Understanding the Telos Economic Development Plan

A consortium of Telos block producers has sponsored a request for comment (RFC) about an economic development plan that we hope will improve Telos for all participants and offer side benefits throughout the EOSIO community and beyond. As a comprehensive economic plan, the TEDP is complex. Before it is submitted as an amendment to the Telos governance documents, we want to help the community understand how it is intended to work. We also want to request comments about the community’s opinions about the plan. This can only be adopted if at least 55% of voters agree that it is the right path forward. This document is intended to address questions about the plan.

What is the TEDP?

The Telos Economic Development Plan (TEDP) is a set of economic measures intended to boost the adoption, use, and value of the Telos blockchain network and its stakeholders. It includes measures that would increase spending on chain promotion through the Telos Foundation (TF), user-voted worker proposals through the worker proposal system (WPS) and block producer (BP) pay. To offset the negative effect that such selling could have on the TLOS token price, measures such as zero inflation, professional market-making services and liquidity pool funding and significant resource exchange (REX) staking rewards have been added. Longer term, the increased value from the TF spending on chain promotion and marketing and the value added by WPS funded projects are also expected to grow the value of Telos.

What is the Telos economic situation now?

At present, Telos has a token supply of about 351 million TLOS with 4.5% annual inflation. 1.5% inflation is paid into the WPS for user-voted spending initiatives including core development and 3% is paid to block producers to operate the network infrastructure. The 3% inflation pay is scheduled to become 2% in three months and finally 1% one year after the Telos launch. The TF holds about half of the tokens granted to it for chain promotion purposes, most of its spending having gone towards paying for exchange listing fees, marketing services, and conference participation. Apps are deploying on Telos but slowly and the network is underutilized leading to a TLOS price that is approximately 300X cheaper than EOS which is a technically equivalent network in broad terms. Holders of TLOS tokens receive no form of interest or reward for holding their tokens. Telos block producers are paid about $1,100 worth of TLOS each month and 30 standby BPs are paid half that rate. The actual costs to run competitive infrastructure and services vary by BP but are in the neighborhood of $10,000 per month as a conservative estimate. There are no professional market-making or liquidity-providing services operating on TLOS markets which leads to unnaturally wide price swings whenever trading occurs. This in turn contributes to investor concern about future token prices. The Exchange Token Reserve Fund (ETRF) of 140 million tokens were reserved for exchanges and wallet services to claim for their customers as of the EOS genesis snapshot. These could be claimed at any time but so after five months, only about 400,000 have been claimed by BitPie. Only the community can change these distributions via ratify/amend voting which requires a 55% yes vote and a minimum participation threshold at the end of a 29-day voting period.

What would the Telos economic situation become under the TEDP?

Under the TEDP, Telos inflation would become 0%. Whatever the TLOS supply was when the TEDP was enacted, it would be exactly the same number when the program expired, possibly several years later. Funds would flow from the unused ETRF into various funding pools in lieu of inflation.

How would this go into effect?

The TEDP is currently a request for comment, meaning that community opinions are being solicited and heard. Broad-based opinions for improving or modifying the plan may be incorporated to ensure the actual proposed amendment best reflects the community priorities. At some point someone will sponsor the plan as an official amendment to the Telos Blockchain Network Operating Agreement (the TBNOA, our primary governance document). This will require the release of a new version of Sqrl wallet for voting and/or the development of a Scatter-based voting portal. (Both are underway but only Sqrl is essentially ready to deploy at this time.)

Why don’t other chains institute such a plan?

Decentralized blockchains are designed to efficiently maintain consensus about transactions that have occurred on the chain under the existing rules, but most blockchains have no clear way to determine consensus about creating new rules. Telos stands apart from all other blockchains in its clear governance structures allowing all network users — not just developers or validating node operators — to decide how the network will operate. We have the opportunity to make important changes to how our chain operates in just 29 days without risking a splitting of our community. This allows Telos to be nimble in its governance and ensure that changes are supported by the majority of the active stakeholders. In short, no other blockchain can propose such a sweeping program without great risk of splintering their user community. This demonstrates the strength of Telos governance.

