After careful consideration we have updated the economic model of our network ahead of our upcoming open staking launch. In this new model, the total reward across the network (issuance plus transaction fees) will remain constant regardless of average block time and staking ratio. The goal of this change is to achieve a higher staking ratio, to simplify the model and to create a path to 0 issuance, all of which we believe will bring long term benefits for Harmony.
- Constant annual reward of 441M ONE regardless of changes in underlying variables such as block time and staking ratio
- Transaction fees offset issuance creating a path to 0 issuance as protocol gains adoption
- Fees are burned, and as more transactions are generated eventually the fees burn per year would equal the 441M ONE.
- 1st year yields range: 164% (at 5% staked) to 9% (at 95% staked)
- For more in depth information, take a look at our spreadsheet model
Why aim for a higher staking ratio?
A higher staking ratio is beneficial for two reasons. First, the staking ratio is a barometer for the health of a PoS chain. A high staking ratio (above 60%) means that the network is highly secure since mounting a 33% attack would require at least 20% of the token supply. Just as important, a high staking percentage signals a large and loyal community that is committed to the project for the long term. If 60% or more tokens are bonded in the staking contract, you know that a majority of tokens belong to HODLers.
The second benefit of a higher staking ratio is that it creates organic demand for the ONE token. In the long run adoption of on-chain applications will drive network usage and demand for ONE, but the first major use case and demand driver for the token will be staking. We believe that higher staking yields will lead to more desire to stake ONE, thus driving more demand.
Why is simplicity important?
Bitcoin demonstrates the power of simplicity. The economic model is so simple you can express it in one sentence: “Issuance halving every 4 years until a maximum supply of 21 million.” The simplicity of Bitcoin’s economic model makes it quick for people to understand so that it’s easy to onboard new community members. The more understandable the model is, the easier it is to spread. Conversely the more complicated the economics are, the less likely the protocol is to reach mass adoption.
For this reason, we strived to create an economic model that could also be explained in one sentence. Here’s ours:
“Issuance plus transaction fees set to 441M ONE per year.”
An advantage of this simple model is that it becomes easy for validators to project their future rewards and it becomes easy for token holders to project future circulating supply. This predictability gives the protocol a stable economic base for our stakeholders to rely on.
One of the potential problems of Bitcoin’s economic model is that it is unclear if or when transaction fees will be able to compensate for the decreasing block reward issuance. This presents a potential time bomb within the protocol. For any protocol to survive in the long term, it will need to bring in enough transaction fees to at least sustain the cost of operating and securing the network. However, it’s nearly impossible to predict when transaction fees will be adequate to sustain a network in place of issuance.
Our model solves this problem by allowing transaction fees to offset issuance. Thus as network usage increases, issuance decreases by the same amount. When the network is fully mature and can sustain itself on transaction fees alone, issuance will naturally fall to zero. Rather than trying to predict the future, we structure our model so that it adjusts automatically when the timing is right. This way we get the benefit of a stable source of funding to secure the network while also maintaining the potential to have a finite supply of ONE tokens like Bitcoin.
Differences from the old model
You might be wondering how this new model is different from the old one. The old model had a variable issuance. As the percentage of tokens staked increased, the annual issuance decreased from ~500M at 0% to 0 ONE at or above 80%. With the new model’s constant issuance of 441M, the reward is slightly smaller at staking ratios of less than 10% but significantly higher at higher staking ratios greater than 10%.
This means that the rewards are more generous! Stakers and validators should be excited that there will be more rewards to be claimed. Yields range from 164% (at 5% staked) to 9% (at 95% staked) in the first year, and 73% (at 5% staked) to 4% (at 95% staked) in the third year.
Why did we change the model?
We changed the model because the assumptions and judgments underlying the original model changed. As John Maynard Keynes said, “When the facts change, I change my mind. What do you do?”
Initially we wanted to have as low an issuance as possible while maintaining reasonable security so that we could minimize inflation. However, we realized that the potential harm from inflation would pale in comparison to the benefits of cultivating a strong community of validators and stakers in the early stages of the network. Furthermore, we realized we could put a cap on long term inflation by using transaction fees as a way to offset issuance. Therefore we decided that increasing issuance was a worthwhile trade off.
Another assumption in the old model was that staking was inherently competitive with use cases that rely on collateralization such as DeFi. We wanted a lower staking ratio so that a portion of token supply would remain unstaked for these applications. Since then, a new concept called “staking derivatives” shows promise to eliminate this competition as it would allow for derivatives representing staked tokens to be used as collateral instead.
Finally, the original model issued a constant amount of ONE per block. However, we now realize that our block time will decrease over time as we optimize the protocol but this would in turn increase issuance in the old model. So we designed the new reward system such that reward per block will adjust with a change in the time between blocks to keep annual rate of issuance constant.
Join the community
If you are curious to learn more about our economic model we encourage you to check out our spreadsheet here and to join the discussion on our subreddit. If you are a validator or delegator and want to see what this new economic model will mean for your rewards, we are creating a staking calculator for you to explore your yields under different circumstances.
Want to stake on the first ever sharded Proof of Stake blockchain? Join our Pangaea testnet as we gear up for our Open Staking launch. Run a node, earn rewards and be part of history. Come to our Pangaea Volunteers telegram channel and our community leaders will take care of the rest.