How ICONs ICX could potentially become a deflationary asset

ICX is ICONs native governance token. It can be used to stake, vote, as transaction fee payment as well as for computational services on the ICON Network.

ICX can also be bought and sold on cryptocurrency exchanges; however, before buying any ICX, you should make sure you’re aware of all the factors that could potentially affect its value. In this article I will point out all the factors why I think ICX is on the way to become a deflationary asset in the future and this fact alone will increase its value and demand significantly. Let’s take a dive into ICONs economic policies.

ICX Issuance System

As indicated in the ICON Incentive Scoring System IISS, the ICON Network incentivises two different contributors in the ICON ecosystem:

The Block Producers (P-Reps) and ICONists that stake and delegate their votes.

A Public Representative, contributes to the ICON Network through both block validation and participating in governance decisions. ICX holder lock up their funds and delegate their attributed votes (1 ICX = 1 vote) to a P-Rep team, which in their opinion provides the best infrastructure and skillset to keep the network secure and nurture the ecosystem.

Both receive rewards in form of I_Score, which is minted by the public treasury and can be claimed every 24 hours (or every 43,120 blocks) and exchanged for ICX (1 ICX = 1,000 I_Score).

The rewards for P-Reps depend on their i_rep value, their number of votes and their current ranking. I_rep is a governing variable that is used to calculate the monthly reward for the top 22 main P-Reps and 78 Sub P-Reps. It is defined as the value that a P-Rep calculates to be their monthly cost for operating as an active P-Rep team. Half of i_rep is used to reward P-Reps based on how many votes the P-Rep has received. The other half is issued to each P-Rep that is currently among the top 22. To avoid further confusion the ICON Foundation has decided that i_rep will from now on be referred to as “P-Rep Commission Rate”.

The rewards for ICX Holder are currently at 13,59 % annually.

Strategic steps to combat inflation

• Lowering i_rep

In the end of May 2020 the ICON Foundation has proposed and recommended to every P-Rep team to gradually lower their i_rep from 50,000 (default value) to 14,000, which results in a P-Rep Commission Rate of approximately 17.5%. Not only does this lower the P-Rep Commission Rate to a more reasonable number, but causes also inflation to drop from 8% to under 6%, which represents a 25% decrease of newly minted ICX. This change will only affect the ICX supply and not the annual reward rate for ICX stakers.

• Staking

The governance protocol of ICON is appropriately called delegated Proof-of-Contribution (DPoC). In order to receive rewards you must stake your ICX and delegate your votes. There is no reward for only staking. Voters receive the same reward no matter which P-Rep they vote for. The reward rate depends on the amount of ICX being staked. The more people are voting the lower becomes the reward rate. The annual reward rate fluctuates between its maximum of 36% and a minimum rate of 6%. The current reward rate is at 13.5 % annually. However longterm investors are usually more interested in the real yield rate. In order to get the real yield rate, we have to take the reward interest rate and subtract the inflation rate. The real yield rate is currently at 7.67%.

If you compare that number to rates of other popular projects like for example Cosmos (1.94%) and Tezos (0.50%) it is one of the most attractive in the crypto space.

In a global low-rate environment, staking is a feature that allows ICX to become a positive carry asset. It generates a positive return for holding it as opposed to, for example, precious metals, which are negative-carry, as they, in high quantities, incur storage costs.This in my opinion will lead to more and more people locking up their ICX and hence reducing the real circulating supply. In the long term, this stimulates demand and creates an incentive to borrow money to purchase and earn yield. Overall, positive-carry assets increase stability of price movements by creating long term holders and widening the investor base.

• Increase of Transaction Fees

Last week a new network proposal by Scott Smiley and the ICON Foundation was approved and deployed to increase transaction fees by 25%. The goal is to raise the fees gradually over a period of time to reach a total increase of 2 times its current value.

As you can see on the image below the fees on the ICON Network were substantially lower than compared to other blockchain networks.

Increasing metrics and growing ecosystem

Having a look at certain key metrics you can definitely say the ICON Ecosystem keeps growing and maturing. Diligent investors, traders, developers and users are usually drawn to a blockchain project with rising interest, token price and network usage.

• Transactions

A couple of weeks ago the ICON Network passed 100 million total transactions, which represents a huge milestone for the project. The average amount of transactions is currently at around 140.000 txs per day.

• Active wallets

There are now almost 415.000 active wallets on the ICON Network, that are being used to stake, vote, transact or interact with its DApp Ecosystem.

• DApps, Games and DeFi projects

The ICON ecosystem keeps on growing with more and more DApps, Games and DeFi Projects running on the public chain. Here is a list of very promising projects that are either already generating transactions or are still under development.

• ICONbet
• FutureICX
• IconSwap
• Stayge
• Tipicon
• MyIconWallet
• Broof
• VisitMe
• LICX (under development)
• Balanced (under development)
• Project Nebula (under development)

According to THE ICONIST, ICONLOOP might soon be providing blockchain-powered visitor management solutions (VisitMe) to local governments in South Korea to help fight the COVID-19 pandemic.

• MyID

MyID is collaborative organization establishing a blockchain-based digital ID ecosystem powered by ICONLOOP. MyID Alliance currently has 68 organizations and corporations in various industries such as commercial banks, security firms, e-commerce companies, and manufacturing companies. MyID is aiming for 1 million users in 2020 and according to ICONLOOP their DID service could launch any day. Many members of the MyID Alliance have already expressed interest in interconnecting with the public chain. Thanks to ICONs interoperability protocol BTP 1.0 it will be possible to share and seamlessly transact value and information across its network from both, public to private chain and also other blockchain protocols. Every transaction via the interoperability protocol will require ICX. It can only be assumed how many transactions this will be generating in the future.

At what point will the ICON Network be able to sustain itself solely with transaction fees?

As outlined in the IISS 2.0 paper: “if the transaction volume of the network is high and transaction fees provide sufficient funding for the reward fund, new ICX will not be minted”.

According to Scott Smiley, it would take ~43M transactions per day to break even with our current average transaction fee.

So with the current proposal to raise fees by 2x, we could be counteracting inflation entirely with ~21.5M transactions per day.

If the amount of transaction fees within a block exceeds the required funding sum, the excess transaction fees will be burned and ICX will effectively become a deflationary asset.