Polkadot’s technological development has always been at the forefront of the crypto industry. Besides technology, what other ways can we make Polkadot Great Again? Here, we propose an approach that combines the economic model with operational and marketing strategies, and with a pragmatic attitude, we explore how to make Polkadot Great Again. Below are the detailed ideas and conclusions.
How Will Polkadot Develop After the Economic Model is Determined to 8% Inflation?
1. Review of the Current Economic Model
Before diving deeper, we need to clarify some fundamental assumptions: what factors will drive the growth of DOT, and what mechanisms are currently related to its growth?
Firstly, for any crypto, the fundamental driver of price growth comes from the real demand created by the economic model and business model, as well as the confidence investors have in DOT’s future potential. The former is primarily driven by real demand, where the buying pressure for DOT exceeds the selling pressure, focusing more on actual factors. The latter is based on optimism about Polkadot’s fundamentals, which places more emphasis on future expectations. Any actions that can enhance either of these aspects will contribute to DOT’s growth.
Secondly, as of now, the latest changes related to DOT growth mechanisms are as follows:
- The adjustment of the inflation rate from 10% to 8%.
- The shift of Polkadot’s slot auction mechanism to a Coretime sales mechanism, with all Coretime sales revenue being burned.
- The official launch of the Agile Coretime and the start of Coretime sales for Polkadot.
- 80% of the gas fees generated by DOT transfers will flow into the treasury, and 15% of DOT inflation is fixed for the treasury, which will burn 1% of the total treasury amount every 24 days.
These are the key updates, and now we can start considering the next steps.
2. What Other Strategies to Accelerate Polkadot’s Growth?
① Coretime Revenue Burning
First, let’s discuss the burning of Coretime sales revenue that has already been implemented. On October 5th, all the Coretime Cores offered for the month were sold out, totaling 279.85 DOT, with a usage period of one month and an average price of 55.97 DOT. The second batch of Coretime sales has also begun, with the price currently around 100 DOT, showing a modest increase in sales.
According to Referendum 1200, the total number of Cores for Polkadot will increase from 80 to 100. For more details, please refer to: [Whitelisted Caller] Increase validator set size to 500.
We can calculate that with a total of 100 Cores, 120,000 DOT could be burned in a year. Even if this burn volume were increased tenfold, reaching 1.2 million DOT, it would still be too little compared to the annual inflation increase (assuming the total DOT supply is 1.4 billion, and with the latest adjusted annual inflation rate of 8%, the new issuance in the coming year would be 112 million DOT). Therefore, relying solely on Coretime revenue burning will not be enough to significantly reduce DOT’s overall inflation rate. We need to explore other ways to increase DOT demand and accelerate burning.
② Treasury Burning
Next, we can look at treasury-driven burning. The DOT burned from the treasury is primarily influenced by two factors: the treasury’s overall balance and the 1% burn rate applied every 24 days. Thanks to the previous allocation of a fixed percentage of inflation funds (15%, as designed in Referendum 1271) to the treasury, we can ensure that a sufficient amount of funds flows into the treasury every year, without worrying about it running out. If 112 million DOT is issued over the next year, 15% (which is 16.8 million DOT) will go to the treasury.
However, this doesn’t mean we can use treasury funds recklessly. We suggest splitting the treasury into two sections: accumulated funds from past years and the newly added funds each year. Since a fixed percentage flows into the treasury each year, if we manage to ensure that treasury expenditures remain below the annual inflow, the treasury’s total balance will increase over time. As the treasury grows, the amount of DOT burned via the 1% burn rate every 24 days will also increase.
This is a variable we can try to control by establishing a structured spending plan for OpenGov, ensuring that expenditures don’t exceed the annual influx. Given the current state of OpenGov, this would be a relatively long process. Furthermore, the treasury currently holds about 11 million DOT. If we apply the 1% burn rate every 24 days, we can roughly estimate that 1.65 million DOT will be burned in a year. In the peak period, with 40 million DOT in the treasury, this would result in approximately 6 million DOT burned.
Another variable is the 1% parameter. Adjusting this parameter directly changes the amount of DOT burned through the treasury. Its role is somewhat similar to the effect of the U.S. Federal Reserve adjusting bank interest rates to control inflation. Likewise, Polkadot can adjust this parameter to influence the final inflation rate of DOT.
On the other hand, 80% of the gas fees generated during DOT transfers flow into the treasury. While this design aims to increase the treasury’s income, the actual revenue from gas fees is minimal. This is because Polkadot itself does not support smart contracts, and there is not a significant demand for DApp participation. As a result, the DOT income entering the treasury from this mechanism is quite low.
It is worth noting that by the end of December 2023, the launch of the DOTA project minting generated a large volume of DOT transfers on the Polkadot Relaychain. This brought a total revenue of 286,000 DOT to the treasury in that month, compared to other months, which typically contribute only a few thousand DOT to the treasury. From this, we can infer that a single project like DOTA can bring about 280K DOT to the treasury in just one month. If we imagine similar levels of activity each month, a project like DOTA could add up to 3.38 million DOT annually to the treasury. With ten similar projects, this could mean an additional 33.8 million DOT in treasury revenue. With this increased income, more DOT could be burned.
However, two issues arise from this approach.
First, the original design is to direct these gas fee revenues into the treasury, which then burns 1% every 24 days. Assuming the treasury receives 33.8 million DOT annually from gas fees, as we estimated, the current mechanism would result in 5.07 million DOT being burned, with 28.73 million DOT remaining in the treasury. However, this burn rate remains too low compared to the annual inflation of 112 million DOT. Therefore, we should consider more aggressive measures to increase DOT burning and thereby reduce the inflation rate.
