Burning transaction fees generated on Relay Chain and System Chains like Asset Hub (Plaza soon)

Governance
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What is done with transaction fees on Polkadot in this moment:

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What I’m proposing is that issuing DOT through inflation to cover expenses and then burning the income from fees is functionally equivalent to a direct transfer of value from users to validators and other network-supporting actors.

Detailed Explanation of the Value Transfer

  1. Inflation as a Payment Source: When additional DOT is generated through inflation, those funds are used to pay validators and fund the treasury. This additional DOT acts as a “subsidy” that ensures the network’s critical operations are covered.

  2. Burning Fees as a Balance Mechanism: If we then burn the revenue generated from fees, we are effectively removing that value from circulation. It’s as if the value collected from users who pay fees indirectly flows to validators and the treasury via inflation, while the fees are burned to offset the issuance.

  3. Equivalence to a Direct Value Transfer: This combination of inflation and burning fees is, in effect, an indirect way of transferring value from users who pay fees to validators and other network actors. The burning neutralizes the net inflation effect, resulting in a transfer of value without increasing the total amount of DOT in circulation.

Benefits of this Approach

Economic Efficiency: This is an efficient way to transfer value within the system, ensuring that the users who use the network contribute to covering costs, without impacting the global supply of DOT.

Balanced Incentives: This mechanism ensures that validators and other participants receive rewards without the need for an indefinite increase in the DOT supply, which benefits long-term holders.

Simplicity and Transparency: From a design perspective, this structure of burning fees and issuing through inflation is equivalent to a direct value transfer. It simplifies Polkadot’s internal economy and allows users to clearly understand where the value they contribute is going.

Summary:

In Polkadot, a certain amount of tokens (DOT) is created each year through inflation. This money is used to pay validators, who keep the network secure, and to fund projects in the treasury. When network users pay fees for transactions, those fees also generate additional revenue.

The proposal is to burn (destroy) those fees instead of saving them, since operational costs are already covered by inflation. Burning the fees has two benefits:

  1. Fair Value Transfer: Instead of accumulating unnecessary DOT, the value users pay in fees ends up directly benefiting validators and other network participants, without increasing the total supply of DOT in circulation.

  2. Protecting DOT’s Value: By destroying the fees, we prevent the total DOT supply from growing more than necessary, which helps keep the token’s value stable.

Thus, burning the fees is like making a fair and transparent transfer of value between the users who use the network and the validators who keep it running, without overloading Polkadot’s economy.

5 Likes
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I’ve been considering this for a while, and I believe it’s a reasonable next step following RFC#10, especially with Referendum 1271 set to execute soon, which will establish a fixed inflow to the Treasury. There’s a clear trade-off between allowing the Treasury to accumulate more funds and externalizing the benefits of increased network activity to all token holders. In this context, I’d argue that increased network activity directly enhances the value of DOT, with the burn mechanism amplifying this effect. The Treasury would then benefit indirectly through its fixed inflow, capturing value from the network’s growth. This approach could also apply to system chains, where high activity could similarly result in value accrual for all token holders.

However, I wouldn’t go for a 100% burn rate since we still need to provide incentives to include transactions into blocks. A split of 20% allocated to validators/collators and an 80% burn could be a good balance.

As for system chains, my understanding is that collators are currently compensated retrospectively through the Treasury, so they do not rely directly on transaction fees. The 20% cut would then be a nice bonus, giving the right incentives to do the work (vaguely related, I remember some discussions about including system chain collators into the era payout of the relay chain, not sure if that is still on the table. Afaik, @joepetrowski was proposing this idea and knows more).

In any case, implementing these mechanisms to reduce total issuance seems reasonable to me.

5 Likes
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Thanks Jonas for the response. Indeed, if the treasury is going to have a fixed income with Referendum 1271, adding the fees would be something like double financing. I completely agree with keeping 20% ​​for validators and collators for including transactions. My main objective with this proposal is to alleviate the inflation burden on holders by helping to reduce it with transaction fee income. This, together with the burning of Coretime revenues, leads to a more sustainable and efficient protocol.

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I’m also in favor of modifying the current allocation of fees once #1271 is live & running.

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I absolutely agree with you ser

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What is the difference between burning and not inflating (as much) in the first place?

I know with less inflation there’s less (coin issuance-wise) to arbitrarily spend, but that inflation doesn’t create any value itself. It’s only an appearance of riches, while everyone is being watered down.

As to the idea itself, I like the direction, but my personal preference would be to not inflate as much in the first place.

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It seems that this approach is also a direction many are considering. Why not take it a step further by combining this mechanism with some operational directions and marketing strategies to maximize its impact? I have detailed explanations here and welcome further discussion: How To Make Polkadot Great Again? - #2 by ultracoconut

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Of course, the difference is that regardless of the inflation rate there is (we could not be so radical in lowering inflation because we did not know the possible consequences) burning the fees relieves the burden on the holders since it reduces net inflation thanks to the users.

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I agree but we have to go step by step and each thing in isolation to guarantee that the community can choose something specific more easily, don’t you think? I would like to do a WFC, about this. What do you think?

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Okay, point taken, I see its merits in practical sense (as it relates to how the community works).

I’d only note another way of thinking is “won’t inflate, because we don’t know the possible consequences”. Central banks aim to inflate (e.g. 2% a year) and then fiddle with “policies” (interest rates, repo rates, etc.) in both directions. Of course, they inevitably get lost in that maze and create bad outcomes (recessions and bubbles), and that’s best case scenario where there’s no deliberate high inflation to destroy/expropriate creditors and help debtors (usually spending-happy governments).
I notice parallels in these Polkadot-based governance systems.

If I were to vote on these matters, I’d vote for 0 inflation and extremely tight budgets (0 default budget, everyone has to re-apply from scratch) but I know everyone sees this great chance to control the printing press as a way to finally improve the world for everyone :sweat_smile: . As if that wasn’t the idea at the outset of all inflationary currencies.

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DOT could even at a given point become deflationary, obviously it wouldn’t be something that would happen consistently only when fees burned exceed inflation. What we have seen happen with ETH a few times.

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I fully support this. The methods I propose are usually framework-based and aim for various improvements to work together in coordination for better results. Of course, during the implementation phase, each proposal still needs to be passed one by one.

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The other way around. Is anyone against it?

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Guys, how much longer should we wait to launch the WFC. Maybe 30 days would be okay?

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Could you please review my draft WFC, if you want to change something go ahead. By the way, yesterday I asked about the deposit to present a WFC, and it is 20,000 DOT, unfortunately I am not a whale😅. How we could carry it out. Thank you🙌