Proposal to Improve ICP Governance Staking Re: Tax and Tokenomics

WARNING: This post contains fiduciary analyses of the taxation of proof-of-stake staking rewards (on other networks), and governance staking rewards obtained from voting neurons (on the Internet Computer). The content represents my personal views, which are derived from the information that I have collected. These have been developed so that I can help design staking schemes as Chief Scientist for the Internet Computer project. This post is not meant to be financial advice under any circumstances. Always do your own research and commission your own advice. Thank you. DW.

In this post I will describe some important technical changes the Dfinity Foundation shall soon propose regarding how ICP tokens are staked inside the Network Nervous System, which governs and manages the Internet Computer blockchain, and how voting rewards may be obtained. This is relevant to everyone that currently participates in Internet Computer governance, and anyone interested in advanced web3 DAO technology and blockchain governance in general.

Quick Recap: the Internet Computer and its governance system

The Internet Computer blockchain aims to provide a platform where developers both build new web3 services and rebuild the traditional world using advanced smart contract code, without need for traditional IT, such as cloud services, server computers, databases, web servers and firewalls. Behind the paradigm lies innovations in cryptography, distributed computing, smart contract execution frameworks, and much more, which together make it possible for a public blockchain to run at web speed, with incredible efficiency, to host code that serves web to users, and scales infinitely. For the Dfinity Foundation, which has for years run blockchain’s largest R&D operation, the migration of humanity’s data and computation onto public blockchain is the endgame of web3, which we call “blockchain singularity”. For all the reasons, the way a public blockchain aiming to provide humanity’s foundational compute layer is governed and managed, is extraordinarily important.

The Internet Computer also brings a fresh and innovative approach to blockchain governance. Its entire sovereign network runs under the control of an advanced DAO, called the “Network Nervous System”, or “NNS” for short. The system is permissionless, and many thousands of people have staked billions of dollars worth of the ICP token inside so that they can participate in governance. The NNS is fully integrated with the decentralized blockchain network upon which it lives, and whenever submitted proposals are adopted, it is automatically executed by the network. In the 8 months since Genesis, many hundreds of proposals have already been executed. Proposals can do anything from tweaking the blockchain’s economic parameters, through adjusting the topology of its network to help it scale, to patching the software run by the “node machines” that host the network — for example to fix issues or improve performance, or securely upgrade the protocols that create the blockchain.

People participate in Internet Computer governance by staking their ICP tokens inside the NNS to create “voting neurons”. They can direct these to vote on proposals manually, or configure them to vote automatically, by following the voting of other neurons, in a system of “liquid democracy” where trust and expertise can be delegated on the fly. As a reward for participating in governance, the network allows neuron holders to earn “voting rewards”.

The proposal that Dfinity plans to submit to the Network Nervous System will change the way neurons work if adopted. The aim is to help clarify when voting rewards are realized as income for tax purposes, and improve the network’s tokenomics.

TIP: remember that governance staking on the Internet Computer is very different to proof-of-stake staking that allows “validator nodes” to be joined to a network and help host a blockchain. Be careful not to get confused.

Quick Recap: Neuron Staking, Voting, and Voting Rewards

At any time, anyone can stake ICP tokens inside the Network Nervous System to create a new voting neuron, which provides them with voting power that allows them to participate in the governance of the Internet Computer blockchain and earn voting rewards over time. To ensure participants in governance are committed to the long-term success of the network, and will therefore vote in ways that promote its success, voting neurons lock-up the ICP that is staked inside. In order to retrieve the ICP inside a neuron, its owner must first “dissolve” the neuron. The time this will take depends upon a configurable attribute of the neuron called the “dissolve delay”. A neuron owner can increase its dissolve delay at any time, but they can only reduce the dissolve delay by placing the neuron into “dissolve mode”, which will cause the dissolve delay to count down, day-by-day, until it reaches zero, at which point the ICP can be retrieved. When a neuron owner decides to sell ICP staked inside a neuron, the longer its dissolve delay, the longer the delay before the sale can occur, and thus the greater the probability they care about the long-term success of the network. For this reason, the longer a neuron’s dissolve delay, the greater its voting power.

