Bringing forward the inflation halving

General
1

Summary

This forum posts suggest to kickstart Phase 1 of the proposed token economics improvement.

The objective of phase 1 is to reduce the inflation, and thereby the maximum supply.

The suggested method of doing so is to bring the Inflation halving event forward with a change in the inflation parameters to fasten the inflation reduction process, thereby reducing the Max Supply.

Context & current parameters

  1. XPRT inflation was designed to be between 25% to 45% with a target bonding ratio of 67% (lower inflation at a higher bonding/staking ratio and vice versa)
  2. XPRT inflation is now at the 25% mark due to a high bonding ratio (~80.1%)
  3. XPRT bonding ratio has consistently been higher than 67%, thus reducing the effective inflation rate
  4. The staking APR is currently ~28.38% (after validator commission)
  5. The inflationary issuance is distributed to the community pool (10%) and XPRT stakers (90%)
  6. Inflation halving is expected every two years (dependent on block times). The halving time (2 years) calculation is based on block times, not seconds. However, block times were expected to be 5s at launch. Still, due to various reasons (such as a more decentralized validator set, chain upgrades, apps on the chain, etc.), block times have skewed towards the 6s mark, thus resulting in delays to the inflation halving. The inflation halving is expected to start around August 2023.
  7. Once the halving event happens, the inflation will take about eight months to reduce to 12.5% (if the bonding ratio remains the same). This is because the halving event only halves the minInflation and maxInflation parameters to 12.5% and 22.5% (currently 25% and 45%), then continues to let the inflation rate change mechanism do the work to gradually reduce inflation until the target bonding ratio is reached, or until the minInflation is reached.
  8. Based on genesis parameters for inflation, XPRT max supply is ~403M

Suggested change in inflation parameters

Inflation Min = 12.5%
Inflation Max = 22.5%
Inflation Rate Change = 2.5
Blocks per year = Update based on current average block time (~6 seconds)

This is effectively bringing forward the inflation halving. The core 1 team will then have to recalibrate the halving module to ensure the next halving is scheduled 2 years after the effective change of the above parameters.

Impact of change

The expected output halves inflation in the next ~3 months to 12.5% from the current 25% if the bonding ratio stays above 67%.

For inflation to reach 12.5% or within the new range at the current inflation rate change of 1, it will take about ~7.5 months at the current bonding ratio of ~80%. As the bonding ratio decreases, the time required to reach 12.5% IR increases. Changing this parameter to 2.5 will reduce inflation to 12.5% faster (in less than three months).

With future inflation halving every two years, the issuance of XPRT would keep reducing with more dapp activity on the chain, thus creating a soft max supply of XPRT, which would be variable but substantially less than 403M.

Currently, ~117.5k new XPRTs are issued daily. With this new inflation rate of 12.5%, new XPRT issuance will reduce by 50%

Validator Economics

Changing inflation will also impact validator economics. To counteract the reduction in validator earnings, MEV capture and sharing should be introduced (Phase 2). More details on the validator economics can be found in this document: [v1] XPRT Tokenomics improvements - Google Docs

After the upcoming chain upgrade, validators will also have the option to suggest an overall commission minimum via governance to ensure validator operations remain viable. Initially this minimum will be set at 5%, as decided in proposal 18.

We strongly suggest validators to engage in this discussion to come up with viable long-term solutions for both the chain and the validators.

Action Items

  1. Review the linked posts and documents and ask any questions in case things are not clear
  2. Share your feedback on this specific phase by replying to this forum post
  3. Engage in the discussions around the other phases of token economics improvement
4 Likes
2

Totally agree, thanks persistence team for the amazing job and community involvement.

4 Likes
3

Phase 1 of the Tokenomics Revamp looks great to me. I doubt there will be a substantial drop in the bonding ratio since most of the XPRT stakers are long-term investors. There are little to no people staking for the high APR.

Consider setting the minimum and the maximum Inflation Rates even a bit lower. The reason is that even if the bonding ratio will lower drastically (which I doubt), we will have other security measures in place such as Interchain Security, Mesh Security, and Babylon’s Bitcoin security. Those could bolster the security of the chain, even in the case of a lowering bonding ratio.

With Phase 1 on point, more attention needs to be given to the other phases. As a Liquid Staking Hub, validators and stakers should earn from the activity on the chain. A good approach would be imposing a fee for all activity occurring on core-1 dApps. As activity is relatively low right now, it won’t have a noticeable effect on the staking APR. But, it will change in the future (that’s what all of us want, of course).

3 Likes
4

After going through the XPRT Token Economics Improvement Proposal and the topic on advancing the inflation halving, I value the initiative taken by the team to address these crucial matters. I am in favor of accelerating the inflation reduction process by modifying the parameters as proposed. This change will benefit the ecosystem and contribute to a more sustainable token economy.

At the same time, I’d like to highlight the significance of keeping validator economics in mind. It’s encouraging to see that the introduction of MEV capture and sharing (Phase 2) is planned to offset the decrease in validator earnings. It’s essential to engage validators in these discussions and discover long-term solutions that cater to the interests of both the chain and validators.

I’m eager to witness the development of this proposal and its influence on the Persistence ecosystem.

3 Likes
5

I’m not a financial or economic expert, more technical side, so correct me if I’m wrong. I support all that described in documents above. Do I understand correctly that the purpose of all this is to force to switch ordinary stakers to liquid staking?

6

The goal is definitely never to force anyone to do anything. In the end, everyone should make their own decisions based on what they are most comfortable with. If you look at it from a pure economics perspective however, as inflation reduces, alternative DeFi opportunities such as providing Liquidity on an exchange (such as Dexter) may become more attractive for people who understand and manage the risks.

Once liquid staking for XPRT (stkXPRT) is live, users will be able to stake XPRT and then use stkXPRT in DeFi at the same time, so the trade-off wouldn’t even be there anymore…

7

Quick update here:

I was trying out the proposed changes on testnet and noticed 2 important things which I didn’t realise before:

  1. The inflationRateChange parameter has to be between 0 and 1, so the proposal of having it set to 2.5 to increase the speed of inflation is impossible.
  2. The halving was programmed to change minInflation from 25% to 12.5% and maxInflation from 45% to 22.5%. With these parameters, at the time of this halving (and actually every following halving too), there would actually be an immediate and sudden shock to inflation from 25% to 22.5%. A design oversight in my opinion, where to me it would make more sense to keep things gradual at all times.

Since the staking ratio is high enough to make inflation drop quite quickly, I don’t think either of these are a big issue, so I suggest to move forward by doing the following (a slightly more conservative approach than originally proposed above):

Inflation Min = 12.5%
Inflation Max = 25.0%
Inflation Rate Change = 1 (remains unchanged: the maximum value)
Blocks per year = 5259600 (= updated based on current average block time (~6 seconds)).

I will post the governance proposal for this on-chain in one of the next few days so we can at least keep the ball rolling on phase 1 and keep discussing on the other parts of the token economics improvement proposal.

As always, looking forward to hearing everyone’s thoughts and feedback!

8

This proposal is now LIVE for voting:

9

We appreciate the proposal to kickstart Phase 1 of the token economics improvement plan. Reducing inflation and the maximum supply is an important step toward creating a more sustainable ecosystem for XPRT.

1 Like