I’d like to use the invitation as an opportunity to start a discussion and raise the question again:
Would it be possible to introduce incentives for compounding staking rewards within Polkadot’s staking model?
The underlying goal would be to reduce selling pressure by creating a meaningful economic incentive for participants to keep their staking rewards compounded rather than realizing and selling them.
One possible implementation could be a progressive reward multiplier. The longer rewards remain compounded, the higher the effective reward rate could become. Once DOT leaves the staking account—for example, when rewards are claimed for non-compounding purposes—the multiplier would reset to its minimum level and the mechanism would start over.
An important question would be whether such an incentive should apply only to nominators or to validators as well.
As I understand it, nominators and validators currently receive rewards through different mechanisms, particularly since direct validator commissions have been removed. Nevertheless, I believe applying the incentive to both sides would be preferable if technically and economically feasible. This would create a more balanced and fair incentive structure across the staking ecosystem.
I think a change like this could have an impact beyond simply modifying the nominal staking yield. If the incentives were strong enough to be clearly noticeable, they could potentially reduce sell pressure by encouraging participants to compound their rewards.
At the same time, there could be a psychological effect. DOT is unfortunately still often perceived as an asset that should be moved into “safer” assets as quickly as possible. A staking mechanism that visibly rewards long-term compounding could help shift this perception and create stronger incentives for participants to think of DOT as an asset worth accumulating and holding rather than immediately selling.
In my view, this could therefore be an interesting way to use the staking system not only to secure the network, but also to influence long-term economic behavior within the ecosystem.
I’m aware of the obvious first question or objection that naturally follows from this idea:
“Staking rewards are taxable events in most countries.”
I don’t think this is necessarily a critical issue, though.
1.
First of all, participants would still be free not to use such a mechanism in the first place.
2.
There could also be ways to compound a predefined percentage of the rewards while having the remaining portion paid out to cover the resulting tax liability and other costs. In that case, the incentives would simply apply proportionally to the amount being compounded.
3.
In principle, there is also the option of paying any resulting taxes from sources other than selling the staking rewards. Of course, that assumes that participants consider DOT an asset worth holding rather than something they want to sell as soon as they receive it.
“dotUSD is the instrument which makes dollar-denominated budgeting possible on-chain. Under the second phase of the DAP, validators and nominators are to be remunerated in stables; the Treasury is to receive a mix of stables and DOT. Without a native, decentralized, DOT-backed stablecoin, these operations would necessarily depend upon externally issued instruments with all the counterparty risk and governance dependency that entails. dotUSD closes this gap: it allows the network to denominate its obligations in dollars, disburse them in a native asset and retain full sovereignty over the process from issuance to settlement.”
“validators and nominators are to be remunerated in stables”
Oh. I wasn’t aware of that.
That means the selling pressure resulting from the staking system is effectively built-in from the very start.
Is that really desirable?
To my mind, that’s a step in the wrong direction.