Currently, to vote on proposals and earn rewards, a neuron must have a dissolve delay of 6 months or more, and the dissolve delay can be configured to a maximum of 8 years. By setting the dissolve delay to this maximum value, the voting power of the neuron can be doubled. In addition, the longer a neuron has not been placed into dissolve mode, the greater its “age” grows, up to a maximum age of four years, which increases voting power by a further 25%. Therefore, given some baseline number of ICP that has been staked, a neuron’s voting power can be increased 2.5X if its dissolve delay is set to 8 years and its age has grown to four years:

Voting power = stake * (1 + dissolve_delay/8) * (1 + age/16)

How Voting Rewards Work Today

Every day, the NNS calculates a notional “neurons reward” that it will divide amongst all the neurons participating in governance, according to a pre-determined schedule. At Genesis, the annualized neurons reward started at 10% of the ICP supply, and now, 8 months after Genesis, has fallen to 8.9% of the supply. Eventually, a little more than 7 years after Genesis, the reward will fall to 5% of the supply, on an annualized basis, whereupon it will then stay constant. Every day, the NNS divides the reward amongst the neurons according to their relative claims, which are the product of their respective voting powers factored by the proportion of proposals they have voted upon.

IMPORTANT REMINDER: a proposal is planned that if adopted will prevent neurons from voting automatically on “motion” proposals, such that you will have to vote manually on motions to maximize your voting reward. This proposal includes weighting motion proposals much more heavily for the purposes of weighing participation.

Crucially, when the NNS disburses the neurons reward, it does not distribute new ICP tokens to the neurons. Instead, it increases their “maturity” attributes. Maturity measures the notional unrealized gains acquired by a neuron through its voting activity as a percentage of the ICP that is staked inside. Maturity does not exist on the ICP token ledger, but is rather an unrealized gain that the owner of the neuron can do different things with. Currently, the owner can choose to do three things with the maturity:

1. Do nothing with the maturity, and wait for new ways to use maturity as the design of the NNS evolves.
2. “Merge” the maturity into the principal. This causes the NNS to convert the maturity into ICP tokens on the ICP ledger, which are added to the stake locked inside the neuron. Naturally, this then increases the voting power of the neuron.
3. “Spawn” the maturity. This causes the NNS to create a new neuron by converting the maturity into new tokens on the ICP ledger and staking them inside the new neuron. The new neuron has a relatively short dissolve delay configured, providing a route to retrieve the ICP in a timely way.

One of the most important aspects of this design relates to how voting rewards are treated by tax authorities. Only when a neuron owner executes options 2 or 3 is maturity converted to ICP tokens on the ICP ledger, which have a market value. Why this is important is explained in the following sections.

Taxation Of Proof-Of-Stake Staking Rewards

IMPORTANT UPDATE 1: Since I published this post, the IRS in the United States has given indications they may accept the arguments following in this section, which would be fantastic news for crypto. For more information, see https://blockworks.co/in-win-for-crypto-stakers-irs-offers-refund-on-untraded-token-rewards/ and then search accordingly. If the IRS has accepted the arguments following, this increases the chances that other tax authorities around the world will also adopt this commonsense and fair approach to taxing staking rewards, which is also backed by the kinds of solid legal argument, based on existing accepted case law, that I give here. Remember, always do your own research.
IMPORTANT UPDATE 2: Caution is always needed when interpreting the kind of actions I linked to above. An argument that the action is legally vacuous, in the sense that it does not bind the IRS to any kind of position, is given here https://www.coindesk.com/layer2/taxweek/2022/02/08/your-staking-rewards-are-still-taxable/.

Staking in proof-of-stake blockchains both mediates the integration of validator nodes into their networks, and supports the workings of their low-level consensus mechanisms. This is fundamentally different to staking neurons to participate in Internet Computer governance, as governance and the neurons driving it reside above the network that it controls, and involve very different mechanisms. However, there are some commonalities between proof-of-stake staking and neuron governance staking as regards tax concerns. Before proceeding to examine the specific tax issues surrounding neuron staking, we must first review the current taxation of proof-of-stake staking rewards.

