The Internet Computer’s Token Economics: An Overview
With this economic and governance mechanism, developers and entrepreneurs worldwide will find ways to expand the fabric of the internet.
The Internet Computer — the world’s first web-speed, internet-scale public blockchain— reimagines not just what’s possible in blockchain, but also the very nature of software and IT. A key feature of this development environment is the Network Nervous System (NNS), an open algorithmic governance system that oversees the network and the token economics that make it possible to build DeFi and dapps, open internet services, and enterprise systems that are capable of securely operating at hyperscale.
At Sodium, DFINITY unveiled the NNS and explained how it manages these token economics, as well as how ICP tokens (formerly known as DFN) and computation “cycles” will be used for governance and to run software, respectively. ICP tokens are primarily governance tokens that can be used in the management of the blockchain network created by the Internet Computer Protocol. When the network launches, there will be 469,213,710 ICP tokens in existence. ICP tokens allow users to participate in managing the Internet Computer network, and as such are a form of utility token.
You can do two things with ICP tokens:
- Lock them inside the NNS to create “neurons,” which can vote on proposals and earn voting rewards.
- Convert them into cycles, which are used to power computation by canister smart contracts running on the Internet Computer.
Neurons
When you create a neuron, its voting power starts off by being proportional to the number of ICP tokens locked inside. This proportion also applies to the rewards your neuron receives from the NNS when it votes on proposals. For example, all things being equal, a neuron that locks up 200 tokens will have twice the voting power, and receive twice the rewards for voting, as a neuron that locks up 100 tokens.
Depending on your neuron’s configuration, a maximum voting reward is available each month. The NNS tracks your neuron’s participation in votes, and rewards you with a pro-rata share of that maximum reward. You can also configure your neuron to mostly vote automatically by following other neurons you trust.
Some other factors also affect your neuron’s voting power and the rewards you receive.
Essentially, to withdraw ICP tokens locked inside one of your neurons, you must dissolve it. Dissolving takes time, but you can start and stop the process of dissolving a neuron whenever you like.
The minimum time remaining before a neuron can completely dissolve and release its locked tokens is known as the “dissolve delay,” and this falls while a neuron is being dissolved. The dissolve delay is configurable by a dial in your neuron’s online management interface. The longer the dissolve delay you set, the greater your neuron’s voting power and the greater the voting rewards you will receive, because this encourages you to vote with a longer-term view on driving the success of the network.
You can increase the dissolve delay any time you like. You can think of this being similar to a kitchen timer, where the dial can be twisted clockwise to increase the countdown, but the countdown can only occur through the passage of time. In order for your neuron to participate in voting, the current dissolve delay must be set at between six months and eight years.
The final way neurons increase their voting power and voting rewards is by growing older. The age of a neuron is the time that has elapsed since it was last placed in dissolve mode.
The NNS’s payment of voting rewards to neuron holders is inflationary. The conversion of ICP tokens into cycles that are “burned” by software running on the Internet Computer is deflationary.
Cycles
Software canisters that run on the Internet Computer must be charged with cycles, which are used to power computations and memory management, and are burned in the process. The conversion of ICP tokens to cycles occurs at a variable rate, which is constantly configured by the NNS in response to external markets.
Over time, more and more cycles will be burned by computation. Since cycles can only be created from ICP tokens, effectively over time more and more ICP tokens will be burned by computation and disappear. This guarantees that so long as computations are running on the Internet Computer, someone must be buying ICP tokens somewhere as a means to create the cycles that power them.
When ICP tokens are converted into cycles and burned by computation, the effect is deflationary because it reduces the supply. The value of cycles will stay approximately constant, which ensures that the cost of computation remains stable.
The Internet Computer’s use of computation to produce a stable value for cycles is potentially revolutionary. Holders of cycle tokens receive a guarantee that — so long as the Internet Computer network is running — eventually all surplus cycles will be burned, and the value of their cycles will return to its usual peg.
This works in stark contrast to other projects, where such tokens are either collateralized by assets held in trust by custodians acting as issuers and redeemers, or the their values are stabilized using elaborate schemes that depend on assumptions about the volatility of crypto assets held as collateral — which in either case makes them difficult to trust.
The power of cycles underscores that the Internet Computer stands ready to facilitate DeFi, just as much as it will help developers create the hyperscale internet services of tomorrow.
Open internet services
The ICP token is the Internet Computer’s native governance token, but every open internet service can create its own governance token if needed. Moreover, an entrepreneur, enterprise or developer can program a canister to hold balances of any token and send tokens to other canisters as part of function calls.
We hope open internet services will eventually provide alternatives that stretch across today’s closed monopolistic Big Tech ecosystem, and that we will soon see open versions of services such YouTube, LinkedIn, Salesforce, and Facebook. That is why we are developing LinkedUp and CanCan — LinkedIn and TikTok clones respectively — as sample apps.
Open internet services will be built from autonomous code that is controlled and managed by open tokenized governance systems, which function similarly to the NNS. Tokenized governance systems for open internet services will generate their own tokens to be used in voting and to potentially receive a distribution of value generated by the autonomous system.
We hope that talented teams of developers and entrepreneurs all around the world will find ways to expand the fabric of the internet by creating a new breed of open internet services.
Register for access to the Internet Computer’s Sodium Developer Network at dfinity.org/sodium.
Join our developer community and start building at forum.dfinity.org.
