Remove Inflation from Proof Of Stake Nois Network
Why is there inflation in the first place? What about validators?
Disclaimer: The following article is intended to be a thought-provoking piece and should not be taken as a concrete plan or implementation. The ideas presented are purely hypothetical and may or may not be feasible or appropriate for implementation in the future. This has also not been discussed with the rest of the team but just me thinking out loud.
In an economic system, inflation is generally meant to incentivise participants or actors that are not sustainable in the short term but are needed for the common health of the ecosystem. Typically, governments invest in long-term projects that are not very profitable on the short-term but are necessary for the public good, such as long-term research, education, and public well-being. Because these projects are not economically sustainable, the central bank creates money to buy government bonds that fund them. Emitting new money in the economic system slightly decreases the value of all holders of that money by a small amount to invest in something that nobody would have been willing to invest in otherwise but everyone can take advantage of.
Now, imagine that there could be a perfect economic system. In such a perfect system, all actors have a role to play and are well-compensated to do so. Even for public goods, there is always one actor that can align their direct interest with this common interest. In such a system, inflation would not be necessary because every actor is already sustainable. Therefore, trying to design a perfect ecosystem is trying to get an incentive for every participant that is not an inflation incentive but an actual compensation for a real job that someone else is willing to pay for. So, one should aim to find an economic incentive for every actor, including the ones that bring common goods. Every actor or component that is removed from the inflation list is a win for the ecosystem because it becomes a self-sustainable component.
In blockchain, designing the tokenomics involves matching many roles that need to be done by an actor with another actor that is willing to pay for them in order to earn even more. You need to find incentives for each of them so that everyone accomplishes their role in a sustainable manner. Some roles are easy to reason about because they contribute directly to someone else’s profit so that counterparty will directly incentivise/pay them. For example, in a marketplace blockchain, there is a clear incentive for a seller looking to make a profit out of a product they don’t need anymore and a clear incentive for the buyer who needs that product and is ready to pay money to the seller to get it. However, it is harder to find an incentive for the 100 independent operators hosting the frontend of this decentralised platform, and it is even harder to find the incentive for the person checking for security vulnerabilities related to the programming language that the platform is programmed with.
In Cosmos chains, inflation is used to incentivise non-profitable participants such as validators. The reason why validators receive inflation is that they are not directly profitable, even though they bring an actual service of running the chain’s code, securing it, and computing every on-chain transaction.
Most protocols design their inflation to start at high values, sometimes even higher than a yearly 100% inflation, and slowly decrease that throughout the years, hoping that validators become more profitable.
Validators provide a computation service that should be paid for. There is already a payment system for that and that is gas fees. So such protocols that decrease the inflation estimate the amount of transactions will increase over the years in a way that validators will get more compensation from gas fees such that the inflation part that goes to the validators is not needed anymore.
Some networks, like price oracle blockchains or randomness beacon blockchains, have the “luxury” to start with a big number of on-chain transactions and the luxury to also predict quite accurately the amount of transactions that will happen in the future. The reason why this big amount of transactions can happen already from the genesis of these chains is that there is enough incentive for some participants to create such a relatively big amount of transactions even with early adoption. In Nois Network, a blockchain that sells randomness to other chains over IBC, the drand-bots submit frequent transactions on-chain to bring and verify randomness.
This can be an opportunity to design Nois in such a way that the gas fees paid by the drand-bots are enough to pay the validators to keep running their infrastructure. Increasing the gas prices until the validators get as much gas fees rewards as the inflation would and thus removing the need for inflation. Validators would then be one less component getting rewards from the inflation and will instead get rewards from some other already well incentivised actors which are the drand-bot operators.
Many people think that gas fees should be as low as possible and the lower they get, the better the chain. However, I think the best gas fees are when those fees pay everyone fairly, including the validators who run your transaction, plus a small bonus to encourage them stay in business. Therefore, low fees can lead to an unsustainable ecosystem. When making such a change, gas fees become higher and drand-bots would start paying much more, so we need to think about increasing their rewards as well to make sure they not only break even with the fees but also make some bonus that keeps them in business.
These drand-bots are incentivised by the Nois icecube smart contract which holds a large token supply that is staked. The Nois icecube should not have a problem keeping up with such high fees to pay drand-bots because it will collect back those fees from the gas spent by the drand-bots(the icecube is a token staker and stakers collect gas fees). The gas rewards will, of course, be shared with other stakers, but you get the idea.
The other actors that can be unhappy about this change are IBC relayers because they pay relaying fees, increasing gas fees means making their job more expensive. But at Nois, we already have ways to incentivise relayers, so we can simply increase those incentives.
The other actor who also won’t be happy with the gas price increase is the regular token holder who executes other non-protocol-specific transactions, such as transferring tokens or delegating. This regular user should pay the fair price to actually pay the cost of validators instead of getting the service for free.
That being said, this gas increase may solve the problem for validator, but inflation should still exist as long as we have other unsustainable actors in the ecosystem, such as developers or the league of entropy (source of randomness).
In conclusion, designing a perfect economic system is challenging, but we can work towards creating an ecosystem that incentivises every actor, including those that bring common goods, without relying on inflation as the primary incentive mechanism. In the case of Nois, we can explore the possibility of using increased gas fees to incentivise validators, while still making sure that other actors are also incentivised fairly. This approach can help us create a more sustainable and resilient blockchain network that benefits all stakeholders.