Today, the taxation of proof-of-stake staking rewards remains a controversial grey area in many of the world’s tax jurisdictions. The key question is whether staking rewards represent taxable ordinary income at the moment they are received, which amount would be calculated from their fair market value at the time, or whether they only later become taxable income when they are sold, exchanged, or otherwise disposed of. This far, the IRS in the USA has not issued specific guidance on how proof-of-stake staking rewards should be treated. However, in 2014, in response to the rise of Bitcoin, they issued advice on how proof-of-work “mining” rewards should be treated for tax purposes (a “miner” generates “mining rewards” using special hashing hardware that occasionally wins the right to add a new block to the blockchain, within which they can include an assignment of new tokens to themselves).

IRS Notice 2014–21 (2014–16 I.R.B. 938, Q&A 8 sets out the current position of the IRS that mining rewards obtained from proof-of-work networks immediately become taxable ordinary income upon receipt, according to their fair market value at the time. This guidance was issued as Bitcoin was first rising to prominence seven years ago, and was being heavily promoted by its advocates as a replacement currency. That meant that many tax authorities saw bitcoin as being cash-equivalent, and consequently also saw the receipt of unencumbered bitcoin through mining to be income received. However, as understanding of blockchain has matured in the years since then, bitcoins have become better understood as a digital commodity, such as “digital gold”, which should be treated as property that has been created.

Since the IRS issued this guidance, blockchain has become vastly more complex, proof-of-stake networks have risen to prominence, and yet other types such as that represented by the Internet Computer, and new types of token have emerged that are designed to provide a specific utility, such as enabling participation in governance, rather than playing a virtual currency role. In the absence of new advice regarding how utility tokens and staking rewards obtained from proof-of-stake networks should be treated, many now argue that proof-of-stake staking rewards should correctly become taxable income at the time they are sold, exchanged or otherwise disposed of, rather than when they are first received from the network. To justify this, equivalence is sometimes drawn with the mining of oil, since in the USA, those extracting the oil only pay income tax on the receipts of their sales, rather than at the moment of extraction, since doing so would depend on highly speculative measures of fair market value. However, this tax treatment is not uniformly applied to all mineral extraction, and for example authorities often tax extracted minerals on their fair market value at the moment they leave the mouth of the mine.

The real argument, which is much more powerful, is that staking rewards are in fact created by those receiving them. Indisputably, a blockchain is formed by a decentralized network, in which independent parties collaborate via a public protocol, through which process new blocks of transactions that contain newly minted tokens are paid out to those parties as staking rewards. This is crucial, because no economy in the world taxes the product of creative activity. When people or companies create things they might later sell, they are never taxed on the value of what they have created, only on the proceeds of its sale. Thus, when an artist paints a painting, a writer writes a book, a company builds a new car, or a farmer harvests crops, their creations are not treated as income that should be taxed. Instead, it is when they sell, exchange or otherwise dispose of their creations, that the proceeds become ordinary income upon with tax is due. A court case is now underway in the USA making this argument regarding staking rewards gained from the Tezos network (Jarrett v United States of America).

There are clear reasons why this should be so. Imagine that a farmer harvested some fields of grain that he had grown, and the tax authorities decided that the grain itself represented ordinary income. Upon harvest, he would have to query the grain price on markets were it might be sold, and pay tax on the nominal gross income gained from an imaginary sale, as though it were in fact realized income. However, the income is of course not realized in reality. If some international treaty governing the importation of grain changed, say, and the price of gain collapsed before he could sell his, then after the addition of tax to this costs, he might suddenly be forced into a dramatic loss, harming him, his industry, and the economy generally, which lays bare how ridiculous such a taxation practice would be. This is even more true in crypto. Nascent crypto markets are often highly volatile and thin, and the price can double or halve in an hour, and security and technical issues can easily prevent proof-of-stake staking rewards ever making it to market. Market convulsions and technical issues could easily thus bankrupt the recipients of staking rewards if this approach is taken to their taxation.

