Nov 18, 2021
The Current State of Governance of the Internet Computer and Proposals for Tokenomics Improvements that Incentivize Long Term Participation
by Wenzel Bartlett, Kyle Langham , and Alex Mucalov
November 17, 2021
After reading this article, please join the discussion at: https://forum.dfinity.org/t/proposal-to-change-dissolve-delay-bonus-and-age-bonus-parameters/8661
Abstract
The current structure of the Internet Computer NNS entails risks that require attention by the IC community. The current NNS tokenomics parameters have failed to i) attract sufficient new participants to offset the dissolving stakes of current participants, ii) encourage current participants to remain committed long term to the IC, iii) address conflict-of-interest risks that may prevent the IC from executing its mission long term. This article explores those risks and proposes a solution with the intent of driving a community conversation and executing an NNS proposal for vote.
Introduction
It has been over 6 months since the genesis launch of the Internet Computer (IC) that occurred on May 10, 2021. ICP is the governance utility token for the IC network nervous system (NNS) and the tokenomics were explained in the white paper published by Dfinity Foundation provided before the launch (1). The article indicates that “the purpose of the NNS is to allow the Internet Computer network to be governed in an open, decentralized, and secure manner” and that “the NNS can perform tasks such as upgrading node machines to update the protocol or apply security fixes, tweaking economic parameters, or forming new subnet blockchains to increase network capacity, at any time.” In a more recent article (2), Dfinity explains that “all aspects of the Internet Computer, including governance, can be modified through NNS proposals, giving the ICP community the power to guide the blockchain’s evolution and optimize it for developers, entrepreneurs, and users.”
To evaluate IC stakeholders’ current commitment to the governance of the IC network, NNS neuron data was extracted from the ic.rocks website using an API query from PowerBI data analytics software. Genesis neurons are neurons that were included in the initial allocation at the time of Genesis Launch. Non-genesis neurons are neurons created after launch and are not associated with the initial allocation. The neuron data was exported into a spreadsheet (3) on 31-OCT-2021 to facilitate manual calculations of voting power of each individual neuron in a way that enables a quick change of tokenomics parameters to test potential voting power distributions. It is recognized that ic.rocks is unable to know all neurons and this analysis produced a total voting power approximately 5% less than the reported total voting power of the NNS. It is likely that this analysis does not include approximately 5% of neuron voting power, which is believed to be exclusively non-genesis neurons.
Based on a review of available NNS neuron data, there appear to be several problems with the current state of participation in NNS governance. Staking is not taking place at the rates that should be expected and desired for decentralization. As indicated in the Calculating Voting Rewards section of the tokenomics white paper (1), “we begin by deciding that 90 percent of the total supply of ICP should be locked in neurons. Then we estimate what returns, in the form of newly minted ICP, must be provided to those locking their ICP to incentivize 90 percent participation.” At a bare minimum, we should be moving toward that goal, meaning the percent of all ICP that is staked on the NNS should be increasing. However, over the past 6 months, ~2M ICP dissolved per month and only ~0.5M ICP was staked in new neurons. So, on average, the NNS has been losing around 1.5M ICP per month. This attrition will most likely worsen in 2022, as the average month in 2022 currently shows ~4M ICP dissolving. Some of this loss is offset by governance rewards “topping up”, but it is accurate to say that the percent of total ICP supply staked in the NNS is decreasing (from 51.17% in late June to 49.43% in late October) and is trending to continue to decrease into 2022. This should be a concern for all stakeholders in the Internet Computer.
In the Cryptoeconomics section of the white paper (1), it is communicated that “the long-term success of the network will best be served if neuron owners vote with a long-term view toward maximizing the value of the network in the distant future. For such reasons, the NNS incentivizes neuron owners to make their dissolve periods as high as possible, by disbursing greater rewards to neurons the greater their dissolve periods, which can be configured up to eight years.” As can be observed from Figures 1–4, genesis neurons with 0-to-4-year dissolve delays that are dissolving make up 50.6% of ICP in non-dissolved neurons and 36.6% of total voting power of the NNS. It is concerning that many genesis neurons have neither increased their dissolve delay nor kept their neurons locked. The NNS governance incentives appear not to be significant enough currently to convince these genesis neuron owners to increase the dissolve delays as high as possible or to remain locked.
