanwhile, locking tokens will harm some fans of Ouroboros, but however, speak with your tokens.
  2. We should have burning system, that seems useless, but many investors will ask for this feature. We can burn the whole TX fees, increase current snark fees and burn part of it.
  3. Opt-in or Opt-out should not be determined at this moment. If when this harfork happen, no killer apps come out to absorb liquidity, the mainstream is still staking tokens, then opt-out should be selected, otherwise opt-in should be selected, with minimal harm to holders.
  4. We should also introduce parameter “saturation” of staking pool as Cardano project did, to strengthen decentraliztion, which is the only bright spot of Mina protocol.

Hope we can see these done shortly, not waiting another years.

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Thank you for your reply. First of all, the lock-in rules need to be explained in detail. Is it similar to Cosmos? Secondly, the biggest problem of the mina token economic model is the inflation rate and circulation. There should be a mechanism to keep the total circulation of mina tokens stable in the future. Finally, is the total circulation of mina tokens too much? Is there a deflation mechanism?
Thank you for your time

28

First of all, I would like to understand what ‘excess emission’ is and where it comes from. The average APY over a long term is set by consensus mechanics and it is completely unclear why it suddenly became ‘excess’. Also imo it is a strange practice to withhold anything from validators, since many validators are already working at almost a loss

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29

As far as I understood it the main goal isn’t value accruel, but the main goal is creating a sustainable financial foundation going forward. This sustainable financial foundation will give MF enough possibilities in the coming years to keep funding builder programs and keep covering other expenses.

However, one could lead to another:

Locked coins could create less sell pressure/higher buying pressure.
More zkApps could create more traffic on the network and could bring in more use cases / users that use Mina.
Etc.

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30

To reply on the questions on treasury, while the primary goal of the proposals was improving tokenomics, when talking to ED it seemed like if there were to be an eventual decentralized treasury, that would be an important part of the tokenomics and it would be a good time to figure out how that could be added as well.

We’ll leave it to ED to respond on the specifics, but our understanding was that a minority of funds would go towards the treasury too – and that this would be compatible with achieving an ~10% staking return for stakers, lowering inflation, and having some tokens left for the treasury. The specific numbers would be really good to have too, as we also think a majority should go towards network security / stakers, with a more minimal amount going towards treasury.

On the treasury in particular, we think having a decentralized treasury will be an important step in ensuring that the protocol can continue to evolve, improve, and stay decentralized. For example, right now Mina Foundation is organizing and funding programs like zkIgnite, Navigators or Core Grants. A decentralized treasury, together with advances in the governance workstream, will allow the protocol to run programs like that indefinitely, without relying on an external source of funding. It will also improve decentralization by limiting dependencies on any particular entity, including MF, which we also think is important, especially in the long run.

The foundation governance team has been iterating on a possible decentralized funding process based off of learnings from zkIgnite and surveying other processes, and is planning larger scale testing towards feedback gathering Q4 and Q1. There was a smaller test of it in the last few weeks, and a blogpost is also set to come out soon with more information. We’re very curious about feedback to the blogpost, as well as feedback from people’s experiences in the upcoming tests the next few months. We’re planning to iterate on the process with community feedback, towards a design that everyone has tried and likes, and an MIP for implementing this process and voting on chain.

At the end of the day though, any MIP for the decentralized treasury funding process will be up to community discussion and voting. We’ll leave it to ED to confirm, but while we think any treasury should be a minority part of the economics of this proposal, given it does have an impact it does seem good to include in the tokenomics proposal here too to make sure its accounted for. Happy to discuss further or answer any other questions too.

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31

I’ll leave the tokenomics ones to ED for now, but re Ouroboros, this wouldn’t require changing Ouroboros. Adding locking would however allow us to change the consensus to something else later.

Particularly, it would ensure that of the “actively staked” tokens, a high percentage are actually participating. We’d need more than 2/3 of actively staked tokens to be participating to implement an instant finality consensus mechanisms. This is borderline however today, when there isn’t a differentiation between actively staked tokens and not (I think in the low 70% range today). But with locking, we’d expect 100% or close to it of tokens marked for staking to actually stake, so it would allow us to at some point switch to one of these other algorithms with well over 2/3 participation so we can get instant finality.