It seems likely that the initial promotion of Bitcoin as an alternative currency system led to this unfortunate juncture. If you could indeed manufacture new money, then its receipt would represent income, even though it were the produce of creative effort, since its value is immediately realized without need for a sale to take place. Today, we know that rather than being a currency, bitcoins are a digital commodity, which are act as kind of “digital gold”, and the IRS have since said they should be treated like property — which makes absolute sense, since the value of bitcoin is volatile, and unlike cash stored in a bank, issues can occur that can easily cause its complete loss. Although the IRS issued guidance regarding proof-of-work rewards seven years ago, in the intervening years it has not issued tax guidance regarding proof-of-stake networks and staking rewards, or the treatment of utility tokens, which provides an important opportunity for the web3 community to campaign for their fair and proper tax treatment. Unfortunately, there are indications that in the aforementioned lawsuit, the IRS will double down by claiming that while staking rewards do indeed represent property that the staker has themselves created, that in some special contexts, such property can still be treated like currency whose value has already been realized as income.

Realistically, blockchain will reman a battle for years, which will be fought on many fronts, and here like everywhere, we cannot expect a reprieve, and the community needs to fight for what is right.

Correct Taxation Of Neuron Maturity

The Internet Computer’s decentralized governance system, the Network Nervous System, provides a framework that makes it possible to stake and lock ICP governance tokens to create “voting neurons”, and then earn “voting rewards” in the form of newly minted ICP by making their neurons vote on digital proposals submitted to the system. This staking of neurons to participate in governance is very different to staking on proof-of-staking networks, but some pertinent tax considerations are shared, because, for example, in both cases participants are collaborating via a protocol to enable a decentralized network to operate, through which creative effort process they are causing new tokens to be produced, which they ultimately collect — and the same argument that the product of creative effort should only be taxed upon sale applies.

However, given that particular argument has yet to be resolved, understanding of blockchain remains thin on the ground around the world, and the propensity remains to think of every token as being a crypto “currency” akin to cash, substantial danger exists that some tax jurisdictions shall rule that even where tokens are produced by creative effort, they represent wealth that is immediately realized, and are thus taxable as ordinary income on receipt. Very fortunately, then, the Network Nervous System’s governance staking framework has been designed in such a way that taxable income should not be generated whenever a neuron votes and gains maturity, which can occur almost continuously owing to the high throughput of new governance proposals that are submitted to the network. Substantial defense is provided against the unfair premature taxation of nominal gains, which proof-of-stake staking frameworks do not currently have. The primary difference between the systems is that ICP voting rewards are produced through an intermediary step, which involves the concept of neuron “maturity” that cannot itself be defined as income, which provides neuron owners with some control over when they produce taxable income.

To understand the correct tax treatment of voting rewards, a good place to start is a legally accepted definition of gains that represent taxable income in the USA. Commissioner v. Glenshaw Glass, 348 U.S. 426 (1955) defines taxable income as: “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion”.

When neurons vote, their maturity is then increased. In the following section, we ask if the application of neuron maturity to generate new ICP produces taxable income. Here we ask whether the increasing maturity of a neuron alone represents taxable income:

Is Maturity An “Undeniable Accession To Wealth”?

Neurons are designed to be non-transferrable, which binds the financial outcomes of those voting to the future of the network. Neuron maturity is an attribute of neurons, which cannot exist independently, and cannot be separated from the neuron to which it belongs. This makes it impossible to sell, exchange or otherwise dispose of neuron maturity. For these reasons, neuron maturity is clearly not a kind of token, and when a neuron’s maturity grows, the treatment must be very different than if its owner were continuously receiving newly created ICP. Clearly, however, neuron maturity must have some value, otherwise there would be no incentive to make neurons vote to increase maturity. The nuance is that neuron maturity can be used to eventually produce ICP, and therefore it provides a stepping stone on the path to wealth. But, does increasing maturity represent an undeniable accession to wealth? The answer is a firm no.