This situation also creates a security concern, as there are many seed investors and early contributors who have evidenced a disinterest in remaining committed to the IC long term, in that they have chosen not to lock their neurons or increase their dissolve delays. Approximately 36.6% of voting power on the NNS is controlled by genesis accounts that are dissolving with less than 4 years remaining. Many of these entities could well have other blockchain investments or Big Tech investments that are directly threatened by the IC, and it is possible that they could execute governance actions with nefarious intent with little warning and a reasonably well-coordinated effort. This is especially worrisome given the recent change to a Simple Majority voting mechanism, according to which only 3% of total voting power is required to vote in favor in order for a proposal to be accepted. By way of illustration, the bitcoin integration roadmap proposal (5) only passed 14M Accept to 10M Reject before DF and ICA voted. Most Reject votes appeared within the last couple of hours before liquid democracy ended the vote (the Absolute Majority voting mechanism applied at the time and Dfinity Foundation had publicly committed to following the majority at the end of the manual voting period). There was very little by way of dissent in the roadmap discussion in the IC forum to reflect this many Reject votes, so this Reject vote count at the end of the voting period was surprising. It is difficult to imagine 10M in voting power not wanting to integrate BTC with the IC for bona fide reasons, especially when the purpose of this roadmap motion proposal was just to decide if the Dfinity team should put effort into developing this capability further.
In summary, we have not increased the number of non-genesis participants significantly, we have not incentivized existing participants sufficiently, and there is a potential security threat with the amount of voting power held by shorter term neurons. Hence, it may be time for a change to some of the tokenomics parameters to make long-term staking more attractive. The remainder of this article will describe some mechanisms to accomplish this task.
The Problem — Current Tokenomics Parameters
Voting Power is calculated by the NNS as shown in the equation below.
VP = ICP Stake * Dissolve Delay Bonus * Age Bonus
Hence, the main tokenomics parameters that govern voting reward distribution are the max dissolve delay bonus (2x), the max age bonus (1.25x), and the time it takes to achieve the max age bonus (4 years). All genesis neurons were vested at 48 months or less and most were pre-aged at 18 months.
Figure 5 provides interesting visibility into why so many genesis neurons do not have incentives to keep their neurons locked and to increase the dissolve delay. There is an insignificant difference in the voting rewards between dissolving and locked neurons because the age bonus is too small, and the duration to reach a meaningful age bonus is too long. There is effectively no voting rewards penalty for the decision to dissolve a neuron, especially today since there are no neurons that have achieved anywhere close to the max age bonus.
An even bigger problem is that voting reward distribution disproportionately favors lower stake duration. The voting reward yield is currently 1.9x greater for an 8-year neuron when compared to the reward yield of a 6-month neuron, yet it requires a 16x longer time commitment. This is a significant discrepancy in voting rewards compared to the time commitment it requires. Hence, the governance participation incentives greatly favor genesis neurons that are dissolving.
The Proposed Solution — Proposed Tokenomics Parameter Changes
There are two solutions to this problem that require only coefficient changes to the tokenomics parameters related to dissolve delay bonus and age bonus. These two ideas, described below, are worth a formal motion proposal in the NNS to enable a proper vote to see if a majority of voting power agrees. (Several other ideas to incentivize long term staking have been considered, but are still being developed, and will be the subject of a future article.)
Before continuing, it is worth emphasizing up-front that none of the parameter changes proposed in this article would affect the total voting reward inflation schedule of ICP. The parameters in question only change the distribution of the voting rewards among the neurons in the NNS as weighted by voting power. It should also be pointed out that these proposed changes would not discriminate between genesis or non-genesis neurons or the amount of ICP staked in neurons: if a neuron owner is committed to long term participation in IC governance, then they would be rewarded in proportion.
Proposed Change #1: Increase the Maximum Dissolve Delay Bonus
There are two lines of code that enforce the current dissolve delay bonus (4). The calculation of dissolve delay bonus is a linear function that ranges between 1x and 2x over the 0 to 8 year acceptable range. The assert function caps the dissolve delay bonus at 2x.
let d_stake = stake + ((stake * d) / (MAX_DISSOLVE_DELAY_SECONDS as u128));
assert!(d_stake <= 2 * stake);
The change that will be proposed is to increase the maximum dissolve delay bonus to 8x. The changes that would be necessary to accomplish this task are shown below.
let d_stake = stake + ((stake * 7 * d) / (MAX_DISSOLVE_DELAY_SECONDS as u128));
assert!(d_stake <= 8 * stake);
This increase in max dissolve delay bonus serves to increase the slope of voting power to more heavily favor neurons with higher dissolve delays and to encourage NNS participants to increase their dissolve delay.
