IOV Token Economic Cycle — Distribution of the IOV Name Service turnover
In the analysis in Part 1 and Part 2, we have looked at the macro effects which support a healthy token economics. In Part 3, we have presented the value proposition of the service offered by the IOV Name Service and the full economic cycle.
In this part, we look at the micro effect of turnover distribution: who is entitled to receive what?
Who? Rewards are distributed to validators and token holders depositing their tokens, with a preferential reward for validators who are also depositors. And
What? The rewards are split according to a formula based on known and observable metrics. For the Validators, the metrics are compiled into a quality Score q. The token holders are also given access to a reward through the IOV Name Service Term Deposit and the deposit rate r.
The governance splits the total rewards between a part for the IOV Name Service Term Deposit account and a part for the Validator Reward.
The way Validators and Depositors are selected and are rewarded is IOV’s Proof-of-Value.
IOV’s Proof of Value and the Quality Score
IOV is proposing the Proof-of-Value mechanism. It is based on respecting the core values, which are necessary for the blockchain to operate, such as trust, transparency, decentralization, as well as measurable metrics of contribution to the blockchain quality. A quality score based on these metrics is designed to reflect the support provided by the validators to the IOV Name Service.
Validators have a special role. IOV is using Tendermint BFT’s consensus. Validators get a quality score evaluated dynamically according to public metrics such as their performance at proposing blocks when they are supposed to and their performance at voting for blocks. The idea is that a validator proposing all its blocks and signing all other’s blocks will have the best quality score. The voting power for blocks depends on this quality score, which is why we call IOV’s consensus Proof of Value. For more details on how to become a validator, you can see this introduction link, more details to be released soon.
Token Holders may also be entitled to a reward by depositing their IOV Tokens in the IOV Name Service Term Deposit account. Depositors receive a part of the turnover according to their deposit rate.
Validators who are depositors use their quality score in place of the deposit rate. This is the best combo for reward in the IOV Name Service Economy.
Here are more details:
1- The IOV Name Service Term Deposit account
IOV introduces the IOV Name Service Term Deposit account :
- IOV Token holders may, under certain transparent conditions (such as KYC, etc), put their IOV Tokens into the IOV Name Service Term Deposit account.
- They are free to withdraw their IOV Tokens at any time.
- If they leave their IOV Tokens for long enough, they become entitled to a share of the turnover of the IOV Name Service proportionally to the amount of IOV Tokens in their term deposit account for the qualified time and to their deposit rate.
The deposit rate r is designed to incentivize helpful behavior on the chain. Calling d the amount of tokens that a token holder puts in the term deposit account, their share of the IOV Name Service revenue is their r*d over the sum of all r*d from other contract’s participants.
A validator can hold IOV tokens in the IOV Name Service holding account, in which case a quality factor q reflecting its value as validator is used instead of the deposit rate r.
For example with 10,000,000 in total rewards, assuming 9,500,000 tokens to distribute, S=46,000,000, a deposit of 1,000,000, a quality score of 100% and deposit rate of 33% we can see the individual rewards. For a deposit of twice the amount of tokens, the rewards are twice as high.
2- The Validator Reward
Another part of the turnover is distributed to the validators to cover their costs. This amount is set by the governance, to be split amongst the validators.
Each validator has a quality score q. This quality score increases as the validator delivers a good support to the chain.
This part of the reward is distributed only to validators, and each validator receives a proportion q of their maximum allocation. The tokens which are not distributed at this stage are distributed in the term deposit account reward distribution.
Following the previous example, with a reward of 500,000 tokens for validators and 8 validators for a max score of 100%, then a validator with q=100% will receive 62,500 tokens.
The explanations above can be summarized in the following tables. All parameters such as the split amount distributed to validators and depositors and the deposit rate are set by the governance.
Kick-Starting the IOV Name Service Economy
All the presentation above describes how the rewards are being distributed. We remember from Part 3 that all the rewards come from the turnover of the chain. This means that the more names bought, the more reward to distribute, and the higher the economic incentive to participate.
There are also good reasons to participate early even if the distributed rewards are still small:
- Participating early allows to building of a good quality score for validators, which will put them in a priority situation once the turnover of the chain becomes substantial.
- Moreover, buying a substantial deposit amount might be costly if tokens are bought once the IOV Name Service is very active and the IOV Token price is already reflecting this activity. In addition, for a given token holding, it is better to deposit them (and be a validator) than not deposit them.
Of special note, IOV is also planning a guaranteed reward for the first years of operations in order to make sure that operating costs are covered and keeping the game interesting. The guaranteed reward is a pre-allocated subsidy of IOV tokens (created at genesis) that is distributed as reward in an algorithmic manner that decreases to zero over time; this subsidy does NOT cause inflation; it is NOT paid on every block. This guarantees to early participants that they will benefit economically as well from participating early.
The IOV Name Service term deposit is the part of the reward distribution supporting the IOV Token valuation. It is important that the access to the deposit account is as easy as possible:
- For validators, IOV is working on easing the set up of validator node and aiming at having only validators qualifying for this reward distribution in the long term when there are enough of them.
- In the meantime, while the validator set is limited and barrier to entry to the validator set is high, the term deposit account is open more broadly to non-validator participants.
Another important feature to take into account is the deposit term, that is the duration after which the deposited tokens start remunerating their owner. In the first implementation, it will be a fairly long fixed term to support development and stability. Going forward, the deposit rate will reflect the amount of time where the IOV tokens are put on hold thanks to an IOV Name Service Term Deposit Bonus and the minimum holding period will be reduced in parallel with the right to reward.
It is also important to keep in mind that the origin of the reward is the sale of names, and research is ongoing for providing supplemental rewards for entities that help with increasing the sales of names.