Updating Mina’s planned inflation and block reward schedule from the original tokenomics

[evan]

Idea:

We’ve seen Mina’s participation rate very high (north of 90%+). This gives confidence that Mina’s current consensus and block rewards are sufficient to ensure a high staking percentage. This suggests Mina could reduce block rewards more quickly, given how high staking is right now.

Given that, I’m proposing to update the protocol’s planned inflation and block reward schedule from the original tokenomics blog post.

The below graphs are provided for illustrative purposes only and are not intended to be projections or forecasts. The graphs are created using the following tool here, which is interactive. I encourage you to utilize the tool and experiment with various assumptions or inputs.

Context:

In order to incentivize staking, Mina Protocol rewards block producers with Mina tokens when new blocks are created. Additionally, to encourage a high staking ratio, the Mina protocol was programmed to launch with additional rewards for liquid tokens that are staked, supercharged rewards.

This is configured in the protocol as a constant block reward, intended to be updated at hard forks, with a bonus multiplier (currently 2x) set for supercharged rewards.

While there’s another thread here discussing changes to supercharged rewards for the upcoming hard fork, and a thread here discussing process, this thread is intended for discussion on the tokenomics themselves.

Block Rewards Schedule Following the original Block rewards schedule (assuming constant emissions after year 6). Block reward updates are assumed quarterly, resulting in effective yield that varies slightly between each update. Month 0 refers to the launch of the protocol in March 2021

Criteria:

To start, here are some criteria I’m thinking will be important:

• Ensuring a high staking proportion, both among liquid and locked tokens.
  • This ensures further decentralization, frequent block production, and network security. We have previously determined 75% participation to be a threshold that ensures maximal security of the network. We believe current staking participation is north of 90% and have seen that number on various sources, but we should get the number calculated and double checked as a next step
  • Given this, any policy should also lower block rewards slowly over time. Assuming participation is related to block rewards, small changes in block rewards should also allow small, measurable changes in participation.
• Doesn’t create excess inflation on top of what is needed for a high staking percentage.
• Whatever policies we explore should go through research and analysis, to ensure we’re confident that they’ll have their intended effect.
• Have high buy-in among both the core community, block producers, and general community.
• Be simple to communicate, and have a good communication plan.

Stakeholders

• Block Producers
• General community

Proposed schedule, given the above criteria:

High level, the proposal is, we lower inflation inflation vs the original tokenomics, to ensure we’re not creating excess inflation on top of what is needed for a high staking percentage. Additionally, we use some mechanism to use fees to replace block rewards, so that once fees become larger, effective inflation drops to zero. Assuming Mina reaches wide use in 4 years (as measured by Ethereum today, assuming similar fees relative to total supply), this caps the total 10 year supply at 1.275 billion Mina.

Total Mina created if Mina reaches 1/10,000th of its supply in daily fees in 4 years under the following schedule. See link here to see different schedules or make your own

If Mina reaches 1/10,000th of its supply in daily fees in 4 years, this leads to ongoing inflation under 0.8%, and a total supply in 5 years of ~1.2 billion tokens , and a total supply in 10 years of ~1.275 billion tokens. This is a reduction of ~600 million tokens entering the supply over 10 years compared to the original schedule. With greater than 1/10,000th of total supply in daily fees, inflation reduces further, and becomes negative.

We’d implement changes here at the earlier hard fork following a scheduled update. If no hard fork occurs, we’d skip a change, but we’d aim to do a hard fork at least once per year.

Before each hard fork, we’d also check whether the participation has dropped below a threshold of 82.5%, and if so we’d revisit the schedule to account for that. We’d also look at new data, research and experience across the crypto community, and see if those provide any new insights or worthwhile updates to this schedule.

Reasoning for determining a new block reward schedule

When the original token schedule of Mina was determined, the staking protocol landscape and the tested mechanisms were very different. Given recent developments in crypto, I think there is some room for substantial improvements to the original tokenomics.

With Mina itself, we’ve seen Mina’s participation rate very high (north of 90%+). This gives confidence that Mina’s current consensus and block rewards are sufficient to ensure a high staking percentage.

This suggests Mina could reduce block rewards more quickly, given how high staking is right now. The only important thing to be careful of is that block rewards aren’t reduced too quickly, resulting in low participation, damaging network performance and security. This is a good motivation to check staking participation after each hard fork, to ensure that it hasn’t dropped below a threshold.

O(1) Labs has previously determined 75% participation to be a threshold for ensuring maximal security of the network. Where the threshold goes above that is debatable, but I am proposing 82.5% to provide a bit of buffer.

In total, with the goal of reducing Mina’s inflation at a smooth schedule, phasing out supercharged rewards in 2022, and minimizing excess inflation, I’m proposing the schedule seen above.

