Origin
In April of this year, just a few days before the Token2049 event in Dubai, the well-known media outlet in the Polkadot ecosystem, Kusamarian, announced the return of the “Behind the Code II” interview series and launched a new series called Web3Thinkers. The first episode featured an interview with Dr. Gavin Wood, focusing on his recent proposal, JAM, and his Gray Paper, as well as discussing the significance of Polkadot and his recent thoughts.
Towards the end of the interview, the topic shifted to a question that many are concerned about – what will happen to our DOT after the relay chain upgrades to JAM? From a technical perspective, it is likely that these DOT will be duplicated to a parallel chain called the relay chain parallel chain, or more likely to AssetHub, a universal asset chain. Another possibility is that they will be duplicated to a Staking parallel chain (or the relay chain will directly convert to a Staking parallel chain), but this has not yet been confirmed and is still under investigation.
However, there is no need to worry, as this will not result in any substantial changes for DOT holders. Nevertheless, Gavin then raised questions about the tokenomics of DOT.
Originally, the inflation rate of DOT was 10%, with a portion of inflation funds going to the treasury based on the difference between the optimal Staking rate and the actual Staking rate, and the remaining portion going to Staking participants. However, there is an accepted RFC (Request for Comments) to change this, ultimately allocating 2% of inflation funds to the treasury to ensure stable income, with the remaining 8% used for Staking rewards.
But Gavin is also considering whether a more rigorous economic system is needed. He believes there are enough reasons to constrain the economy to make it difficult to change. Since the JAM chain will replace the relay chain, new DOT issued will be done through JAM, and there may be a new economic system running on the JAM chain in the end.
So, what might this new tokenomic system look like? Gavin suggests it could take various forms, perhaps with a fixed 10% annual growth rate. However, there is a more interesting approach, such as drawing inspiration from BTC’s halving cycle, which has a useful feature known as a Schelling point. This is a natural solution or focal point that people unconsciously gravitate towards without communication, representing a default consensus point. It’s like the actions people take around the time of BTC’s halving, creating fluctuations, consensus, and consistency. This is an interesting concept, but Gavin is not entirely convinced about introducing a similar economic Schelling point for Polkadot.
As for how the new tokenomic system might operate, Gavin suggests that if the goal is to reduce DOT’s inflation rate, not through deflation but by decreasing inflation, it might involve gradually reducing the issuance rate over time. This could be achieved by fixing a certain percentage of the issuance amount at a specific time, resulting in a decreasing inflation rate as the total supply increases.
Another possibility is to implement a more aggressive approach leading to a distribution curve similar to BTC’s halving cycle, setting a maximum quantity. For instance, with the current total DOT supply being over 14 billion, doubling this number to approximately a figure like pi (31.4 billion), determining the future total amount of DOT to be minted, and issuing a percentage of this remaining amount annually. This type of issuance cycle could be adjusted to various timeframes, not necessarily 12 months.
Gavin believes that this gradual decreasing curve year by year could be intriguing, providing a smooth transition from current rewards to a fixed final amount.
However, there is a safety mechanism in place. If the current economic model becomes too radical, adjustments can be made through a hard fork to increase the total amount of DOT. Validators can measure this process, and a soft governance directive can be implemented, specifying that the Staking amount for DOT should not fall below a certain amount in fiat currency. If the Staking system is insufficient to ensure this, a hard fork can be conducted to increase the total supply, ensuring this requirement.
Gavin sees this as an interesting possibility, with the safety mechanism in place, and he doesn’t see any major drawbacks. However, he does acknowledge a significant advantage – financial certainty and the introduction of Schelling points.
These are some of the potentialities of the new DOT tokenomic model as mentioned by Gavin.
The full video of Gavin’s interview can be viewed in Chinese here: https://mp.weixin.qq.com/s/Xk90E6P6ctbFa6WkCSpHcA
The complete English version of the video can be viewed here: https://x.com/TheKusamarian/status/1784613780367749527?t=4743
Recently, someone proposed a referendum based on Gavin’s suggestion of a fixed maximum supply of DOT (the example of a total of 31.4 billion) as a way to provide financial certainty for the treasury. Details can be found here: https://polkadot.polkassembly.io/referenda/851
This proposal falls under the “Wish For Change” track, which is used for discussions on potential changes and does not lead to substantive changes even if approved. These proposals are primarily for collecting opinions.