Proposed Change #2: Increase the Maximum Age Bonus and Reduce the Time to Reach It
There are three lines of code that enforce the current age bonus (4). The calculation of age bonus is a function that ensures that the age bonus ranges linearly between 1x and 1.25x over a 0 to 4 year timeline. The assert function caps the age bonus at 1.25x.
pub const MAX_NEURON_AGE_FOR_AGE_BONUS: u64 = 4 * ONE_YEAR_SECONDS;
let ad_stake = d_stake + ((d_stake * a) / (4 * MAX_NEURON_AGE_FOR_AGE_BONUS as u128));
assert!(ad_stake <= (5 * d_stake) / 4);
The change that will be proposed is to increase the maximum age bonus to 2x and to reduce the accumulation period for the age bonus to 6 months. The changes that would be necessary to accomplish this task are shown below.
pub const MAX_NEURON_AGE_FOR_AGE_BONUS: u64 = 1/2*ONE_YEAR_SECONDS;
let ad_stake = d_stake + ((d_stake * a) / (MAX_NEURON_AGE_FOR_AGE_BONUS as u128));
assert!(ad_stake <= (2 * d_stake));
The age bonus differs from the dissolve delay bonus by having a smaller impact on voting power and by accumulating over time instead of instantly. The age bonus currently takes 4 years to reach its maximum benefit and it is capped at only a 25% bonus in voting power. However, there is a utility in its implementation that makes it meaningful for discouraging the dissolve of a neuron. For this to be an effective deterrent, the age bonus needs to be significant in a relatively quick timeframe. The moment a neuron starts to dissolve its age is reset to 0 and the age bonus goes away. At 1x to 1.25x age bonus range with a 4 year accumulation period, the accumulated age bonus has a trivial impact on the decision to dissolve. However, if the maximum age bonus were 2x and the time it takes to reach that maximum age bonus were decreased to 6 months, then the decision to dissolve a neuron would have a big impact on voting reward yield for that neuron owner. The decision to dissolve the neuron with an age of 6 months would immediately reduce the voting reward yield in half. This parameter change is intended to encourage neurons to remain locked without dissolve.
Results of Proposal on Existing Voting Power and Voting Reward Yield
Figures 6–9 show the results of the changes described in this proposal on the voting power and voting reward yield based on the current neurons that participate in governance. The google spreadsheet (3) linked in the references is provided to enable anyone to go check the math behind the claims made with this data. Users are encouraged to download the spreadsheet and test different parameters in yellow on the Proposal tab. This will give a better idea of how these parameters affect voting reward yield distribution compared to the current dissolve delay bonus and age bonus parameters.
Figure 9 is especially helpful in understanding how the reward distribution would change. Basically, any neuron with a dissolve delay larger than 2.75 years, not dissolving, and 6 months age would see an increase in voting power and voting rewards yield. Any neuron with a dissolve delay less than 2.75 years and not dissolving as well as all dissolving neurons would see a decrease in voting power and voting reward yield. This change would move the voting power of neurons with an 8-year dissolve delay (not dissolving) from 36% of the total voting power to 57% of the total voting power. It would also change the ratio of voting rewards yield from 1.8x to 5.5x when comparing 8-year locked neurons to 6-month locked neurons assuming the same age bonus. These parameters seem more likely to encourage long term staking and put the majority of voting power within neurons that are staked for 8 years and are not dissolving.
Importantly, while some existing neurons would be negatively affected by these proposed changes — namely, those that are dissolving with shorter dissolve delays — there is nothing preventing neuron owners who are dissolving their neurons or have lower dissolve delays from deciding to stop dissolving and to increase their dissolve delay to receive the benefits offered by these changes. In other words, these changes would be applied equally to all participants, allowing anyone to take advantage of the greater incentives going to those who commit to the long-term good governance of the IC.
NNS Proposal Logistics
The 2 changes described above will be the subject of a formal NNS proposal to be submitted in the near future. The plan is to publish this article on medium.com and to submit a post on forum.dfinity.org in the Governance category, describing intentions to file the formal NNS proposal recommending updates to the NNS dissolve delay bonus and age bonus parameters. The post will include a description on the background (problem to solve), the proposed solution, thoughts on how the solution should be implemented, and other details and links that will help the community understand and discuss the proposal. A link to this article will be provided along with other links to other relevant information. After that post is submitted on the forum, announcements will be made on Twitter, Reddit, Telegram, DSCVR, and Distrikt. We will ask everyone to get the word out regarding this proposal and join the conversation.
