(Proposal) Inflation and community pool changes

Hi all,

Following up on this thread, we want to lay out a proposal that changes the current network inflation and significantly lowers the % of inflation directed at the community pool. This proposal is meant to be the first to follow the newly proposed governance best-practices. Steps #1 and #2 have already taken place in the forum of the previous forum post, conversations in other Secret Network social channels, as well as discussions with community members on the community calls. We are now ready to follow the 3rd step - making the proposal off-chain (this post).

Proposed changes to inflation and community fees

Based on feedback gathered, there seems to be a consensus at meaningfully reducing the community fee and maintaining a low double digit inflation figure. As such, we propose the following changes to the network:

  1. Inflation: Change to 7%-15%. In practice, this will lead to 15% inflation currently.
  2. Community fee: Change to 2%.
  3. Foundation fee: A new concept we recommend the network should adopt.

Rationale

  • The goal of inflation is to subsidize network security, by offering validators/delegators meaningful rewards in the form of new coins. Reducing the inflation to 7%-15% would maintain a lower inflation (which is generally a good thing), while still providing rewards (%-wise) that are higher than many (if not most) networks out there.

Bottom line is: validators/delegators currently earn 4.75% of the inflation. With the following changes, they are expected to earn between 12% to 14.7%. So practically 3 times as much. In terms of actual returns on tokens staked, validators/delegators will currently earn ~70%-85% returns. This is expected to decrease over time as more people stake.

  • Changing the community fee to 75% was always a temporary measure to build up a meaningful community pool. With 850K+ SCRT, that has been achieved. It seems reasonable to return to the previous, default, fee value of 2%, thus increasing the net share stakers earn.

  • To balance the community pool change, we would like to suggest a new form of fee for the recently founded Secret Foundation. The Secret Foundation is quickly becoming the best distributed entity representing the community itself, and we support finding a sustainable mechanism for the network to support them. While not an official part of this proposal, we would like parties to signal approval/disapproval for such a mechanism (which would need to be separately developed) in this proposal, as it would affect staking rewards.

Please feel free to comment on this proposal and talk it out. We plan to prepare an on-chain proposal based on the responses and submit it next week.

7 Likes

Thank you for sharing your proposal. Here is my feedback:

1. Inflation 7%-15%: I totally agree with that inflation range. Not too high, but still very attractive to potential node runners.

2. Community fee 2%: 2% seems fine to me. The community pool is large enough as it is. IMHO the pool should only be used for very specific and crucial Secret Network needs. We don’t want it to be use like the Dash Treasury is used. Meaning that the Dash Masternodes (Validators) have to vote every month on multiple requests for funds from various projects. It is hard and time consuming to analyze and separate the good from the bad projects.

3. Foundation fee: I think it is a good idea to separate the Community fee from the Foundation fee. We could allocate 10%-25% of the staking rewards to the Foundation. Assuming the Foundation provides detailed info on its operating costs and funds needed to operate efficiently, that allocation should be revised to make sure the Foundation receives enough staking rewards to fulfill its mission and be sustainable.

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I agree with the proposal Guy Z. suggested.

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Thank you @guy for bringing this to the community’s attention. I would like to respond from the perspective of the Secret Foundation. Obviously, we are aligned on the idea of the foundation fee, with the emphasis that only the Foundation (as a transparent, regulated, non-profit organization) will receive this fee. I do have more thoughts on how this can and should be implemented below.

Inflation: this range seems reasonable to me, with the acknowledgement that we will likely stay at the high end of the expected range for a long period of time until more staking power comes online.

Community fee: I agree that the current fee is far too high and that the pool is already well capitalized. However, I have one other suggestion in addition to your thoughts. The Foundation is currently not receiving any funding from the blockchain and will not be able to do so until such time as a module is built to resource it directly. In conversations with validators, we have converged on a 20-25% range for a share of network rewards flowing the foundation. This figure ensures the self-sustainability of the foundation and its ability to perform critical actions (focused on education, awareness, adoption).

My proposal is that 20% be added to whatever figure we reach as a figure for the on-chain community pool tax until such time as a module is created to fund the foundation more directly, at which point another proposal would be made to add this module and remove this 20% from the tax. For example, if we determine 5% is a fair figure for a community pool tax, then the proposed figure now should be 25% community tax, adjusting to 5% after the module is successfully built and proposed. That way the impact on validator returns is the same both pre- and post-foundation module creation (25% lower than inflation alone would suggest). This all ensures more resources are available for the direct benefit of the community and ecosystem.

Foundation fee: see above. I am currently looking to identify individuals who would be willing to build this module for the network, which is a task that should in my opinion be funded via the existing on-chain pool.


To conclude, here would be my suggestion for an immediate proposal:

Inflation: 7-15% range
Community Pool Tax: 25%, immediately adjusting to 5% after the creation and successful proposal of foundation tax module.

Validator ROI will remain exceptionally attractive until the staking rate increases. Staking rate will have far more to do with ROI than inflation / tax rates in these ranges (and this is by design). So I certainly don’t think a higher tax in the short term is a bad thing, especially as it is acknowledged to be temporary.