What would Telos inflation be under the TEDP?

Under the TEDP, inflation would go to 0%. There would be exactly the same number of TLOS tokens recorded on the chain at the last block of the program as on the first. However, the TEDP would begin releasing tokens that are currently stagnant in the ETRF. These tokens would otherwise be released unpredictably as exchanges claim their accounts.

The TEDP would release more TLOS into circulation, will that hurt the price?

In the simplest understanding of economics, adding more liquid tokens to a trading supply — especially if all are expected to be immediately sold — would be expected to reduce the trading price because there would be additional selling without offsetting buying. However, this understanding is overly simple and makes many assumptions that ignore the other functions of the TEDP.

How does the plan mitigate sell pressure?

The TEDP will directly address the “sell pressure” from the additional tokens injected into the liquid supply with professional market-making and liquidity- providing services and by paying a sizeable reward to all those who stake their TLOS tokens in REX — effectively removing those newly injected tokens from the liquid supply again.

How does market-making and liquidity pools mitigate sell pressure?

Though rarely discussed, professional market-making and liquidity-providing services are the norm amongst new cryptocurrency projects. This allows these coins to trade without huge price fluctuations from thin trading volume. Such services are common to many financial markets, not just cryptocurrencies. The Telos Foundation has found reputable providers for these services but they come at a price that could not be paid for very long without the TEDP. This was, in fact, one of the drivers for this proposal. Markets that absorb large trades smoothly are seen as more mature and trustworthy by traders. There is less likelihood of losing money through large price swings. Employing these and other professional financial services will help TLOS be perceived as a more worthy investment.

How does REX mitigate sell pressure?

REX staking gives TLOS-holders a reason to lock up their tokens that does not presently exist on the system due to low network utilization. Locking up tokens through REX staking will offset the additional tokens entering the money supply by taking them back out of the active money supply through REX staking. Even those earning TLOS through the TEDP are likely to stake a large portion of those tokens because of the ability to earn REX rewards and due to the perceived value of those TLOS tokens being higher than the present value.

If 6.1 million TLOS flow into the economy each month how can 1 million TLOS to REX offset that?

Even though the amount of TLOS paid into REX staking rewards is lower than the amount of tokens injected into the system through BP rewards, WPS and TF funding, the return is high enough — especially compared to all other EOSIO chains — that it will regularly pull more tokens out of the liquid trading supply than the TEDP injects.

The TEDP infographic shows different rates of ROI, what does that mean?

Everyone who stakes TLOS in REX will receive the same rate of return as everyone else staking at the same time. The infographic lists a few important numbers to illustrate what the expected annual percentage rate of return would be based on certain levels of participation. For example, there were about 50 million TLOS tokens recorded on the Telos Original Snapshot at block 6 million. This is around the amount in the accounts of current Telos users. If 80% of these tokens were staked in REX (40 million TLOS), each person staking would receive about 30% annual rate of return. For 100 TLOS staked they would receive 130 TLOS after a year of REX. As participation increases, this rate of return would decrease. There were about 200 million TLOS in the genesis accounts. If 80% of 200 million TLOS were staked in REX (160 million TLOS), each person staking would earn around 7.5%. At the end of the TEDP after all TLOS have in the ERTF have been exhausted, there will be about 351 million TLOS in existence (due to 0% inflation over that entire period). If 80% of those tokens were staked to REX (about 281 million TLOS) the REX annual rate of return would be around 4.25%.

Would everyone participating in REX at a given time receive the same ROI?

Yes. No one would receive more or less based on when they received their tokens.

What is the difference between inflation and increased liquid money supply?