A time period of one week will be provided for deliberation on this proposal in the forum. The final days will be used to wait for quiet on the deliberation. If new, insightful, and actionable comments continue in those final days, then the deliberation period will be extended. Otherwise, seven days after making the forum post the formal NNS proposal will be made on this topic. The exact content of that proposal will be shaped by the ideas presented in this article as well as actionable feedback that occurs during deliberation as long as they move staking performance closer to the 90% goal and can incentivize maximization of dissolve delay.
During the deliberation period, it will be determined if the formal NNS proposal should be a motion proposal in which the outcome includes an expectation that Dfinity will develop and implement the code, or in the alternative whether the NNS proposal should actually include the code that will be changed automatically if the proposal is adopted. A formal NNS proposal will then be submitted following that determination.
Subsequent to the formal submission of this proposal to the NNS, and per the current voting mechanisms in place in the NNS, the proposal will be executed or rejected within 24 hours by Simple Majority if Dfinity foundation chooses not to vote. If Dfinity does choose to vote, then the proposal will be decided by Absolute Majority by way of liquid democracy.
Concluding Remarks
There is no better time than now to propose changes to the tokenomics parameters that favor long term staking incentives. All the changes that are discussed in this article would benefit neurons that are participating in governance with the longest dissolve delays without dissolving. Neurons with shorter dissolve delays and neurons that are dissolving would have a reduction in voting power and voting reward yield. Yet the disadvantaged neuron owners currently control 64% of the total voting power in the NNS. Hence, proposals based on these changes can be made in good faith because the negatively affected parties can easily vote to reject the proposal.
As previously mentioned, none of these proposed tokenomics changes would affect the total voting reward inflation schedule of ICP. These proposed changes would only affect the distribution of the voting rewards among the neurons in the NNS as weighted by voting power. These changes would not discriminate between genesis or non-genesis neurons or the amount of ICP staked in neurons: if a neuron owner is committed to long term participation in IC governance, then that owner would be rewarded in proportion. There is nothing preventing existing neuron owners with lower dissolve delays or dissolving neurons from deciding to stop dissolving and increase their dissolve delay to receive the benefits offered by these changes.
Changes to the tokenomics parameters like this must be community-driven and would be a good demonstration of decentralization of the Internet Computer. Whether a proposal based on these ideas passes or fails doesn’t matter from the perspective of decentralization, as long as it is executed in a transparent way. There will be resistance to these ideas, but opposition and debate is healthy for a robust governance system. No matter how this vote goes, our hope is that this proposal generates a high level of participation among IC stakeholders, translating into significant active voter turnout, and ultimately resulting in the IC community collectively learning something useful about decentralized governance on the IC.
Full Disclosure
Wenzel Bartlett goes by the social media pseudonyms of @BartlettWenzel (Twitter and Telegram), u/sayitkind (Reddit), and @wpb (DSCVR and Distrikt). He has staked ICP in non-dissolving neurons with dissolve delay of 8 years. All his ICP was purchased on exchanges after ICP genesis.
Kyle Langham goes by the social media pseudonyms of @KyleLangham (Twitter), Kyle L (Distrikt, Telegram), @Hodor (DSCVR), u/HodlingHodor (Reddit). He has staked ICP in non-dissolving neurons with dissolve delay of 8 years. All his ICP was purchased on exchanges after ICP genesis.
Alex Mucalov goes by the social media pseudonyms of @ayjayem1 (Twitter), alexmucalov (Distrikt), and @ayjayem (DSCVR, Telegram). He has staked ICP in non-dissolving neurons with dissolve delay of 8 years. All his ICP was purchased on exchanges after ICP genesis.
References
3 https://docs.google.com/spreadsheets/d/1ojcPLCGEEKSR2Lf3O1gRKccEwA6oFpFU94vfvA4tcdo/edit?usp=sharing
The google spreadsheet linked in reference 3 should be View Only, but can be downloaded and edited to review the content in detail. Adjust the parameters in yellow to model difference scenarios. Contact wpbartlett@gmail.com if an Excel version is needed.
