[WFC] Burn-Based Tokenomics for Kusama: The Ethereum Model, Not a Hard Cap

[hantoniu-codeberg]

Acknowledgment

Referendum 627 concluded with rejection: approximately 28% Aye, 72% Nay.

I want to thank everyone who engaged with this proposal—supporters, critics, and those who asked difficult questions. The four weeks of discussion produced genuine refinement: the original v1.0 was corrected, split into complementary pieces with @olanod’s validator work, and stress-tested against real objections. That process worked as intended, even if the outcome wasn’t what I hoped for.

The Structural Gap

The primary blocker was W3F’s requirement for “broader stakeholder and economist engagement.” I addressed the timing and process concerns in in a previous message—I won’t rehash them here.

What’s worth emphasizing is the structural point: no public pathway exists for the kind of review W3F has indicated is necessary. If formal economic analysis is now a prerequisite for tokenomics changes, that’s a new standard—and Kusama governance currently has no infrastructure to satisfy it. The only path offered was private (email), which doesn’t work for participants who operate exclusively in public channels.

This isn’t an attack on W3F. It’s an observation that the gap isn’t in the proposal—it’s in the process.

Responding to Feedback

@Onepebble raised a fair point: usage drives value, and changing the economic engine doesn’t substitute for adoption. This is correct as far as it goes, but it frames a false choice.

Usage requires users. Users—particularly those evaluating where to build—assess the economic environment alongside technical capabilities. A network bleeding 7.82% annual inflation into a validator set sized for ten times its current activity sends a signal. That signal affects adoption decisions.

The argument isn’t “fix tokenomics instead of building usage.” It’s “fix tokenomics so that usage, when it comes, compounds into sustainable economics rather than continuous dilution.”

Ethereum didn’t wait for maximum adoption before implementing EIP-1559. The burn mechanism was deployed as infrastructure for growth, not a reward after growth arrived.

The Path Forward

I’m not resubmitting immediately. What’s needed isn’t another revision—it’s clarity on process.

A concrete ask for W3F: If formal economic review is a prerequisite for supporting tokenomics changes, what does a public pathway to request one look like? A forum thread? A treasury proposal to fund external review? Something else? The process needs to be visible and accessible.

In the meantime:

• I’ll support @olanod’s upcoming proposal on validator and core reduction. The supply-side and cost-side reforms are complementary; progress on either advances the broader goal.
• The analysis in this thread remains valid. If W3F or others commission economic review, the data and projections here are available as input.
• Clarifying Kusama's Governance Direction: Independence or Integration? remains open, asking for clarity on Kusama’s governance direction. The answer to that question affects whether Kusama-specific economic proposals make sense at all.

Closing

Rejection in Kusama governance is iterative, not terminal. Proposals get refined and resubmitted. That’s the design.

What this process surfaced is that the gap isn’t in the proposal—it’s in the infrastructure for evaluating proposals of this type. Filling that gap is now the work.

Thanks again to everyone who participated. The discussion was worth having.

[hantoniu-codeberg]

Brief update on where things stand, nine days after the post-mortem.

The validator reduction discussion is now active. @sigurpol opened an issue today proposing to reduce the active validator count based on core needs — a separate effort from @olanod’s work, but aligned with the same economic reasoning. In an earlier post, I noted the supply-side and cost-side reforms are complementary. That multiple contributors are now converging on the cost-side independently reinforces the point. @burdges raised valid concerns about the security implications of a smaller validator set (the 2/3 Byzantine assumption), which will need to be worked through carefully. But the core economic logic — that Kusama is paying for far more validators than its current activity requires — is now being examined from multiple angles.

The burn proposal fits into this picture. Kusama’s estimated annual inflation is 7.23%, calculated from last era’s validator reward (878.35 KSM) across 1,460 eras per year against a total issuance of 17.75M KSM. Reducing the validator count addresses the cost side. Burns address the demand side. Together, they bring inflation from 7.23% to something sustainable — not through complex financial engineering, but through straightforward supply mechanics that are already proven elsewhere.