It should also improve performance of Ouroboros, since given not all tokens stake or delegate right now, some blocks are getting missed. This should fix that. The max fill rate (% of slots with a block) of Ouroboros as configured is 75%, and currently I believe last I looked is ~60%, so this should help improve performance a bit with Ouroboros too.

I think new consensus with instant finality is something worth pursuing at some point in the next year or so also, depending what other priorities come up – there seems to be ways of doing it that wouldn’t require capping participation in consensus too, so I’d think we would try and implement it that way for decentralization too.

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32

Next year is too late,make this happen by end of the year is better.

33

Instant finality and better consensus performance in general would be extremely beneficial for Mina. Great to hear that those things are being considered.

Although I wonder if locking tokens is a necessary condition for instant finality, since I consider that Mina should avoid incentivizing the emergence of Lido-like / Eigenlayer-like entities, because those introduce centralization, leverage, and systemic risks.

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34

What is the exact aim behind multi-tiered structure. Aim is making it straight forward for stakers and predictable. While this is predictable I don’t believe it’s a good approach to staking. Everyone should be equal. Some unstaking periods for exists are always better. Only reason I can think of is exiting early have penalty so network retain those rewards or it won’t allow to exit which is bad experience.

With the current ‘active stake numbers,’ it’s very unlikely there will be excess rewards. Participation is already low under the current structure, and the expectation is that locking will further reduce it. The fill rate is very low, so without necessary network changes, this would be detrimental to the network’s health.

Based on the proposed numbers, even though they haven’t been finalized, there are no additional rewards for stakers since they are already receiving around 10% APY. Generally, curves are significant at the start and stabilise around the middle, but it depends on the target.

Funding future chain developments is good, and doing it in a sustainable way is even better. However, from everything mentioned above, I don’t see any significant changes to the tokenomics that would solve the issues we have on-chain; it seems like it’s just adding a treasury and lock without a change.

If we are implementing a locking system, the frequency should be as often as possible. There’s no point in waiting for an epoch, etc., since it’s no longer linked to block production. If we are discussing reward and distribution calculations on-chain, they shouldn’t take longer than an epoch, though I’m not sure if that’s possible.

Outside all what is the aim stake participaton %?

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35

Why is this not related to the production of the block? How do you plan to calculate APY? This confused me. Please explain what you mean.

36

We are decoupling validator rewards from validators producing blocks. There is no way of delivering steady apy without that. All rewards needed to be pooled at protocol level and distributed from there to achieve that. If fill rate is low for example or validators are unlucky you could miss the apy% which is just doesn’t make sense. There are many other things which can mess up with it so decoupling fully is just sensible if we are going towards that.

37

First I’m happy that Mina Protocol are looking into the tokenomics of the Mina token, with regards to locking the tokens, burning etc… From past projects this is only benifical when there’s huge demand for a project.

That being said I am positive mina will one day meet this demand however I’m still undersided with the proposal and look forward to seeing more feedback from the community on which is the correct direction to follow.

38

Hi everyone,

I wanted to share another place that would be great to get feedback, a tokenomics proposal survey on discord.

We’ll be looking at input there as well as here in MinaResearch, for anyone that prefers / would also like to respond there. The survey also supports other features like auto-summarization to give the community a snapshot of current survey sentiment. Its also designed so you can always update your response later too as more information comes through.

Let us know any other thoughts. It seems like right now ED’s responses later would be most useful on these questions too – our understanding was that 10%+ staking rewards was feasible without increasing inflation due to locked tokens being a smaller fraction of tokens, but think best to wait for their response on these and the other tokenomic questions.

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39

The Details will be defined in the next phase where we will run more simulations and refine the percentages and final parameters that will be submitted to vote. This proposal doesn’t require reducing the inflation rate (which was done not too long ago, and can be done again in the future), but rather building a mechanism to replenish the treasury in a sustainable way, which in return should help support the protocol growth and adoption. Deflationary mechanisms will be discussed during phase2 as well.

40

The excess will come from a simple mechanism:
locking tokens should reduce staking participation - > less tokens are required to guarantee a certain APY ( tokens that would’ve been distributed to those who decided to stop staking can be redirected to the treasury).

Can you elaborate on how are your validators operating at a loss? This is important no matter which mechanism we adopt. We can do this in private if you don’t want to share numbers publically.