A key reason is that because the Internet Computer runs under the full control of the Network Nervous System, an automated decentralized governance system, it is both self-directed, and self-updating. Very deliberately, by design, every aspect of the Internet Computer is subject to constant revision, including the Network Nervous System itself, in a significant break from traditional blockchain design. Currently, the system provides various options for applying maturity, but the network provides no guarantees about the continued availability of those options. This very blog post you are reading demonstrates that. I am describing and advocating for a forthcoming proposal that will change how maturity is treated if adopted. A proposal will be submitted, and if the Network Nervous System adopts that proposal, its logic will change automatically: the node machines that host the network will automatically patch their software, and the change will come into effect immediately. Therefore, while maturity is certainly a stepping stone to wealth, it cannot be an undeniable accession to wealth, since the options for using it, and even its continued existence, can change at any time.

Meanwhile, the fact that options exist for applying maturity to produce ICP tokens, cannot themselves represent an undeniable accession to wealth. Firstly, the maturity of a voting neuron increases continuously, and it is not reasonable to say that its owner might somehow continuously execute options to generate wealth, before network updates might remove the options. Secondly, even the options that the Network Nervous System currently makes available do not provide for “wealth” to be instantly realized: If the maturity is sufficiently large to be “merged”, then new ICP tokens can be created, but they are added to the locked stake inside the neuron and cannot be transferred for sale, and if the maturity is used to spawn a new neuron, then new ICP tokens are created within that new neuron, but they are also inaccessible for some period, such that a minimum delay before sale is involved, which makes it impossible to determine what fair financial value will eventually be realized. Thirdly, it is not reasonable for tax law to try and force the owners of neurons with maturity to choose an option for how it will be applied just so that tax revenue can be instantly created.

The best way to think of maturity is as something transient that exists during a production process. Even in tax regimes that treat the extraction of minerals by miners as gross income (which, note, involves the extraction of materials, not the manufacture of something new), the tax event occurs when the mineral leaves the mouth of the mine, not when it is taken from a rock face or broken into chunks underground. Until that happens, the miner might choose to leave some rock behind for economic reasons, or some might become unrecoverable. What happens during that process underground is left to the miners, and the tax system waits for the product of their work.

Therefore, even if a tax authority claims that when ICP is created by a person or organization through their participation in governance, and that although ICP tokens are obviously governance utility tokens that are a commodity that become their property on production, that in this special context they should be treated as currency, which when received represent income, very clearly it still remains the case that neuron maturity remains a simple intermediary artifact of the production process and the framework within which ICP is created, and it does in itself represent an undeniable accession to wealth that should not be treated as income.

Is Maturity Wealth That is “Clearly Realized”

The foregoing arguments make it very clear that maturity is also not wealth that is “clearly realized”. Maturity cannot be transferred or sold, and the routes available for converting maturity into new ICP that can be sold are long and might disappear at any time, owing to the self-updating nature of the Internet Computer. Moreover, neuron maturity grows continuously with voting, and is not technically possible, nor would it be practical, to immediately apply maturity whenever it appears, and even if it were, it would be entirely unreasonable to demand that neuron owners should continuously decide how to use neuron maturity on the fly. If a tax authority ignores the foregoing points, and takes the position that some best option must be chosen by the neuron owner, in a logical sense, in order to calculate nominal income that can be taxed whenever maturity increases, difficulties still arise because the options currently made available cannot “clearly realize” wealth either. Currently, the options for generating new ICP do so in ways that ensure there is some minimum delay before they can be accessed in freestanding form. Since the value of ICP on markets is highly volatile, there is simply no way to calculate, even approximately, what value might be realized in practice at that future time they can be accessed and transported to the markets.

Is Maturity Wealth Over Which a Taxpayer has “Complete Dominion”

Again, the foregoing arguments make it very clear that a taxpayer who owns a neuron with a non-zero maturity attribute does not have “complete dominion” over the value it represents. The Network Nervous System, a decentralized governance system, has complete control over the Internet Computer network, and all its logic, which includes “dominion” over the attributes of neurons, whose treatment it can change at any time, including the options available for applying maturity (as the forthcoming proposal described herein shall do if adopted). In principle, the maturity of a neuron could even be deleted, or the concept of maturity abandoned altogether. Moreover, even if a neuron owner executes an option that applies maturity in a way that will cause new ICP to be created, that ICP will not immediately be accessible in freestanding form, and they must wait some time before they gain “complete dominion”.

