I’ve been reflecting on our network’s economic dynamics and have considered the potential benefits of adjusting our current inflation rate. As many of you know, our network currently has an inflation rate of 15%, and I propose that we open a discussion to consider reducing it to 10% or even down to 5%.
This is not a definitive proposal but rather an invitation for a discussion. I believe it is essential that we approach this topic with open minds to reach a consensus that is in the best interest of our community.
Some initial thoughts on why a reduction in inflation might be beneficial for us:
Inflation and Value Preservation: Lowering inflation could help preserve the value of SCRT and thus make it more attractive to hold. Higher inflation can often lead to depreciation in value, and this might discourage participation.
Balancing Rewards for Long-term Sustainability A lower inflation rate could mitigate the risk of over-saturating the market with tokens and ensure that staking rewards remain attractive without devaluing SCRT. A lower inflation rate may therefore be more sustainable in the long term.
Network Security and Decentralization: While inflation is a tool to incentivize staking and thus secure the network, it’s crucial to strike a balance. Too much inflation can lead to centralization issues if large validators obtain a disproportionate amount of tokens. Reducing inflation could promote more equitable distribution.
These are just a few preliminary points, and there’s much more to consider, including potential drawbacks. I am fully aware that any change to the inflation rate could have a wide array of effects on various stakeholders, so I am keen to hear the community’s feedback, especially from other validators.
Please share your thoughts on the potential impacts. Would a lower inflation rate be beneficial? Is there a specific rate between 15% and 5% that you believe would strike the right balance?
Without changing the core dynamics of how much SCRT goes to validators from the inflation or the number of active validators i think lowering the inflation will cause a significant validator exodus because of unsustainable economics.
I am in favour of lowering inflation but probably not as a simple parameter change.
as long as sufficient validators stay around, why is validator exodus a problem?
How does this proposal affect Secret Network?
I noticed that the original reasons shared with me for the proposal have not been shared here so I’ll outline and discuss the stated reasons and motives.
Stated Reasons for the Proposal
- Counteracting Price Depreciation: Some individuals believe that the low price of Secret tokens is primarily or even mostly due to inflation.
- Increasing Total Value Locked (TVL) on Secret Network: The proposal aims to make staking less attractive, with the intention to increase the TVL on Secret Network.
Fallacy of Stated Reasons
Counteracting Price Depreciation
- Analysis: The price depreciation is mainly due to large holders (“whales”) unbonding and or simply selling their holdings.
- Evidence: This can be substantiated by examining the data from SecretWhaleAlerts and Cosmos_Whalecat. By cross-referencing the transfers to exchanges such as Kraken, Binance, and osmosis with the price drops, one can observe a correlation.
Increasing Total Value Locked (TVL)
- Analysis: There is no substantial evidence or argument that suggests that lowering the security of Secret’s Layer 1 (L1) will lead to an increase in TVL, or that if it does it would be good or without bigger consequences.
- Possible Outcomes if Staking is Made Less Attractive:
- Outcome A: Secret tokens (SCRT) are unbonded and sold for other assets,(lowering the price of SCRT).
- Outcome B: SCRT is unbonded, sold for other assets, and then provided as liquidity (lowering SCRT price).
- Outcome C: SCRT unbonds and is LPd into CL pools, which would bring TVL that would lower unless SCRT gets more buyers.
- Outcome D: SCRT stays bonded.
It is likely that the reality will be a mix between these four outcomes, and two of the four possibilities contribute to lowering Secret’s price, then the other 2 outcomes still don’t solve for a lack of buyers for SCRT. Moreover, increasing TVL on Secret by cannibalizing L1 security could lead to a trend towards the gravity scenario described in this Twitter post. It’s common cosmos ethos to suggest the L1s security should be sufficient to protect the TVL held within the L1 and this goes against that ethos.
Reducing inflation doesn’t strike me as such a bad idea, but it doesn’t strike me as appropriate now, in these market conditions, and immediately reducing inflation is not a good idea either.
If the Secret Network is to reduce inflation ( long term it is a good idea ) then we need to make sure that it does not harm validators in any way, one way may be to incentivize smaller validators or cap the number of capped SCRTs ( these suggestions have been discussed here before )
I also think it’s a good idea to redirect TX fees from delegators purely to validators, for the time being this could provide more funding for smaller nodes