Fee burning

Additionally, the fee markets on many platforms have substantially developed, to the stage where fees can provide considerable rewards on top of block rewards. This can allow block rewards to be reduced further. As fees are already circulating coins, if fees stand in for block rewards, this means lower total inflation.

However, reducing block rewards past some point, even if the fee market is very strong, is risky. If the fee market decreases temporarily, and block rewards are very low, it could become no longer sufficiently rewarding to make blocks, temporarily lowering participation.

A good solution to this, is after a certain point, replacing decreasing block rewards with introducing and increasing fee burning. That way, block producers are guaranteed incentives to produce blocks, while total inflation can be lowered. If the fees burned is equal or greater than the block reward, resulting inflation can be zero, or even negative.

One more note on this, in my opinion, it remains to be seen whether negative inflation is a good thing, or if it causes reduced platform activity. I would propose we continue to study the market and other platforms to see how they’re performing and make any changes if necessary.

I would also suspect there will be many mechanisms seen in the next few years to implement things conceptually similar to fee burning. From what I’ve seen, these solutions are more complicated, such as EIP-1559, so I think we should wait until more data is available before pursuing any of them, but they should be considered before fee burning is implemented, on the schedule I suggest, in 2023.

Comparisons

To compare, please see the following alternative schedules (original tokenomics, and if we left the block rewards unchanged from their current values at hard forks).

Block Rewards Schedule Following original Block rewards schedule (assuming constant emissions after year 6)

Block Rewards Schedule if Block Rewards Unchanged (720 block rewards & 1440 supercharged ongoing)

Looking For Feedback:

• What do you think of this idea? Does this policy make sense? Any concerns with it I missed?
• Do you agree with the above criteria? Do you want to add any other criteria that we should take into consideration?
• Are there any stakeholders that aren’t included here, but should be included?

Related Resources:

• Mina tokenomics blog post
• Mina economic whitepaper

Any feedback, and comments on this idea would be welcome, and I’m looking forward to collaborating with everyone on ideas that help improve the protocol.

[Pete]

Many thanks for the detailed information Evan.

I think it’s fair to say that the biggest discussion point in the wider community concerns the tokenomics/inflation and if it is possible to find a balance between reducing inflation and keeping block producers happy then I am sure it would go down positively.

With ZK Snarks such a hot topic and with so many new start ups entering the space, in order for MP to be the pioneer we should be able to adapt and re-adapt along the way.

[CashPeng]

Agree with the deflation mechanism

[Syd]

Agree, though I think it’s more than “Block producers”, it’s really about all the stakers ie all the people that secures the network.

Overall I think Evan proposal is fairly balanced for every stakeholders. Original tokenomics was, afaik, expected by everyone so it shouldn’t be interpretated a “bad surprise” and it’s surely more healthy for Mina in the long run.

[lamps]

I’m in support of the proposed tokenomics. I think it’s thoughtful and captures the development of the chain well.

[Marc2234]

I support this change.

[EmrePiconbello]

I am also supportive of this proposal but I have 2 concerns

1. The significant reduction of supercharged yield which advertised and documented higher for some period of time

2. The fee burning mechanism and possible aim for negative inflation. It’s set for years later while that requires significant on-chain user activity. That will only happen after building and utilizing a huge ecosystem. While making assumptions are ok the negative inflation part will be taken out of context most of the time. It will hurt the ecosystem if it gets forced into before the ecosystem settle. You mentioned a more complex fee structure etc while we need to see that system work before. The existing fee snark system is not working at all.

[BeaconChain]

I agree with you. We need to slowly reduce the block reward and disable the super-charged block reward.
I also agree with you that the burning fee is a good idea but it has to be considered, reviewed, and researched carefully and any mechanisms should need to be tested on devnet/testnet before it can be implemented on mainnet. We need more user data to analyze and choose the right method.

One thing I think it’s also related to the tokenomic is the address creation fee. Is it burned, right? It also affects the users and developers, who directly create and use Snapps. I think we also need to talk about it here?

It seems that my proposal is also your init idea, but I want to refer to it again at here

Another thing is the snark fee. I think we need to have a mechanism to let the blockchain manage it automatically instead of manually set by node operators. I saw there’re snark fee shocks sometimes when there’s a high demand of txs and snark jobs, but low demand of snark workers and the difference of snark fees are too high.

[eldeniz]

The proposed reward schedule looks good. Mina Protocol has a very competitive reward tokenomics. MHO.

[Ducca]

I agree with the proposal. It’s really original.

I support disabling supercharges and gradually reducing the block reward to such levels. Keeping unnecessary inflation at an acceptable level is good for the project.

[evan]

Thanks everyone for the feedback! I was trying to keep in mind all the different criteria across the community, so glad that it is sounding good.

