Zilliqa tokenomics revision: aligning the incentives for all Zilliqans
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TL;DR
The $ZIL token economy currently does not have enough sink to take in the newly minted tokens. To remedy this, new mechanisms and avenues need to be developed to create an active circular economy that’ll absorb newly minted tokens. New tokenomics are expected to be implemented at the end of Q3.
Breakdown of the changes:
Block reward adjustments
- block reward increase
- block reward distribution adjustment
Creation of a circular $ZIL economy
- recycling of transaction fees
- uncapped (non) custodial staking
- powering Open Finance (OpFi) via $ZIL as medium of exchange
Combating inflation
- increase TX block gas limits
- decrease Scilla operations gas consumption
- increase minimum gas price
ZIL-3
Recently Zilliqa turned 3 and held a virtual town hall to share more about the progress they are making, how they see the future and spoke with various parties from the $ZIL ecosystem. All though lots of interesting topics passed I just want to zoom in on the changed tokenomics for now.
Fancy visuals instead of reading? Tokenomics presentation can be found here.
Zilliqa basics
Let’s start with freshening up how Zilliqa works in a nutshell:
Problem statement
While having realised everything stated in their white paper (2017) is noteworthy in itself there is still some fine tuning left to do on the current $ZIL tokenomics:
Problem: “The $ZIL token economy currently does not have enough sink (further reading: 1, 2 and 3) to take in the newly minted tokens. To remedy this, new mechanisms and avenues need to be developed to create an active circular economy that’ll absorb newly minted tokens.”
Adjustments to the current tokenomics
What are those new mechanisms and avenues to create an active circular economy?
Block reward adjustments
- block reward increase
- block reward distribution adjustment
Creation of a circular $ZIL economy
- recycling of transaction fees
- uncapped (non) custodial staking
- powering Open Finance (OpFi) via $ZIL as medium of exchange
Combating inflation
- increase TX block gas limits
- decrease Scilla operations gas consumption
- increase minimum gas price
As counter intuitive it may seem as we just stated that currently there is not enough token sink for the $ZIL token economy an increase and distribution adjustment in block rewards is proposed to allow uncapped staking with meaningful yields which benefits both $ZIL miners and token holders. While meaningful in Annual Percentage Rate (APR) it will only be meaningful if a circular $ZIL economy can get kick started while at the same time inflation can be tempered.
The circular $ZIL economy consists of recycling transaction fees (instead of miners receiving them directly), uncapped (non) custodial staking and powering an ASEAN focused Open Finance initiative via regulated stablecoins built upon Zilliqa with $ZIL as the connected medium of exchange.
Block reward adjustments
Block reward increase
DS Block rewards are being increased by 40% to 275.000 $ZIL (from currently ~197.000) meaning that while inflation rises uncapped staking with meaningful yields measured in APR can be offered to $ZIL holders.
Block reward distribution adjustment
The DS Block rewards are being reallocated from 5% stakers and 95% to miners to 40% of the block rewards allocated to stakers (via staked seed nodes) and 60% allocated to DS and shard nodes (miners). Want to learn more about the difference between DS and shard nodes? Click here or here.
Creation of a circular $ZIL economy
With an increase and adjustment to the distribution of the block rewards the importance of kick starting a circular $ZIL economy becomes all too clear:
(i) Usage of the network is needed to recycle transaction fees which perpetually replenish the mining address,
(ii) holders are needed to reduce the freely available circulating supply by accepting risk free yields through staking,
(iii) and with the aim to bridge compliant and regulated ASEAN stable coins with USD $ZIL has to be used as the medium of exchange and liquidity incentive to power Open Finance and close the circular $ZIL economy loop.
Thus with these new tokenomics Zilliqa is moving to a state where usage of the network is directly tied to the longevity of the network.
Revising the tokenomics to achieve a circular $ZIL economy consists of:
Recycle $ZIL transaction fees
With inspiration drawn from EIP-1559 transaction fees are not directly paid to the miners anymore but instead are being recycled. Recycling means that the gas paid to the network will be pooled in a special address from where all mining rewards come from. Later this gas can be used for block rewards creating a perpetual supply of tokens if network usage is sufficient.