I welcome all thoughts!

5 Likes

I think i agree with you Tor, as much as i would like it to drop to single digits, i think a good 15%-20% should be kept for now for the Community Pool until we have a sustainable projects funded, too keep SCRT network healthy.

Agreed with this perspective (though I think rather than having the foundation tax be separate, having some fraction of the community pool be transferred to foundation funding as repeated grants is probably easier, and allows for more insight into foundation activities)

Moreover, I’ve seen relatively little of validators saying ‘our ROI is too low’?

1 Like

backing these numbers as well

Thanks all.

First, I completely agree with @Erikb about keeping a close eye on how the community pool is used. Seeing how a couple of spend proposals were rejected, even though they came from valuable community members, shows that the community agrees with that sentiment.

This is also the main reason we’re against keeping the Community Fee higher in the interim compared to its expected long term figure. The second reason is that any fees collected in the community pool are not directed at the Foundation anyway, so there’s little point in having a tax fee higher than 2% (which is the figure Enigma supports - to be in line with the Cosmos ecosystem). Surely, the foundation at some point can ask to withdraw some of the collected funds in the pool, and based on the proposal Enigma and others may or may not vote in favor of it, but given that the community pool is already so large, there’s little value in maintaining a high tax figure going forward.

As to a potential Foundation Tax, I intentionally did not start up a discussion about the figure itself, since the current proposal is already dense enough. However, since others have commented, I’ll speak my opinion, which also covers that of Enigma itself - we believe the Foundation Tax figure should either be a fixed number, if managed, say - of 2M SCRT out of the inflation in the first year, and then decrease after year 1 or year 2. However, if this manages to be too difficult to obtain technically, or the community chooses to prefer a % of rewards, then Enigma would support a 15% figure, and will consider going slightly higher - but in no case, should the Community tax + Foundation tax combined exceed 20%. 10%-20% seems to be the magic range in other networks (e.g., zCash, Beam), so going above it may present Secret Network as less favorable to validators, all things being equal.

3 Likes
  • Inflation: 15%
  • Community: 3%
  • Foundation 15%

If we may, should consider doing some compare & contrast research on how some other networks are handling this.

1 Like

I agree that the range of numbers in this thread are good starting points. However, in the long term, how would these numbers change?

I imagine that tax figures can be politically negotiated, these numbers could realistically stay static(unless network stakeholders decide otherwise).

The question then becomes, does inflation change on a schedule? This assumes that initial projections for growth are accurate.

To ensure that foundation, community, and ROI results remain optimal in response to price volatility, would it make sense for inflation to be dynamic? Alternatively, dynamic tax rates could be used to allow for scheduled inflation changes.

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@Avret Foundation activities will be transparent regardless of the source of funding. That is the intention behind its structure / purpose.

see, on the one hand, i know that, on the other hand, having tangible incentives for structure to persist in its purpose is always good

Thank you for everyone who participated in this discussion - whether on this post, others, or on other channels. We normally believe a week is the minimum amount of time required to move from an off-chain proposal to an on-chain one. It’s been almost a week since this thread was started, but many weeks since starting to discuss this particular proposal, and given the consensus - we feel it’s right to move to on-chain voting.

There seems to be a consensus around the inflation changes (7%-15%), an agreement around 2% community tax, and an agreement around a foundation tax (numbers most likely ranging between 15%-20%). The only aspect for which we’ve heard differing opinions seem to be around whether to include the foundation tax in the community tax for the time being. On that topic, we’ve decided not to include it in the time being for the following reasons, which we hope the community will support:

  1. The community pool is already large, there’s no need to further increase it.
  2. The foundation should be able to build and propose a foundation tax module, that is separate from the community tax module.
  3. In the sake of transparency and good order, it is much preferable that there’s a clear, on-chain separation between fees that are allocated to the foundation and fees that are allocated to the rest of the community.

Therefore, we have just proposed to the network to make the changes as described in this post, and are further detailed in the proposal itself.

3 Likes

The share of Foundation tax should accompany an update on what the foundation intends to do with the money. This is probably stated somewhere, but when one asks for more funds they usually have to back it up with what the increased funds are for.

Otherwise I am supportive of the change.

Here was the initial announcement of the Foundation:

The purpose of the Foundation is to be a self-sustaining, transparent, non-profit organization that can facilitate community governance, education, growth, awareness, and adoption.

The Foundation is only funded through initial donations at this time. The only way for it to become self-sustaining is through a percentage of block rewards. It’s an essential organization for our ecosystem (and for adoption of privacy-first, permissionless tech in general).

2 Likes

I do not have the expertise needed to know if the exact numbers being proposed are perfect or not, but they seem reasonable to me. I also like that the foundation component was broken out for a separate proposal.

The one thing that I wonder about is how the community tax adjustment will age. If the price of the token stays low, and a number of worthy projects get funding, 2% may not be enough. I assume we will then be voting to increase the tax to refill? Just a thought.