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.
WPS funding would more than double from about 432,000 TLOS per month to 1 million. The TF would receive ongoing funding of 1 million TLOS per month to promote Telos through grants, conferences, marketing initiatives, and other services possibly including additional exchange listings. BP pay would essentially triple from their levels one month ago to 3.6 million TLOS per month to support network infrastructure.
A BP-administered fund would pay for professional market-making and liquidity-providing services to add liquidity and stability to trading markets, reducing the wild price swings from trading. One million TLOS per month would be paid into the REX staking rewards pool which would pay rewards of over 30% annual percentage rate (APR) to early participants which would reduce as more TLOS participated in the program reaching about 4–5% APR when at the end of the TEDP program. The Telos BPs would have discretionary power over distribution of the 7.1 million tokens distributed monthly, including the ability to send tokens back into the ETRF for future use as the TLOS price rises and fewer tokens are required to reach the same economic goals.
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.)
The proposal would include changes to the official version of the TBNOA as stored online in IPFS. If enacted by a vote of 55% yes votes (ignoring abstain votes for the purposes of determining majority) and above the threshold of voters at the end of 29 days, then the system contract eosio.amend will automatically replace the previous versions of the TBNOA clauses being voted on with the proposed ones. The Telos Core Developers (or some developers) will then work to modify the source code for the contracts effected by the new governance rules and propose it to the Telos BPs at the time to implement it by a 15/21 vote. The code would then go into effect immediately. It is expected that if the vote is seen as highly likely to pass, the TCD will begin work on the code ahead of the final tally to more swiftly implement the code.
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.
In the future, the price of cryptocurrency tokens is likely to better reflect its actual value as a portion of the token economy. At present, however, the most impactful component of token pricing is speculation. Investors speculate on the near future value of a token, purchasing those they expect to appreciate in the near future and selling those they expect to depreciate or simply appreciate at a lower rate. Traders often even sell tokens that they like for the long term in favor of those they think will appreciate faster short- term with the intent of buying more of the favored token down the road. Without clear utility value to rely on, traders typically gauge the value of any given token based on their perception of how others in the market perceive that token’s short-term value. A trader essentially trades based on what trades they expect other traders to make in the near future. This is true even of speculative markets where the end products have real and immediate scarcity and utility, such as crude oil or soybeans. It is far truer in cryptocurrency where the utility of tokens is mostly far in the future and the current price model is simply a discounted part of that expected future value. ln this way, the price of any token represents, more than anything else, the perceived value of that token by the majority of other traders in the immediate term. In short, the perceived value of any token is its actual market value.
The strongest force acting on the value of any cryptocurrency token is neither supply nor demand but the perception of what near-term valuation others in the trading economy are likely to give a token. If the additional tokens in the supply go up AND traders think this will make the price go down, then it will. On the other hand, if traders believe that the offsetting measures are likely to have a greater positive impact on the token price than the increase supply, then the price will go up. We have a very recent example of this available from EOS, which recently destroyed $160 million worth of EOS tokens without receiving any price increase attributable to this token burn. The traders did not believe that this would increase the value of the token and so it did not.
The TEDP has important measures to offset the spending that are designed to both increase the actual value of the Telos economy long term through marketing, development, and the like while increasing the expected value of TLOS short term through REX staking rewards, long-term 0% inflation, and increased trading volume and liquidity through professional market-making services. These measures are well understood by traders. Significant staking rewards are well known to improve the price of other tokens. Often these end up having value of limited duration but that is only because it becomes apparent that the underlying token does not offer any real technical advantages. Telos, however, offers very significant technical advantages over any system and is experiencing an unnatural period of price depression compared to its closest relative, EOS, with which it has technical parity and therefore should derive some multiple of its value simply through arbitrage. The typical arbitrage value of a close fork of a major coin is around 10–15% of the original coin’s value. As more traders encounter Telos due to its impending CoinMarketCap listing, it is natural that they will perform a similar arbitrage and find the present value difference of 1/300th of EOS’s value for a comparable system (let alone one with measurable advantages) to be too low in classical terms and worthy of purchase for this arbitrage value alone. More importantly, traders will expect other traders to see this arbitrage opportunity and act on it. On top of these purely economic measures, any positive developments to the Telos system will accrue to the perceived value of the token. Many of these are coming soon. Even the very passage of the TEDP will demonstrate great value of the Telos system through its unique and responsive governance tools.
