Yes, we need better control on spending of Treasury first, maybe then we won’t need reducing inflation. It will result in reducing of APY hence a lot of stakers will withdraw their DOT stakes. To reduce inflation we need much more positive narrative for growth of Polkadot, otherwise by reducing inflation we’re putting out a fire which is not big enough yet.
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I tend to adjust the total inflation of DOT from the current 10% to 5% and, with other burning mechanisms in place, eventually control the inflation rate below 4%.
Out of the 5% inflation, 1% will be allocated to the treasury to ensure a minimum amount of DOT enters the treasury each year, avoiding its depletion. The remaining 4% will be calculated based on the difference between the actual staking ratio and the optimal staking ratio, resulting in staking participants receiving less than 8% in rewards, with the rest still going to the treasury. Eventually, with the effect of other burning mechanisms, the annual inflation rate of DOT will be lower than 5%, and it may be further reduced to below 4% through mechanisms such as burning based on transaction fees.
Why choose 5% as the inflation rate?
On one hand, it considers the need for a fixed proportion of inflation to enter the treasury to prevent insufficient revenue. Moreover, from a traditional financial perspective, an inflation rate of 2-3% is considered moderate and conducive to economic development. Many central banks, such as the Federal Reserve and the European Central Bank, typically set their inflation targets around 2%. Therefore, setting the overall inflation rate at 5% is based on the expectation that certain burning mechanisms will reduce the final inflation of DOT to 4-5%. As Polkadot evolves, more burning mechanisms may be introduced, potentially reducing the inflation rate to around 3%.
Furthermore, regarding the adjustment of the inflation rate, I have conducted community surveys in the past, and the 0-3% and 3-5% ranges received higher support from the community. Hence, a rate below 5% is generally acceptable.
I do not support having a fixed upper limit or issuing DOT in a fixed quantity. I support the inflation based on the percentage approach mentioned earlier.
The design of Polkadot’s economic model should not only consider inflation but also strive for a balance with the development of the ecosystem. Considering that the development of mainstream public chains/Layer2 largely relies on the thriving DeFi sector to overcome the initial stages and subsequently develop a diverse ecosystem, and blockchain itself is a network for transferring value, we believe that the development of DeFi is not only crucial for all public chains but also the core ecosystem for Polkadot.
Many DeFi projects and other applications typically design their profitability based on percentage returns. Therefore, we strongly recommend retaining the “percentage-based inflation” design for Polkadot. Otherwise, if a fixed amount or gradually decreasing inflation is implemented, it may undermine the fundamental aspects of DeFi earnings.
Another important reason is the foreseeable future dominance of Real World Asset (RWA) projects. The yield proportion from staking will frequently be compared to the returns of RWA assets. Hence, this portion of the rewards should not be too low. If a fixed inflation model is adopted, it could result in staking rewards falling below the attractiveness of these assets.
In summary, the inflation rate should neither be too high nor too low. 5% is a range I consider suitable after considering multiple factors, and it can be further reduced in the overall inflation rate through burning mechanisms without decreasing Staking rewards.
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@ZouYang
You compare Polkadot’s inflation rate with that of countries’ economic structures and use that to justify 2-5%?
Admittedly, the ratio of 20/80 for treasury/staking rewards that you suggested would be relatively close to the tax system of some countries.
In Germany it is a bit higher. Taxpayers finance a bloated construct of bureaucracy and mismanagement that is run by politicians who often feel like the sovereign and forget that they should serve the well-being of the people and not the other way around. I hope Polkadot does not make this mistake.
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Here is my proposal to maintain the participation incentive and reduce Treasury spending.
Inflation of 6% with an annual reduction of 10%, which would take 4 years until inflation remained at 1.5%.
Stake compensation would be 6% to both validators, nominators and treasury reducing 10% to 1.5% over 4 years.
Treasury currently has 5M DOT and has to put it into stakes and can only spend the rewards for expenses, if the rewards are not spent in 1 year they will be added to the stake block amount.
DOT income from operations will be burned.
Coretime income will not be burned and will be distributed among validators, nominators and treasury.
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It’s getting wild. Everyone now seems to have their own numbers and ratios that they claim offer a good solution, unfortunately so far without very concrete substantiation as to why exactly this should make sense. I have already asked @jonas to elaborate on this in one of my 4 points.
