I am proposing a system to boost parachain demand and project incentives to join the ecosystem while balancing out Polkadot’s economic inflation. Essentially, I propose to divert some of Polkadot’s current validator incentives (10% annual inflation) and, in conjunction, possibly also increase the total inflation rate of DOT, towards incentivizing both builders and DOT contributors towards parachain auctions in a new mechanism. This is heavily inspired by Astar’s dapp staking mechanism, which is designed to increase dapp developer support its protocol.
The mechanism is as follows:
- Imagine an ideal staked and locked-in-auction ratio for DOT (50% and 30% of the total supply, respectively, are some numbers that I have heard floating around) that can be adjusted by governance mechanisms accordingly over time. The DOT rewards would be balanced such that rewards are allocated towards staking and auctions at a 50:30 ratio.
- The ratio would be enforced such that if the total amount of DOT staked in validators exceed 50%, then the reward per DOT staked would decrease, and vice versa for locked-in-auction DOTs. A roughly drawn illustration for this would look something like:
- Create an inflation rate that covers both staked and locked-in-auction DOTs.
- Reward half of locked-in-auction DOT rewards towards DOT contributors, and the other half to parachain teams themselves. The reward amount per parachain depends on how many DOTs are contributed towards each parachain in proportion to the total amount of DOTs contributed towards parachains. DOTs can be given through a vesting schedule (i.e. linearly over two years).
- Parachain teams may still offer incentives themselves in their native token to encourage contributions or win the auction themselves.
The result is that there would be:
a. increased alignment from users towards supporting actual builders, the lifeblood of any crypto ecosystem
b. diversification from the currently unsustainable inflation rate in validators
c. incentivation of an ideal contribution ratio for both staking and parachain auctions, and
d. a moat for users to be incentivized to contribue a large amount of DOT towards crowdloans.
I have been an avid supporter of Polkadot for a while – being in Parity full time for over three years, and now remaining as an ecosystem growth advisor to Parity and being Head of BD at a Substrate-based interoperability platform called Analog. From my observations, Polkadot’s crowdloan and auction system started off very promising. The idea that you sacrifice DOT rewards that would be otherwise given out to validators to obtain security and native interoperability was a strong idea in theory. However, insufficient marketing and bear market realities showed the weaknesses of our system. I think it is safe to say that nobody in the Polkadot ecosystem is happy with the status quo of auctions, and I believe that increased awareness and marketing alone will only drive things such that when mindshare towards Polkadot is hot/we are in a bull market, auctions will be en vogue and in demand, whereas in all other conditions the mechanism will fall short of its goals in securing a large amount of locked DOTs.
We have seen both outside critics on CT blast crowdloans as being ineffective only to be dismissed by ardent Polkadot supporters who, although having strong arguments in theory, refuse to consider market realities, as well as community member proposals to fix crowdloans receive both support as well as constructive criticism.
The truth is that a robust parachain auction and crowdloan system should be as resistant to market fluctuations as possible and provide an easy system for participation while supporting builders. Why don’t we create some DOT rewards for builders who successfully win an auction and for those who contribute to auctions to diversify their risk in projects’ success while still supporting their favorite projects? My company, Analog, has been researching ways to incorporate Dapp staking-like mechanisms into our chain, because we believe it is a very strong way to get developer support, and came up with a similar mechanism to what is proposed for ourselves. I think Dapp staking plays at least part of the reason of Astar’s success today.
In addition, the bear markets and economics have showed that a 10% fixed annual inflation rate allocated mainly towards validators is not only unsustainable in the long term, but also creates significant selling pressure in the short to medium term. Some of those rewards can and should be diverted towards activities that also reduce the free-floating DOT and benefits the overall builder economy.
I created this proposal after discussing this idea with multiple teams in the ecosystem, who all voiced support. I believe this proposed system is not perfect, but even if it is not adopted, I hope this will be able to play a small part in fixing the auction system today.