Separately, the DAP’s pUSD design is facing design questions about what happens to a DOT-backed stablecoin during market drawdowns. Referendum 1761 already rejected one pUSD implementation (81.4% Nay). The burn model proposed here avoids that class of problem entirely — it works with the native token directly, no collateral design required.

I’m not resubmitting the burn proposal yet. The validator reduction should be evaluated on its own merits first. But the two are complementary — and the case for combining them is stronger now than it was ten days ago.

For those who supported Referendum 627: the analysis holds. For those who voted Nay pending further review: the developments since rejection are making the economic argument, not weakening it.

[hantoniu-codeberg]

@labormedia — you asked how many economists there are at W3F. The more relevant question might be how many are in this forum.

This proposal was voted Nay by W3F on the basis that it needed to be “reviewed more in-depth by economists” before they could support it. That’s a reasonable standard. But you’ve been doing independent economic analysis of Polkadot’s tokenomics for months — purchasing power dynamics, CRRA assumptions, the nominal-vs-real gap in the DAP discussion.

So I’ll ask directly. The latest specification is in the v1.2 update. Two questions:

First, is the mechanism sound? Multi-source burns (fees, treasury, coretime, slashing) as a counterweight to inflation — does this address the purchasing power problem you’ve identified, or does it fall into the same nominal-vs-real trap as the DAP?

Second, the parameters — 5% base inflation, targeting ~3-3.5% net — are deliberately conservative starting points, not permanent values. They’re designed to be adjusted by governance as real network data comes in. Is that a reasonable approach for a first implementation, or do you see structural problems with the calibration?

If there are gaps in the economic reasoning, I’d rather have them identified by someone working from first principles than wait for a review process that has no public pathway.

[labormedia]

A EIP-1559 style burn mechanism is designed to solve a specific problem: Congestion .

• Problem: “We have too many users fighting for blockspace. Fees are volatile.”
• Solution: “Burn the base fee to smooth volatility and prevent miners from manipulating the fee market.”

If you have empty blocks (no congestion), the “Base Fee” drops to near zero.

• Ethereum: Blocks are full → Base Fee is High → Massive Burn.
• Kusama: Blocks are empty → Base Fee is Tiny → Negligible Burn.

To make the burn “significant” in an empty network, you have to artificially raise the fee floor. But raising the price of an empty product is economic suicide. It drives away the few users you have. The Luxury: You can only afford to burn fees when users are lining up to pay them.

The Equation of Exchange (MV=PQ)

Let’s look at the math. The goal is to support Price (P).

(Where M is Supply, V is Velocity, Q is Real Value/Utility) .

To implement an aggressive burn model on a network with spare capacity is to optimize for a scenario that doesn’t exist yet. It is “Premature Optimization”. However, if the Cambridge Constant (k) is low (meaning usage is mercenary and Velocity V is infinite), any reduction in M is mathematically overwhelmed by the lack of holding demand.

Hard Cap vs. Burn

• A Hard Cap is a Constraint. It forces discipline on the Treasury and signals to the market that dilution has a limit. It anchors expectations.
• A Burn Model is a Luxury. It only functions when the network is congested.

Conclusion: Do not confuse the mechanism of wealth capture (burning) with the source of wealth creation (external demand). Until Kusama solves the External Sink problem (users buying KSM with fiat/stablecoins to consume a unique service), switching to a burn model is just rearranging the deck chairs.

Fix the engine (Q) before you obsess over the exhaust pipe.

---

Disclaimer: This is an economic analysis of protocol mechanics and not financial advice. Do your own research.

[hantoniu-codeberg]

@labormedia — thank you for engaging with this. You’re the first person to bring economic framework analysis to this thread, and that’s exactly what was missing.

Your analysis is rigorous, but it applies to a mechanism that accounts for 0.002% of our projected burns.

Where We Agree

Fee burns on an empty network are negligible. You’re right — and we’ve said so explicitly since v1.2. Kusama’s relay chain fees are ~0.032 KSM/day. At 50% burn, that’s ~6 KSM/year. That’s not the foundation of any tokenomics proposal.

Your point about external demand is also valid. No monetary mechanism substitutes for usage. We don’t claim otherwise.