To reply to some specific questions:

• @EmrePiconbello the supercharged reward schedule here is intended to be the same as was in the original token economics, I didn’t want to change that too much. Let me know if that matches out, or where you’re seeing the difference
• @BeaconChain That’s a good point re account creation fee, I think I was imaging it would become recoverable as you mention in that thread at some point, so I wasn’t thinking about it burning any supply. I don’t think it would be necessarily be that impactful though, especially if we go ahead with reducing the amount burned per new account as mentioned on that other thread - if it goes down to 0.25 Mina, at 1 million new accounts that’s still only a small fraction of supply (250,000 Mina) burned / locked up. I’d be curious on snark fees too, I haven’t seen any deep analysis of that market, but I’d be also interested on things like fee shocks.

I’ll try making a quick poll here too, if people prefer that way of giving input.

• I think Mina’s tokenomics should stay the same
• I think Mina’s tokenomics should adopt the schedule presented here
• I like the tokenomics proposal presented here, but we should not include fee burning until that mechanism is better understood
• I like a separate proposal not mentioned here (please comment below)

I’ll mention as well a pet peeve I have on polls, you never learn why someone thinks what they do about something, so if there’s disagreement, its harder to find out why and understand concerns (I feel like US politics for example suffers from this problem). That’s why I think potentially pol.is and other tools like that could help giving more insight, but for now discourse’s polling tools are so convenient (and we don’t have that many participants commenting yet), so might as well use it for now.

[Serdar]

Maybe, rewards for soft staking could be reduced, and at the same time locked staking with higher rewards could be introduced to have the desired effect with lower deflation.

I am sure everyone agrees on the benefits of soft staking. It’s a good incentive for the investors to stay in MP, it creates a positive social perception and also sometimes results in free advertisement (coming on top of staking lists). Yet, it comes with some disadvantages as well. The most obvious is, soft staking doesn’t convince the market participants that the staked supply will remain still if the price surges. Therefore, high staking rate might be looking like a masquerade ball to some. This alone is repressing the token price quite a lot, imho.

Should MP introduce locked staking with supercharged rewards (nothing extra in reality), I bet a big portion of the existing investors would take that deal (just like the ETH staking craze) as the community truly believes in the future of MP. This would reduce the de facto circulating supply immensely and give confidence to the market. Those who choose to continue with soft staking would get the reduced rewards and at the end the inflation rate of MP would be pulled down in real numbers as well.

If I am not completely mistaken, market participants really like projects where some of the once-freely-circulating supply is being locked (not the early investors’ and team members’ locked tokens) by their holders purely for their faith in the project. It creates a strong conviction and leads to more adoption.

[EmrePiconbello]

@evan

@EmrePiconbello the supercharged reward schedule here is intended to be the same as was in the original token economics, I didn’t want to change that too much. Let me know if that matches out, or where you’re seeing the difference

@evan I read the timeline wrong that’s mistake on my end while I believe if we are trying to cut the inflation we should aim the locked stake since that’s actually the majority of the inflation came from. The unlocked token amount should be still very small % considering whole supply. Also I am not sure exactly what’s the aim here while I believe locked stacking is likely to help. At the current state I don’t believe staking is creating any effect happen with staking considering other chains while doing that integrating dynamic reward % according to stake % would be cherry on top. Snapps are close I hope these can happen with on chain rewards.

To start with I believe our inflation is high overall. From my point reason is very high number of locked supply generating significant mina. Outside all I like these stuff considered as ecosystem improvements, considered more broadly and carefully vs cutting out inflation because when we just focus on inflation you can always go down while majority of the community never going to be happy with it no matter what (In short we mostly follow the whitepaper which should be know for majority of the community. From most people when they see no price increase in time frame. They just go for inflation so whatever we do majority of that group never going to be happy). Even we reach unhealthy levels which I already did see happen on other chains.

[Comdex]

I agree that we need to reasonably reduce block rewards and disable the super-charged block reward.

However, for fee burning, we need to carefully analyze and research.
Fee burning may easily create the illusion that it can wait for the value to rise as long as it is passively held. In the early stage of ecological development, we need to keep users able to enter mina world at low cost and encourage users to participate in mina’s ecology. After all, the increase of users and ecological development is the basis for mina’s value growth. Therefore, if fee buring is applied, we may need more data support and scientific mechanism design.

[dimosthenes20]

I agree with you Comdex / Currently Minas low cost of participation is one big advantage we cannot lose by introducing high fees. Additionaly, my understanding about Snapps, is that at some point MP will be included, thus high cost of the same, might block large adoption of this new Technology.

[bobichio]

I agree with this update. But we need a more data for apply the mecanism for the inflation now. If we decide use the mecanism inflation can create a lot of speculation and we can lose a lot of user in world. If we imagine Mina is equivalent of Android and we need a lot of participation from user.
For the rewards, i think we need to apply 2 mecanism ( lock 1 month and openworld ) for all user, we need a lot community in dev .