There seems to be (so far only very theoretically) a basic agreement among all of us. We want to strengthen DOT in the general market environment, which is of course a laudable goal. In addition to this view, there are other reasons that relate more to the applications and uses in the ecosystem, defi, security, ease of use, simplification, narrative.
Here are the two variables that seem to be diametrically opposed, at least from a crypto fundamental point of view: High inflation brings high relative token growth vs. low inflation brings a stronger token (which is at least an obvious assumption and does not necessarily have to be true).
My view of things is supplemented by the fact that I would like a “minimal state”. The treasury should be as small as possible and as large as necessary. In this view, there seem to be roughly two camps: those who benefit from the treasury and those who feel dispossessed by it in some way. (I know we all benefit from the treasury as an ecosystem, so this explanation is very simplistic.)
I am missing an explanation in the debate as to why a strong token that offers scarcity is better than an inflationary one that tends to be weaker. And please explain why small changes or large changes should lead to changes in the overall situation. Logically, this is all an experiment in the end, but I think you should have as concrete and well-founded ideas of a result as possible in advance and give a plausible reason for them. If you cannot offer this sufficiently, I think leaving the status quo is the least risky and best predictable situation for the future. Again, the changes are serious.
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@coco - wrote about it here.
The number of people who are opposing the inflation reduction by @jonas simply because they ‘live off their staking rewards’ is alarming.
Polkadot has proven itself - it’s time to take the training wheels off and allow it to flourish and be used in the most ways possible - if this means losing a few wallets because the easy APY days are over - so be it.
If there is any one thing that would sway more people into voting yes on these changes is that it will make DOT a stronger use case for DOT as collateral.
This includes usage in money markets & stablecoin issuance, loans etc.
Another very overlooked piece of information - DOT is weighted at 90% collateral ratio on most major exchanges - Binance / Bybit and a Class B asset on sites like Kraken (Class A is BTC ETH USDT USDC for reference - B is quite good).
Regardless on any ones stance to ‘trading’ - making a stronger case for DOT will give incentive for these exchanges to rate DOT even higher as a use for collateral.
To put it in perspective - the top 5 exchanges do anywhere from 20 - 40 BILLION in trading volume per day and in 2021 Binance did 7 TRILLION in trading volumes.
There is a massive opportunity here for Polkadot to climb up the rank into the top used collateral assets as it is battle tested, secure and liquid.
I for one would like to live in a world of 95% collateral weighting and a Class A rating.
Personally would like to see a slightly higher reduction and further talks & action about supply caps.
We have a real chance to make DOT a very used, very investable, immensely versatile asset and we need not waste time in doing so.
J.
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Inflation is an expense, whether you spend it on the treasury or sell the tokens you get for staking, as polkadot has no income to compensate for inflation, Polkadot is doomed to deficit and that makes the token worth less and less.
It’s the same thing that happens with the FED printing because the US doesn’t make enough money to pay for the spending and that makes the dollar worth less and less.
Inflation needs to be eliminated as soon as possible even if it reduces the staking rewards and eliminate most of the treasury spending so as not to increase the deficit further.
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Hi,
Will be happy to add my 2 cents here since I think this topic is super important. I understand we can’t talk about price, but it’s quite complicated to avoid it when talking about inflation since it’s an inherent part of it, but I’ll do my best.
MarketCap equals PxQ. In the long term, if Q will grow exponentially (currently 10% per year, but let’s assume it’s 20-30% for example), P will tend to go to zero in real terms. However, if Q is constant, then P theoretically has no upper limit.
Having said that, since it’s not only economical perspective, but also security, we definitely should have a basic inflation to ensure people stake in order to secure the network. But is 10% the right number? devalue the token price by 10% every year, double the circulated supply every 7 years? In my opinion the answer is definitely no.
I also don’t understand people who prefer to keep it like this since they use the rewards as a source of income. it doesn’t make sense because again, if they care about the income, it should be the income in $ value and not in the number of tokens they get. Therefore, with low inflation, their $ value income is more likely to be worth more than with high inflation. Personally, as a validator who should benefit from high inflation, I definitely prefer to lower it for the same reason I’ve mentioned above.