REX staking is expected to increase demand for TLOS by paying a significant reward to those who lock up their TLOS tokens to earn REX staking rewards. With this proposal, Telos will become the first and probably only public EOSIO token with a meaningful ROI through staking. This will be in addition to any ROI from token appreciation. To many investors, this will be an extremely attractive combination. Early adopters can be expected to stake their tokens and earn a high reward. This pulls tokens off the exchanges, particularly for the many investors who like Telos long-term but expect something else to appreciate more rapidly short-term. It flips the expectation of perceived value because anyone who sees the long-term value of TLOS no longer sells it off for EOS with the expectation that EOS will rise and TLOS will remain the same therefore allowing more to be bought in the future. In this scenario, TLOS can be expected to rise more rapidly and pay a staking reward to boot.
In summary, TLOS token value is currently depressed not because of supply but due to the perception that it there is no immediate driver for rapid price appreciation and therefore speculators have the opportunity to trade in other tokens for better immediate returns and little risk of missing a big price jump in TLOS. This is true even among those who expect TLOS prices to rise over the medium to long term.
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.
There have been other projects that have tried distributing inflation or unused tokens to users through staking rewards. Many such systems have been extremely successful. DASH and PIVX are examples of hybrid proof-of-stake tokens that that have had long term success from staking rewards. Many clones of these systems have had short term success from staking rewards that ultimately crashed because despite the staking rewards, the token had little underlying value aside from this reward. Investors found themselves holding more of a token that was worth less, especially when these rewards were simply inflation and thus largely offset. Neither of these cases are true of Telos which has very significant intrinsic utility value in terms of system resource use and will not inflate its token supply during this period.
PixEOS has been mentioned as a recent example of a project which distributed unsold ICO tokens to its users as staking rewards, only to drive down its own token price. There are two important differences to Telos here. First, PixEOS had the option of never distributing those unsold tokens. They were effectively outside the token supply having never been distributed. On Telos, however, the tokens in the ETRF were “live” and could be claimed at any time. There is no way or expectation that they are permanently to be excluded from the token supply. More important, PixEOS is a drawing game that pays rewards. Telos is a platform that can run thousands of apps like PixEOS. The value of the systems are significantly different and outcomes from PixEOS are cannot reasonably be expected to be the same on Telos.
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.
The unclaimed genesis accounts are accounts created at the Telos genesis (generally the same as those on the EOS genesis) that have never initiated a single action and therefore never opted-in to the Telos governance agreement. In the TBNOA it is stipulated that these accounts may be forfeit after one year based on the determination of the BPs at that time. These accounts can be claimed at any time simply by having the owners perform any single action on their accounts.
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.
Telos WPS proposals are seen as having a very positive effect on the overall value of Telos and the BPs support these. However, there have been proposals passed which, while valuable to the network, pay their recipients more than a Telos BP would earn in over a year of operations. The economics have drifted out of whack because the current Telos BPs have great faith in the long term value of the system. However, they are operating at a significant loss. The small number of people with the most knowledge, expertise, and investment in the Telos system are paying around $10,000 per month to operate infrastructure that brings in about $1,200 per month worth of TLOS (around 24,000 TLOS for a top 21 BP and half that for a standby BP). They would be smarter, economically, to support Telos from afar and use that $10,000 to buy 200,000 TLOS each month. If the BPs decide that this is a better course of action for them, then they will begin to opt out and the Telos infrastructure will weaken. Moreover, without action, the amount of TLOS BPs will earn each month will drop 33% in 3 months and then drop an additional 50% four months after that. Therefore, so action is needed. However, as the TLOS price rises, this BP pay can be gradually reduced in terms of TLOS so as to release fewer tokens into the economy and extend the duration of the program.
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.
The Telos genesis cap on whale accounts corrected the disproportionate token distribution that existed on EOS. While there may be some increased concentration of TLOS due to the TEDP, it will be orders of magnitude less than what exists on EOS and below the threshold of where it would adversely affect equitable voting on Telos.
About the author: Douglas Horn is the Telos architect and whitepaper author, and the founder of GoodBlock, a block producer and app developer for the Telos Blockchain Network.