[45930]

Staking percentage will probably stay very high no matter what the supercharged rewards are, but I wonder if token distribution would end up being more centralized. As a passive staking delegator, I am getting diluted by vesting mina with or without supercharged rewards. But it’s slightly more tolerable if I can achieve a higher staking reward than unvested mina. Token holders want to lower inflation, but in my experience, what they mean by inflation is vesting mina entering the circulating supply, not the actual inflation on total supply.

I’m not voicing a specific opinion on this, other than a general sense that if the only lever to combat inflation we have is to lower staking rewards (BR or SCR - so assuming that burning locked tokens, removing locked tokens from eligibility to stake, etc… is off the table), and the community continuously votes to lower them, then normal crypto investors might choose to leave mina, and sell their tokens back to whomever will buy them. I suspect those people would be the type of people that already have many tokens and are heavily involved in the community/ecosystem.

Generally, I think as circulating supply approaches total supply, reduction in rewards will be more palatable to token stakers.

[lamps]

if you are always staked, why do you think you would get diluted either way? If your coins are locked then you won’t be if there was no SC rewards. If your coins are unlocked then your % of ownership of the chain should increase slightly.

[45930]

In terms of total supply, you are absolutely right.

But in terms of circulating supply, it is my understanding that backers will be unlocking 10m mina per month for many more months: https://minaprotocol.com/blog/mina-token-distribution-and-supply

That combined with locked tokens vesting for core team, MF, and 0(1) absolutely dwarfs the additional 1440 mina per block that supercharged rewards offers.

I agree that if the only metric is staking percentage, then lowering SC makes sense, and you might as well make it 0. It’s stupid easy to stake, there’s essentially no barrier to entry. But to combat inflation, I think we must think about 2 types of inflation. There’s circulating supply inflation, and there’s total supply inflation. As long as circulating supply inflation dominates total supply inflation, total supply inflation doesn’t bother me.

Struggling to attach an image here, but some “rough numbers” might look like someone buying 1000 mina at a circulating supply of 100m mina. They get 24%, 24%, 23%, 10% apy, and after 4 years the circulating supply is 1b mina. They have 2100 mina. They started with a thousandth of 1% share of circulating supply, they ended with 21 ten-thousandths. If instead they get 24%, 12%, 11%, 10%, then they end up with 1700 mina, or 17 ten-thousandths of circulating supply. Crude numbers, but the broad strokes are there.

I guess my point is either way, there’s insane downward pressure on price for people who just buy and stake the token. SCR give that group a little something for their trouble, and their trouble is making the market for insiders to sell into, so they are certainly providing a service. Since insiders earn BR, but not SCR, it’s easy to vote to stop offering SCR. But while millions of mina per month are being released into circulating supply, I think it’s a little penny wise to be thinking about the inflation impact of thousands of mina per month. I wonder who will be buying this millions per month, knowing that there is millions more coming next month, and as a token staker only, every other demographic in the mina ecosystem is on the dole, except yourself.

I’ve long-been an advocate for the good sense this tokenomics espouses: productive members of the ecosystem get grants, salary, etc… and token holders get diluted but to an acceptable amount after staking rewards and the economic value the other members provide. I think the original economics whitepaper SCR makes sense. I’m just providing the devil’s advocate here, and the case against thoughtlessly lowering SCR. SCR are an incentive module to buy up investor tokens as they vest and sell. It’s another form of community reward for a different kind of community member. Inflation hawks could come here and propose burning community grant funds to raise token price, but I doubt that would be so unanimous as reducing rewards for the “public investor” class, since people on this forum are recipients or hopefuls to receive that money.

Edit: I wrote “thousands of mina per month”, which is not accurate. SCR are also millions per month. But that error does not affect the napkin math of stakers getting diluted by locked shares vesting. As the circulating supply goes double or triple per year (for the first 2 years mostly), people growing their stack by 24% are getting diluted in terms of circulating supply. That is clear. Though in terms of inflation, it is obviously relevant that SCR are on the order of thousands per hour, not thousands per month.

[lamps]

Very thoughtful and informative post, thank you! I guess what we are after are conflicting in some sense: as you said, SCR is needed to encourage people to buy and stake Mina, in part to combat the inflation of circulating supply; on the other hand, the SCR and BR are themselves the reason of high inflation, and they are what this proposal are aimed at addressing, albeit with a smoothed, long-period adjustment that conform to the original tokenomics to a large extent.
Either way, the downward pressure will still be there. I guess the most efficient way to combat that is through tech and ecosystem development on the mainnet. Solana and Avalanche have both achieved 100x in price, with the former having a massive token unlock and the latter 10%+ inflation.