Minting rate in TOSv2
How minting rate changes in TOSv2
Special thanks to Keven.J, Suah.K, Praveen.S, Zena.P, Ale.S, and Darren.K for productive feedback on the posting
You can check the Korean version of the article here.
The minting rate determines how many TOS Treasury will mint if a user bonds 1 ETH. 14,000 TOS / ETH is our target minting rate to accumulate initial TOS reserves for staking rewards during the target runway. We will start with the higher minting rate and then gradually lower it to the target to minimize potential fallouts from unexpected events.
Note: If you are not familiar with the introduction above, please refer to TOSv2 phase 1 parameters: ETH bonding.
How can we reach target minting rate?
The process consists of two phases: 1) set the initial minting rate and 2) gradually decrease the minting rate until we hit the target minting rate.
Set initial minting rate
- Burn TOS
In TOSv2, TOS will be minted if Treasury procures ETH through bonding. However, one question remains unanswered: What about TOS already printed? Of course, they should be supported by a certain amount of ETH based on the minting rate to maintain consistency in the bonding system.
However, despite depositing ETH in Treasury, we cannot let the current TOS supply as it is. In other words, we should burn some of them. It is to prevent the severe dilution of TOS.
As already discussed, we plan to put 2,000 ETH in Treasury. Additionally, 200 ETH will be added to Treasury every month for ten months to minimize the potential risks from unexpected events. With such limitations in budget, an excessive amount of TOS will push up the initial minting rate too much.
2. Deposit ETH
The existing TOS needs ETH as collaterals to align with the bonding mechanism. Given that we will deposit 200 ETH every month for ten months in Treasury, the initial ETH deposits are 200 ETH.
3. Accumulate initial TOS reserves
The next step is to amass initial TOS reserves. We need a sufficient amount of TOS in advance so that it is possible to distribute staking rewards for six years(target runway). The initial TOS reserves consist of 1) TOS from LockTOS contract and 2) newly minted TOS.
If few people bond, we cannot mint many TOS. By the way, in TOSv2, staking rewards have to be given out because the staking APY is 10%. Therefore, without the robust demand for bonding, the amount of TOS newly minted may not be enough to cover staking rewards. The initial TOS reserves are necessary to deal with such unfavorable market conditions.
4. Actual process
All the procedures discussed above were as follows:
- We burn 78,660,051 TOS and deposit 200 ETH in Treasury.
- Treasury procures the initial TOS reserves by 1) taking TOS in LockTOS contract and 2) minting new TOS: 2,145,826 TOS(TOS in LockTOS contract) + 4,730,834 TOS(newly minted TOS by Treasury) + 86,721 TOS(newly minted TOS in the internal test) = 6,963,381 TOS.
- The expected TOS supply is: (initial TOS reserves) + (non-burnable TOS excluding TOS in LockTOS contract) = 6,963,381 TOS + 18,036,619 TOS = 25,000,000 TOS.
- Given that we initially deposit 200 ETH in Treasury, the initial minting rate is: 25,000,000 TOS / 200 ETH = 125,000 TOS / ETH.
Lower initial minting rate to target minting rate
- Deposit additional ETH
We will cut the minting rate by depositing additional ETH in Treasury. After the first deposit, 200 ETH will go to Treasury every month for nine months. Assuming the initial TOS supply(25,000,000 TOS) does not change, the minting rate will decrease with more ETH deposited by Tokamak Network team.
2. Burn some TOS
However, there is a problem. Unlike the assumption above, the TOS supply will probably increase as users bond ETH for TOS and new TOS gets minted. If the bonding mechanism generates too many TOS, we may have to burn some of them to reach the target minting rate. The issue can get quite conspicuous in the case of strong demand for bonding in the early stage of TOSv2 due to the higher minting rate.
- Example
Let’s say we want to lower the initial minting rate by half after one month of TOSv2. In other words, 62,500 TOS / ETH is the target. Fortunately, bonding proved to be successful and attracted 200 ETH. If Tokamak Network team deposits additional 200 ETH as planned, the total ETH in Treasury is:
100 ETH + 200 ETH + 200 ETH = 500 ETH.
However, TOS is printed if bonding happens. In the example above, the amount of TOS newly minted is 200 ETH * 125,000 TOS / ETH = 25,000,000 TOS. Combined with the existing supply, the total TOS supply equals:
25,000,000 TOS + 25,000,000 TOS = 50,000,000 TOS.
Consequently, the updated minting rate is:
50,000,000 TOS / 500 ETH = 100,000 TOS / ETH.
Of course, it is much higher than 62,500 TOS / ETH.
Therefore, we must burn some of TOS. The desired TOS supply satisfying 62,500 TOS / ETH is:
(desired TOS supply) / 500 ETH = 62,500 TOS / ETH
(desired TOS supply) = 500 ETH * 62,500 TOS / ETH = 31,250,000 TOS.
The amount of TOS to burn is:
(current TOS supply)-(desired TOS supply)
= 50,000,000 TOS-31,250,000 TOS = 18,750,000 TOS.
How does changing minting rate affect bonders?
Tokamak Network team will take a large part of the newly minted TOS in the early stage of TOSv2 due to the relatively higher minting rate. It is an inevitable decision to prevent significant loss by unforeseen external factors. We will utilize the funds to compensate our ardent community members who contributed to phase 1 of TOSv2.
Additionally, assuming the stable TOS price, the share for bonders will increase in relative terms as the minting rate falls.
Implications
- Boosts intrinsic value of TOS
The minting rate implies how many ETH supports 1 TOS as collaterals. Since the initial minting rate is 125,000 TOS / ETH, 1 TOS is now backed by 1/125,000 ETH.
As we approach the target minting rate, the intrinsic value of TOS will also increase. In other words, 1 TOS will be eventually supported by 1/14,000 ETH.