In addition, users don’t like high APY that comes out of thin air, because it means that it’ll be offset with the token price eventually, so what’s the advantage here? It’s true that the staking apy is greater than inflation, therefore users should be inflation protected (and also make a few more %), but still it’s very difficult to attract new users to a project that doubles its own circulation every 7 years. They prefer to be part of low inflation / deflationary projects. We all know that devs want to be where the users are, where there are a lot of transactions and TVL. Lack of users will lead eventually to lack of devs.
Therefore, I support @alice_und_bob linear inflation model, which suggests that the inflation rate will decrease overtime in a reasonable pace, and I’m sure the ecosystem growth will mitigate this decrease. In addition, I would remove the treasury share from the total inflation to 5% max in order to force openGov voters to spend it more wisely due to the scarcity.
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@alice_und_bob
Successful organisms (as we hope polkadot will be) follow a logistic curve in their real growth. You typically want inflation to match real growth (or be within a few percent depending on cultural economic values) and seeing as we’re very much in the exponential early stage of that curve it makes sense to keep it exponential.
As to whether we should try and forecast the duration of the curve with some form of scheduling - it would be preferable to just keep it flexible as the lifespan of a government is on the duration of 100s of years and we really shouldn’t be trying to guesstimate. Best to just change the value as we observe.
The good news is we can observe the economy much more minutely in a blockchain system than a traditional one, so matching the real growth rate should be easier than traditional governments find it.
@coco
I felt a bit scattered trying to aggregate you’re various points but it seems to me you’re viewing Polkadot a bit too much as deriving it’s growth and value from being an investment instrument. And that’s fair considering we haven’t had a real economy until now, but with the growth of parachains (and soon DAOs), this is changing. We should do our best to facilitate what Polkadot is now over what it was.
There also seems to be some question as to why we need a stable treasury inflow at all:
Polkadot’s preferred form of taxation is inflation. Currently we divert almost all of that taxation to the private sector, i.e. stakers. And that’s helpful as the private sector is much more granular and diligent in its investments than the public. But some necessary investments are too large or otherwise communal for an individual and hence grows the needs for a large public treasury.
Finally, we’re bickering about what percentage of taxes should be diverted public vs private but ultimately it’s not a well modeled science and we’ll never come to a perfectly justified number. What @jonas has proposed is a reasonable start and more importantly we now have a mechanism to change the values if we are wrong.
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Comparing the inflation rates with the economic structures of different countries is just one aspect among many factors I consider. This includes the impact of inflation rates on applications within the ecosystem. Therefore, the inflation ratio should not be excessively high or too low.
This point seems to be correct, but it generally applies to projects that do not require ecosystem development. For public blockchains that support smart contracts and need to develop their ecosystems, their growth is closely tied to the development of applications within the ecosystem. Almost all such public chains’ development is intricately linked to the growth of DeFi, and many DeFi projects rely on the low-risk returns (i.e., Staking rewards) on these chains as a foundation. Moreover, many DeFi projects design their profitability based on percentage returns. Therefore, adopting a percentage-based inflation model is essential, rather than solely considering the inflation rate and price of DOT itself. When considering adjustments to the economic model, we must consider how to better coordinate and develop in harmony with ecosystem applications.
It’s all about timing.
@Juba.K
“The number of people who are opposing the inflation reduction by jonas simply because they ‘live off their staking rewards’ is alarming.
Polkadot has proven itself - it’s time to take the training wheels off and allow it to flourish and be used in the most ways possible - if this means losing a few wallets because the easy APY days are over - so be it.”
I respect all of your points and can understand them well. However, I am still critical of the passage I quoted because it denies a given reality.
The discussion we are having here is not without reason. The larger goal, in addition to various details, is to strengthen DOT, the goal to which all participants and beneficiaries of the Treasury are committed together, with all the different approaches, fine.
The promise of success of the proposal probably depends on good timing.
There were good reasons for me and many others to be fascinated by Polkadot. The forward-looking implementation of Web3 with all its facets and also the not to be underestimated fact of the generous passive income through staking rewards (even if these technically have a different purpose).
The overall market environment was good for a while until things took a turn. Here, the fact of passive income, which many continued to use, began to act negatively as a catalyst. Now attempts are being made to counteract this.