Possible Taxation On Application Of Maturity

Very clearly, the Internet Computer blockchain creates newly minted ICP tokens through the efforts of those who enable it to exist and function. Very clearly, ICP tokens are “governance utility tokens”, a kind of digital commodity that becomes the property of those who have created them, not realized wealth in the form of currency. However, in the following, I take the conservative view that some tax authorities may continue to incorrectly consider ICP to be a “virtual currency” that represents wealth that has already been realized. In some jurisdictions, it is prudent to assume this will be the position. Of course, where authorities take such positions, it is harmful to the emerging web3 industry, and they place the financial wellbeing of individuals in jeopardy through no fault of their own. For this reason, tax authorities should carefully consider how the fair tax treatment of tokens will help keep web3 innovators, who generate significant tax revenues for them, on their shores. But assuming the worst, what happens when a neuron owner elects to apply its maturity to generate new ICP?

Currently, two options are available for applying neuron maturity. Firstly, it can be “merged” into the neuron’s staked ICP. This option causes the maturity to disappear, and new ICP to be minted that is added to the neuron’s existing locked stake, which increases its voting power and the future voting rewards that it can earn. Secondly, it can be “spawned”. This option causes the maturity to disappear and new ICP to be minted that becomes the locked stake of a new neuron that has a shorter “dissolve delay”, which provides its owner with a faster means to obtain unencumbered ICP than by dissolving the parent neuron. When either option is exercised, what might be of significance to some tax authorities, is that new ICP tokens are immediately minted (i.e. created) on the ICP ledger. Some authorities may be tempted to claim this is a moment that taxable ordinary income has been received, regardless of the many compelling reasons why it is not in fact realized income.

In this post, I have explained technically why maturity cannot be transferred, and exists upon the grace of the decentralized governance system, and therefore cannot be realized wealth. The same cannot be said for ICP that exist on the ICP ledger, which takes the form of a traditional blockchain that is hosted upon the Internet Computer blockchain (a kind of blockchain-within-a-blockchain arrangement that allows the ICP ledger to be easily integrated with frameworks designed for traditional blockchains). While a traditional blockchain’s protocols may be improved and updated, its token ledger entries cannot be changed by those updates. A tax authority can therefore say with confidence that those who create ICP will also eventually come into possession of them, even if they are locked initially. They could claim that since ICP is a “virtual currency”, that the new tokens represent realized wealth, even through they cannot be accessed immediately, and claim taxable income has been created.

Thus, when a neuron’s owner merges its maturity to increase its voting power, which results in new ICP being minted, tax authorities might claim that creates taxable income and an income tax liability. In jurisdictions where this occurs, neuron owners might be prevented from merging if they have no means to pay down the resulting tax liabilities. Meanwhile, in jurisdictions where this is not a problem, or in jurisdictions like Puerto Rico, Monaco and Portugal, which do not tax crypto income at all, neuron owners will be able to merge freely, thereby compounding their voting power, and increasing their relative influence over governance and their share of the voting rewards. Still others who go ahead and generate tax liabilities by merging the maturity of their neurons will be forced to dump unencumbered ICP they hold on the markets to pay down the liabilities, depressing the ICP price when they would not otherwise wish to sell.

When a neuron owner uses its maturity to spawn a new neuron, which will result in new ICP being minted that becomes its stake, this is also problematic. Some tax authorities may claim an income tax liability has been created at the exact moment spawning takes place because new ICP was created. The owner may hope that since the dissolve delay of the new neuron is short, they will be able to recover and sell the ICP inside enabling them to safely pay down the liability, but that is not necessarily the case. The markets for ICP are highly volatile, just like the markets for many other tokens, and if its price crashes after spawning has taken place, the tax liability that has been created may exceed the receipts obtained by later selling the ICP gained, creating a serious financial loss for the neuron owner through no fault of their own. These problems reflect why tokens created through effort should be taxed as income on sale, exchange or other disposal, but we cannot trust that all tax authorities will treat them this way. Design updates are required to try and address these concerns.