Even though Gavin elaborated on this example, as long-term researchers, we do not endorse this idea.
Why are we against this concept?
Firstly, for a PoS system (Polkadot being NPoS with the same logic), a relatively stable Staking income is crucial as it affects network security. If Staking rewards in a PoS system decrease annually and the coin price is falling, node operators’ income will plummet rapidly, leading to many node operators exiting, similar to mining farms shutting down in PoW, thereby reducing network security.
Furthermore, this design would disrupt some of the advantages of PoS systems. A stable Staking income serves as the risk-free rate of return for the coin and tends to generate mature DeFi projects like LSD and Restaking, thereby boosting DeFi activity and capital utilization. However, the rate should not be too high to hinder other projects’ development or too low to impede the ecosystem’s growth.
Staking rewards are also a significant source of funding for the treasury, and Polkadot’s governance relies on continuous support for public interest proposals, necessitating a stable cash flow. The proposed design may struggle to meet the basic demands of public interest proposals.
Secondly, if a Schelling point is implemented, like BTC’s halving cycle, designed for halving rather than Schelling, and since BTC is the first Crypto with unique significance, replicating BTC’s success onto other projects may not yield the same results.
Given that Polkadot’s treasury governance mirrors national governance, and national economies have undergone centuries of exploration, relying solely on a fixed mechanism to regulate the economy is insufficient. Instead, it’s crucial to assess the current economic situation continually and adjust key data to regulate the economy.
The entire Crypto industry has been influenced by the decisions of the U.S. Federal Reserve, which adjusts rates to control the economy and subsequently affects the Crypto industry. This current solution seems more suitable for Polkadot’s governance.
As for the indicators to adjust and the values to be adjusted, focusing on inflation as the ultimate goal (similar to what the Federal Reserve is doing now), with the treasury burning 1% of its total every 24 days, this 1% could be made a dynamically adjustable value. Following each period (every 24 days, a quarter, or a year), the burning rate could be increased or decreased based on the inflation situation, akin to Polkadot holding regular interest rate meetings to decide on rate adjustments.
This Schelling point could be a more reasonable approach if implemented this way.
Moreover, if inflation needs to be adjusted, reducing the total inflation rate from 10% to 5% and then adjusting inflation through controlled treasury burns to ultimately lower inflation to 2-3% could be a viable solution.
Achieving a 3% annual inflation rate would result in the total supply being only 142.7% of what it was 30 years ago, compared to a 10% inflation rate leading to a total supply 1644% of the previous amount after 30 years.
However, it’s essential to note that the 5% inflation rate is a target value, and the methods to reach this can be discussed. It could be a direct adjustment or a smoother transition as suggested by Gavin. Still, many projects opt for immediate adjustments to their economic models or reduce issuance to enhance user confidence.
What will the new DOT tokenomic model ultimately look like? The final draft of the Polkadot Gray Paper is expected to be completed by the end of the year, with plans to launch JAM around next summer. Gavin’s various suggestions during the interview are merely interesting designs and not the final version. However, since someone proposed including some of his ideas in a treasury vote, it’s crucial to express our opinions and attitudes to avoid any misunderstandings that could lead to unforeseen consequences.
While the new DOT tokenomic model remains uncertain, discussions surrounding this direction are likely to increase. We hope that Polkadot enthusiasts will not hesitate to voice their opinions at this critical juncture as it directly impacts all DOT holders.
Likewise, we hope to avoid a situation on Polkadot akin to what happened with Brexit. If our viewpoints resonate with you, feel free to share your thoughts on the proposal (https://polkadot.polkassembly.io/referenda/851) in the comment section below. Our account name is (Polkadot Eco Researcher), where we have already shared our views and hope for your support.