As the changes are sensitive for token holders, the moment for this has to be well chosen. Admittedly, the Polkadot narrative has recently been on the upswing again and things seem to be developing very well.
Let’s hope that the timing is well chosen. I would have a better feeling about this if the effect of a higher deflationary development were initially created by well-functioning intrinsic circumstances, such as coretime sales, first. Yes, I’m sorry, my main concern is to be able to pay my rent. Whether this is done by selling a strong token or holding a weak one with other advantages is irrelevant. Many token holders probably see it that way.
Can we bring about a positive trend reversal with the change in inflation right now? Wouldn’t it be a better time for this when Polkadot has already gained enough real strength on its own? I’m flexible and curious too.
It’s always about timing.
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Right now, the APY for staking is about:
9.5%/0.59 (staking rate)−9% (inflation)=7.1% before commission
If the inflation is adjusted to 5%, where 1.5% of inflation goes to the treasury, the APY is:
3.5%/0.59 (staking rate stays the same)−5% inflation=0.9% before commission
So yes, changing the inflation “a little” has a huge impact on APY adjusted for inflation.
Depending on your country of residence, you may need to pay taxes on staking rewards. This could result in a net loss for stakers after taxes (e.g., a -2% interest rate for stakers). There’s no point in staking if you loose money doing it.
Of course, in certain countries like Austria or the UAE, staking rewards are exempt from taxation, and it might still be worthwhile to stake.
However, staking will only be advantageous in these specific jurisdictions.
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(Reposted to the main reply thread and edited to avoid being deleted due to taking about ‘that which cannot be mentioned’ which I understand although it’s difficult as these things are intertwined.)
Thank you for your detailed reply @jonas. While I understand the concerns raised by parachain teams, I believe we need to also consider the following points:
Firstly, it’s important to note that the entire cryptocurrency market has experienced similar “movements” during this bear cycle, regardless of individual project inflation rates or staking rewards. This suggests that Polkadot’s APY may not be directly responsible for its (full in the gap) decline or parachain competitiveness. The fact is that many people are disillusioned and want to blame something for what has transpired. Staking rewards have been placed in the cross hairs, but as the cycle inevitably changes so will (I believe) people’s concerns. It’s akin to hitting a good man when he is down.
Secondly, the proposed reductions in APY lack a clear scientific or economic basis. Whether we’re considering a eg 1%, 2%, or 5% reduction, there’s no evident data or model demonstrating how these specific changes would impact our ecosystem’s health or DOT’s value. Without this analysis, such adjustments risk being perceived as arbitrary measures rather than sound economic policy.
Moreover, we should consider that many institutional money managers view staking rewards as analogous to dividends in traditional finance. Perhaps this is an incorrect assumption but it’s remains a fact. It’s also the position taken by many tax authorities. This perspective has been a key driver of institutional interest in proof-of-stake networks like Ethereum. In fact, Polkadot currently offers one of highest rewards of among major PoS networks. This is a significant competitive advantage that we haven’t fully capitalized on in our marketing to investors. Reducing our APY could diminish this unique selling point and potentially drive interest towards other networks.
PS: I agree with polka.dom*who said: “Successful organisms (as we hope polkadot will be) follow a [logistic curve] in their real growth. You typically want inflation to match real growth (or be within a few percent depending on cultural economic values) and seeing as we’re very much in the exponential early stage of that curve it makes sense to keep it exponential.” I think history will show this point to be 100% true and should not be overlooked.
PSS: If there is to be a reduction, I’m also more supportive of @alice_und_bob linear inflation model which, as legend* points out: “suggests that the inflation rate will decrease overtime in a reasonable pace, and I’m sure the ecosystem growth will mitigate this decrease”.
*as a new user I can only @ max 2 users so my apologies polka.dom and Legend
3 Likes
Well i’d have to say that this state of portfolio management is being done at the very wrong time.
Polkadot is a web 3 software ecosystem, and holders are trying to treat it like a mutual fund while others are interested in doing everything possible to grow the adoption and value of the project.
Personally, I would like to see tighter tokenomic roadmaps, reduced inflation, supply cap - elements that would no doubt increase scarcity, usage and strengthen collateral weights across finance platforms.
We are fortunate for this opportunity to acquire DOT tokens which allow us to vote in what (imo) will be one of the most competitive and valuable decentralized networks this world has ever seen.