Inflation, in this context, is the rate at which the token supply grows. As of this writing, the inflation rate on Telos is 4.5% annually. If the TEDP is enacted, that rate would go to 0%. However, tokens would flow from the ETRF into the money supply even though new tokens would not be created. The liquid money supply is, in this context, essentially the amount of TLOS tokens that exist in accounts as unstaked or liquid tokens. This includes tokens held by exchanges. Tokens that are staked for NET or CPU resources, or staked for REX are not included in the immediate liquid money supply. Even though tokens are going to be released from the ETRF, they are expected to be staked into REX to earn staking rewards.

I have heard that similar plans have not worked as intended, what is the risk?

Economic systems are often unpredictable and there is always the risk of unexpected outcomes. If markets were predictable, people would not speculate.

How long would the plan last?

The duration of the TEDP is unknown. Several factors will determine its longevity. The amount of tokens available depends on how many exchanges claim their tokens, whether TLOS from unclaimed accounts will be added to this amount when they are retired (scheduled for 1 year after Telos launch)and how many TLOS this would add. It also depends on the price appreciation of TLOS tokens. Telos BPs have the ability to adjust the amounts distributed by the TEDP and will be able to return tokens to the ETRP to extend the duration of the program if the current aims can be achieved with lower amounts of TLOS due to a rising price. The program is most likely to last between two and ten years.

What is the difference between the Exchange Token Reserve Fund and unclaimed genesis accounts?

The ETRF is made up of tokens reserved for those accounts believed to be held on exchanges at the time of the EOS genesis snapshot (with the Telos 40,000 token limit applied to large accounts). This amount of approximately 140 million tokens was an approximation due to many unknown factors but is believed to be close to the correct amount. These funds could be claimed at any time by exchanges who follow the simple documented procedure with the Telos Foundation.

Would the unclaimed genesis accounts be removed under the TEDP?

The TEDP proposed no action regarding the unclaimed accounts at this time. However, the disposition of any accounts that have not yet been accessed will be in the hands of the BPs once the one-year anniversary of Telos passes and they may decide to move those funds into the ETRF to extend the TEDP.

Why haven’t exchanges claimed their Telos accounts?

Efforts have been made to contact exchanges with little effect. It is likely that they have not yet heard enough requests from their customers to care about their TLOS tokens yet. This is most likely a function of the token price. As TLOS token prices rise, exchanges are more likely to claim. Because these token holders held their EOS on exchanges at the time of the genesis, it’s reasonable to expect that they are made of many more investors or speculators than EOSIO technologists. As such they are most likely to sell these TLOS tokens when granted, unless there is a compelling reason to hold them. The TEDP is intended to give these tokenholders that reason so that these tokens are not immediately dump upon distribution.

How would the TEDP affect BP pay?

BP pay would initially increase under the TEDP.

Why not keep BP pay the same?

The Telos BPs and especially the standby BPs currently earn far less income from BP rewards than they spend to operate the network infrastructure. As the BPs perform the crucial tasks of operating the network itself, creating a situation where BP income is not cost-effective means that either BPs will eventually cease to work as BPs or they will drastically scale down their infrastructure and personnel costs to be in line with income. Either of these would reduce the value and resiliency of the network.

Will the TEDP increase whales on Telos?

If the current participants in Telos were to remain the only participants, then the BPs would be likely to accrue an ever larger percentage of the network value through the combination of BP pay and REX staking rewards. However, the increased value and economic activity on Telos due to the TEDP is most likely to expand the Telos community and convince more account holders to claim account, purchase TLOS, and participate in REX in order to receive the rewards. The first participants will receive the highest rewards, but that will not begin until after voting is completed and REX is implemented. Therefore, anyone will have the option to participate. The high early rewards will preferentially reward the early adopters (after passage) but after five months, most of these TLOS holders will be the people who have invested the most in the community to date by holding, buying, or earning TLOS.

GoodBlock is a game and app developer, and block producer candidate for the Telos blockchain network. https://goodblock.io/