Uncapped (non)custodial staking
Staking via staked seed nodes (via delegation) has been underway for quite some time. At the beginning of this year Zilliqa Improvement Proposal #3 came out to decentralise seed nodes via the usage of dPoS.
Simply said seed nodes serve the purpose of forwarding transactions to lookup nodes (another type of nodes) and archiving the entire transaction history. Read the ZIP #3 to gain more in depth knowledge. Or check the developer portal.
To incentivise functioning as they are supposed to dPoS is being applied. dPoS allows $ZIL holders to stake via the staked seed nodes while the staked seed nodes receive a staking commission from the yield of the $ZILs that are delegated to them.
Holders can delegate their $ZILs to the staked seed nodes (via a smart contract — the staked seed nodes don’t hold any actual $ZILs) and receive a steady yield while the staked seed node needs to stay online 24/7, archive the whole transaction history and forward transaction requests to the lookup nodes. Two birds with one stone.
Expectation is that uncapped staking will be in place at the end of Q3 and translates to the following APR for $ZIL holders:
Uncapped staking could take a portion of freely circulating supply and newly minted coins -that can not be consumed as gas fees- out of circulation.
Powering Open Finance (OpFi) via $ZIL as medium of exchange
Kick starting the circular $ZIL economy via Open Finance is an important pillar in the revised tokenomics.
While all being about compliance and regulation Zilliqa is trying to gain a foothold in the ASEAN open finance space and their OpFi stack below shows the current progress.
Currently being built is ZILSwap DEX a Uniswap like non custodial cross-chain DEX that is going live in Q3.
Created by Switcheo (SWTH), with Ethereum, EOS, NEO and Zilliqa as supported chains they claim to have solved front running issues and will offer regulated stablecoin pairs via Zilliqa. Regulated stablecoins will start with Singapore Dollar (XSGD) and USD (zBUSD) while IDR (Indonesian Rupiah) and VND (Vietnamese Dong) will follow later.
Liquidity providers will be incentivised to generate liquidity on the $ZIL/XSGD and $ZIL/zBUSD pairs to create decentralised liquidity pools for regulated stablecoins. With IDR and VND expected to be added in the future too.
With Layer 0 to layer 3 nearing maturity Zilliqa aims to provide the building blocks needed by fintech applications (collateralised lending, remittance services and C2B cross-border payments services) to build on top of them.
By aiming to bridge ASEAN stable coins with USD while $ZIL being the related medium of exchange and providing incentives for liquidity providing Zilliqa intends to lay the groundwork for fintech applications to be built on top of it.
Combating inflation
We’ve gone through two out of the three tokenomics changes with the last one being: combating inflation.
From a perspective of valuing Zilliqa, combating inflation is the capstone of these tokenomics changes as in the end it all boils down to increasing usage of the network while keeping inflation low or even negative (deflation).
With usage of the network being the main driver to combat inflation a few changes to the gas mechanics are being proposed:
- Increase TX block gas limits to 2,500,00 (+185%)
to accommodate more transactions for higher throughput capacity - Decrease Scilla operations gas consumption by factor of 8x (~87.5%)
to reduce the gap between gas cost for payment and smart contract transactions - Increase minimum gas price to 0.002 $ZIL (+100%) overall
to increase gas cost overall in order to facilitate more recycling of transaction fees
The table below makes it clear in one glance how increased adoption translates to net percentage inflation:
Final thoughts
Just as countless times before Zilliqa shows it is able to adapt to the quickly changing cryptocurrency and DLT environment.
Be it by building out the Zilliqa platform through long periods of negative sentiment, partnering with blockchain analytics companies to be one of the forerunners when it comes to compliance, to finding solutions to increase smart contact throughput, aligning the tokenomics with the PoS narrative seen currently and kick starting the circular $ZIL economy via the usage of regulated stablecoins.
With the new tokenomics the incentives for all entities involved into the Zilliqa ecosystem are aligned: further increased usage benefits all.