When you start realizing that the scarcity of DOT = the increased value of your vote - you may start to see things a little differently.
However - we are all entitled to have our opinions and yours (and others) who want to enjoy the high APY’s are valid -
I just think we are still too early to have such a laidback stance.
Time for some offence.
Cheers.
J.
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It was never my intention to offend. If it came across that way, I apologize. It’s just that changes that affect tokenomics are of a different nature than those that serve technical development and this is the first time that Polkadot has tackled something like this. Think about what would happen if, for example, BTC were to expand the maximum token amount, a somewhat exaggerated comparison of course… However, I doubt that many people are Polkadot holders just to be able to vote on proposals. Very valuable, of course.
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Not at all offended - don’t take it that way.
I can actually see where you are coming from - others a well.
It’s just my belief, wish and personal preference to travel the route mentioned in my responses.
Be confident in your stance as well - good debates yield the best results!
Cheers.
J.
2 Likes
I am in favor of the linear inflation model proposed by @alice_und_bob. Below is some data to show that at the start, it is similar to what was proposed by @jonas, with the addition of having a predictive idea of where inflation will go in the next year (down!).
The model is simple: 120 M DOT printed each year, fixed. We can decide how much goes to the stakes and how much to the treasury.
Below is a table of the difference between exponential inflation (current model) and linear inflation (proposed model):
Data used for the plot above:
You can see how, after the first year, inflation drops from 10 to 8.16%, then 7.54% the second year, and so on. If we adopt the linear inflation model, inflation will go to 6% in the next 5 years. I hope that by then, we will get some decent usage of Polkadot tech, that transaction fees will generate a substantial income for the treasury, and that coretime sale burn might push even further down net inflation.
The inflation drop for adopting the linear vs. exponential model can be visualized below:
This should be interpreted as the maximum possible inflation. In fact, it does not take into account coretime revenue sale burn that will create a deflationary pressure more or less important depending on how much Polkadot is used. Then you have transaction fees, where 80% of them are diverted to the treasury. Nothing prevents OpenGov to further reducing the 120 M DOT annual inflation if revenue from fees is substantial enough to be an important revenue stream for the treasury.
Inflation is a vital part of our ecosystem and anything really in the real world. The problem of the real world is that developed countries still have high inflation, and this is bad because you dilute your currency value without necessarily adding much value (as the country is developed). Well, Polkadot is at an early stage of development, and we have had 10% inflation in the past 4 years since launch. It is time to have a clear path forward, easily understandable by anyone, and force people to work collectively to capture value in the next years. I believe the linear inflation model gives us enough time to do so while making the ecosystem appealing to retail and non-retail investors willing to onboard in our ecosystem with peace of mind.
Staker APY will drop to 12.5% in the first year and then gradually to 5% after 20 years.
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While I still think a %-based inflation on total issuance is preferable, having a fixed token issuance (and thereby decreasing inflation) could be a valid alternative.
I think it would be a good idea to calibrate the proposal for a fixed token issuance, similarly to what you suggest, to the numbers that equate a 8% inflation in the first year (ideally with the same split between staker inflation and Treasury). That would reduce complexity and consolidate options and it boils down whether token holders prefer no change, a fixed % inflation or decreasing inflation. It wouldn’t overcomplicate things by adding even more dimensions in terms of which % and which maxStakerReward to set.
It will be quite challenging to find some offchain consensus on which proposal to even put forward if we scatter into too many options.
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- I am not suggesting to remove the burn from the Treasury. The amount relates to historical inflows and therefore has a natural anchor.
- Reducing inflation has been a common topic in the whole community and I set out to give this conversation some structure, distill reasonable options, and potentially leading to a vote in OpenGov. Then, we’d find out whether a proposal receives sufficient support. From the replies here and on other social media channels, you should be able to see that there is indeed substantial support to reduce inflation.
- That is your opinion, other people believe that a substantial Treasury inflow is necessary to keep growing the ecosystem, fund its development, and lead Polkadot into self-sustaining future. The goal, and there is always complications with this, should eventually be that spendings from the Treasury lead to a positive return for all token holders.
- As stated in my original post, large unbonds would lead to very attractive APY, drawing in new stakers.