What the Proposal Actually Does

The proposal isn’t a fee-burn proposal. Here’s where the burns actually come from:

Source	Annual Burns (est.)	% of Total	Congestion-Dependent?
Treasury balance (1%/period, 100K floor)	~317,200 KSM	95%	No
Treasury inflow (10% of inflation income)	~16,300 KSM	5%	No
Transaction fees (50%)	~6 KSM	0.002%	Yes
Coretime revenue (25%)	1,250–5,000 KSM	~1%	Partially
Slashing (50%)	~500 KSM	0.1%	No

95% of projected burns come from treasury balance burns. These fire every 6-day spend period regardless of whether a single transaction happens. They’re a geometric decay: 1% of balance above a 100K KSM floor, every period. These don’t require congestion, a base fee, or users competing for blockspace.

The EIP-1559 comparison in our proposal refers to the philosophy — burns as a feedback mechanism rather than a hard cap — not the specific fee market design. Ethereum’s fee burns happen to be congestion-driven. Ours are primarily treasury-driven.

On MV=PQ

The Equation of Exchange assumes a medium of exchange with meaningful velocity. KSM serves multiple functions — staking, governance, transaction fees, coretime purchases — but with 47.4% of supply staked, velocity for nearly half the supply is effectively zero. A pure MV=PQ analysis understates the impact of supply-side changes when a large share of the token is locked by design.

That said, your underlying point stands: reducing M without increasing Q is incomplete. We agree — and our proposal doesn’t claim to solve demand. It reduces dilution while the network builds toward usage. Both matter. Neither substitutes for the other.

On Hard Caps

You describe a hard cap as a “constraint that forces discipline.” We see it differently. A hard cap forces eventual zero issuance and zero treasury funding. It doesn’t create spending discipline — it creates a cliff. And once set, changing it becomes a political battle rather than a technical adjustment.

Burns with a floor (100K KSM) and governance-adjustable rates create actual discipline: the treasury self-moderates, spending becomes more consequential, and every parameter can be tuned based on real data. That’s discipline through mechanism design, not through a fixed number that becomes increasingly difficult to revisit.

v1.3

In parallel with this discussion, I’ve completed a significant revision of the proposal. v1.3 corrects data errors from v1.2 and adds sections that directly address the economic questions raised in this thread.

Key changes:

• Corrected baseline inflation: v1.2 cited 7.82% — that was the validator portion only. Total system inflation is 10%, split between validators (7.24%) and treasury (2.76%). All projections recalculated.
• Explicit NPoS parameters: MaxInflation reduced from 10% to 5%. MinInflation kept at 2.5% — preserving the self-correcting staking incentive that pulls capital back when participation drops.
• Validator economics: A full section showing how this proposal interacts with @olanod’s phased validator reduction. Break-even is ~564 validators. At 500, per-validator rewards are +13% above current.
• Sequencing commitment: This WFC is designed to activate after the validator count reaches 500. No validator earns less than they do today. The reduction handles the cost side first; burns complete the picture.
• Net result: 10% → ~3.1% net inflation. A 69% reduction. All parameters governance-reversible.

Full proposal: v1.3 on GitHub

The Questions Still Open

In an earlier post, I asked two specific questions. Your response addressed fee burns — which we agree are negligible. The questions about the actual mechanism remain open:

1. Treasury balance burns — 1% per 6-day period above a 100K floor, congestion-independent, geometrically self-moderating. Does this address the purchasing power problem you’ve identified in the DAP discussion, or does it have its own structural issues?
2. The parameters — 5% MaxInflation, 2.5% MinInflation preserved, ~3.1% net. Deliberately conservative. Designed to be adjusted. Is that a reasonable starting point?

We’d welcome your evaluation of these specifics.

@bill_w3f — you indicated this proposal needed to be “reviewed more in-depth by economists.” This is that process happening in public. @labormedia has brought economic framework analysis to the table. v1.3 has corrected the data errors and added the missing sections. We’d welcome W3F’s engagement with the substance — the mechanism, the parameters, the validator economics — in the full v1.3 proposal.