There are two potential ways here. One is to increase the 1% burn rate applied every 24 days, but this approach has limited capacity to impact the burn volume significantly. Additionally, since gas fees revenue is not fixed, and the treasury’s income isn’t exclusively from gas fees, if this percentage is set too low, the effect will be negligible. On the other hand, if it is set too high, following our earlier principle — ensuring that the treasury’s annual DOT expenditure doesn’t exceed the annual DOT revenue — it may affect the amount of DOT available for spending each year.
Therefore, we prefer another way, which is to modify the design of allowing 80% of Gas fees to enter the treasury and instead directly burn 80% of the Gas fees. This avoids the above limitations while providing a direct and substantial burn, reducing the annual inflation rate from 8% to approximately 5.5% — a decrease of about 2.5%!
Of course, since we have already established that the treasury will have a fixed income, there is no longer any concern about the treasury being exhausted. This allows us to boldly burn a large portion of the gas fee revenue, thereby promoting DOT’s growth. This is a way for DOT to directly capture significant value from the demand side.
Second, DOTA is a unique case because it is an Inscription-based project, which incentivizes user interaction without the need for smart contracts. However, to accommodate more classic applications and generate more DOT transfers, smart contracts are still necessary. Therefore, at the infrastructure level, Polkadot needs to have a native interactive platform (System-level, and uses DOT as the infrastructure for Gas fees) that supports smart contracts, which brings us to the recently discussed Plaza and JAM.
Plaza, proposed by Polkadot co-founder Rob Habermeier on June 18, 2024. It aims to integrate parachains and improve the scalability of the network by combining the features of various parachains into a single chain. This integration increases both scalability and functionality. One of the key areas being developed for the Plaza project is the addition of EVM-compatible contracts to AssetHub, which will enhance its capabilities by moving protocols such as staking, governance, and balance functions to AssetHub. This move aims to reduce deposit requirements and improve support for stablecoins and exchanges.
JAM is a brand-new protocol proposed by Polkadot’s founder, Dr. Gavin Wood. It is a protocol that combines elements of both Polkadot and Ethereum, transforming the originally purpose-built Polkadot Relaychain into something akin to a multi-core “world computer.” It not only natively supports various types of smart contracts (including Solidity), but it can also run almost any standard computer code directly, without needing extensive gas optimizations. With minimal costs, users can upload and run code, which will attract more users and introduce new business models to the entire crypto world.
JAM is expected to launch in the second half of next year, and Plaza can be seen as an effective short, to mid-term strategy before JAM’s release. So, once Plaza can support smart contracts and the gas fees on it are also paid in DOT, the foundational infrastructure conditions will have been met. These conditions would be enough to support the direct deployment of many DApp projects, allowing users to interact with them frequently, thereby generating a large amount of gas fees, which can then be burned.
Just as “a delicious dish often requires the right seasonings to bring out its full flavor”, similarly, to accelerate the development of DOT, we need to add a little “seasoning.” Previously, we have proposed how to use treasury funds, as detailed in “What If Polkadot Had an Election? How Should We Formulate a Development Program for Polkadot?”. In this article, we mentioned the idea of launching ecosystem airdrops to accelerate ecosystem development and promote the DOT-based ecosystem.
Once the infrastructural conditions are in place, and the previous model of directing 80% of gas fees to the treasury is changed to directly burning them, we can apply for fixed annual funding from the treasury to focus on supporting ecosystem projects that utilize DOT. We can evaluate how much airdrop these projects should receive based on the amount of gas fees they generate.
In this way, a virtuous cycle of growth can be created:
The more users use DOT → the more DOT is burned through gas fees → DOT becomes scarcer and more valuable → The value of the airdropped DOT increases → Users use even more DOT. This cycle can significantly speed up Polkadot’s growth and DOT’s value expansion.
Summary
With the current inflation rate adjusted from 10% to 8%, and although further reductions are expected, it is still higher than our research institute’s target of 5%. Given this, aside from strategies that cannot immediately show results, such as burning from Coretime sales (which will take time to show effects) and ensuring that annual treasury income exceeds annual spending (which requires long-term coordination), there are several strategies we can pursue to increase DOT burning and reduce the impact of inflation on DOT’s growth:
① Awaiting Plaza and JAM Progress: Especially until they support the Solidity language.
② Modifying the Gas Fee Allocation Mechanism: Change the current “80% of gas fees entering the treasury” to “80% of gas fees burned directly.”
③ Introducing Airdrop Incentives: Allocate a fixed annual portion from the treasury to airdrop projects that generate significant gas fees for DOT, creating a positive effect: the more DOT is used, the more is burned, and the more valuable the airdrop becomes, attracting more users to DOT.
According to previous estimates, if we combine burning from Coretime revenue, burning 1% every 24 days from the treasury, directly burning 80% of gas fees, and operating 10 high-activity DOTA-like projects for a year, we can achieve close to a 3% burn rate. This would bring the initial 8% inflation rate down to a final inflation rate of 5%.
Moreover, if we incorporate treasury airdrops to support DOT-using ecosystem applications, we could accelerate the entire process, potentially achieving a burn rate of over 5%. At that point, with an annual DOT inflation rate reduced to 5% and a burn rate above 5%, we could even enter a deflationary phase, and result in a gradual increase in the value of DOT!
Therefore, Polkadot has considerable potential for rapid growth. So what do you think if you are interested in the development of Polkadot?
You can view the full Medium article here: How Can Polkadot Accelerate Growth After the 8% DOT Inflation Adjustment? | by Polkadot.ERI | Nov, 2024 | Medium.
Related tweet: x.com.
Feel free to join the discussion.