Proposed Changes To The Design

Feature №1: Modulation by Price Trend

This blog post, and the proposal that will follow, shall demonstrate beyond doubt that it is decentralized governance that has dominion over how neuron maturity can be used to create new ICP, rather than neuron owners, since governance can change the treatment of maturity at any time. Nonetheless, there is a risk that the nuances of this modern, self-directed, and self-updating blockchain network, might be lost on some tax authorities. There is a danger that a lack of understanding leads authorities to draw false links between the maturity of a neuron, ICP tokens, and realized income. Therefore, we must further harden the design of the framework to reduce this risk, by having maturity produce an indeterminate number of ICP (that is, so that given some amount of maturity, it cannot be predicted how much ICP it might eventually produce). While this sounds strange, we can do this in a way that improves the network’s tokenomics, while providing a foundation for other improvements, as described in the following. We can do this using trends in the price of ICP.

Through the submission of proposals, the Network Nervous System is already made aware of the price of ICP on various crypto markets, and the exchange rates between various fiat currencies. At the current time, this allows it to provide constant cost compute to users of the network, by offering to convert ICP to cycles, which power compute in the role of “gas”, at constant value, where an amount of ICP worth 1 SDR, or Standard Drawing Right, a compound currency defined by the IMF, produces 1 trillion cycles. This knowledge of the markets would already allow the NNS to detect long, medium and short-term trends in the price of ICP. Since the volatility of ICP tokens is unhelpful to the network, features that exert stabilizing forces on its price will be useful.

Essentially, this proposal has that maturity should always remain unused until such moment the neuron owner directs it to be disbursed, whereupon it should be used to produce new ICP. When such instructions are made, the disbursal of maturity will occur after a delay, which process cannot be canceled, and the amount of new ICP the maturity shall produce will depend on ICP price trends as current after the delay. If the price of ICP is trending upwards, then the number of ICP produced from the maturity will be slightly increased as a reward for selling into excess demand. However, if the price of ICP is constant, or worse trending downwards, then the number of ICP produced from the maturity will be decreased by more, as a penalty. This will create a significant incentive for neuron owners to only produce new ICP from maturity at times when there is excess demand that can absorb the new ICP, which will act as a stabilizing force.

The system will take account of the long, medium, short-term and in-the-moment trends in the ICP price, to create a “price trend coefficient”, in a way that will be described by the code of the forthcoming proposal. Very basically, if the coefficient shows a price trend that is slightly “rising”, then the maturity will produce new ICP without modulation, since this is a neutral time to sell. As the coefficient shows the price trend rising more aggressively, then the quantity of new ICP created will be modulated upwards, up to a maximum of +5%, to encourage people to sell. On the other hand, if the coefficient shows that the price is falling, then the quantity of new ICP created will be modulated downwards, to a maximum of -30% if the price is falling very aggressively. Since these calculations will be made after the delay that occurs when disbursal is triggered, the neuron owner will be incentivized to make intuitive judgments about the markets and the timing of their sales.

Feature №2: Maturity Is Staked, Not Merged

Currently, neuron owners in some tax jurisdictions feel unable to merge their maturity, and compound their voting power, in case it will generate an income tax liability. We must adjust the design so that more feel free to merge their maturity, thereby creating a more level playing field across the world. The solution is to replace the “merge” option with a “stake” option. This will instead cause the maturity of a neuron to be staked inside, alongside the originally staked ICP tokens. Once staked inside, the maturity will increase the voting power of the neuron pro rata, but the staking will not result in new ICP tokens being minted. Only when the neuron is dissolved, and the contents are disbursed, will the maturity will be used to produce newly minted ICP, according to Feature №1.

Feature №3: Maturity Is Disbursed, Not Spawned

Since the “disbursal” of maturity now involves a delay, after which it produces newly minted ICP at a rate modulated by to unpredictable market trends (as per Feature №1), we can abandon the spawning feature. Instead, neuron owners can simply ask for their maturity to be disbursed. When the process is complete, they will find out how many new ICP their maturity has created.

Thanks for reading. I look forward to the community discussion :)