[Proposal] The creation of a new inflation schedule

Hello all (again),

The Problem:

I will keep this short and concise as I am sure there are many in the community who already support this view.

A perpetual inflation rate of 15% creates a problem where the SCRT token is suffering from large-scale depreciation as stakers are realising their income. There are large supply-side injections in the market that demand is unable to absorb.

Theoretically, a lower inflation rate should result in lower SCRT entering the market. Arbitrarily decreasing the inflation rate but letting it sit until the community wants to adjust it again creates some uncertainty (which Ian from Secret Nodes had rightly noted). A lower inflation rate combined with some degree of certainty on inflation at a point in time will be helpful going forward.

Please note that you cannot have your cake and eat it too. High staking APR derived purely from inflation will continue to hurt forever. We are not trying to compete with the US Government and see who can print money as fast as possible to attract people.

The Proposal:

The proposal requests the community’s opinion on transitioning the existing inflation schedule to a programmatic inflation schedule that decreases on a per-block basis.

The inflation curve is proposed to adjust to f(x) = (5 / x^0.5) + 5 where f(x) is the inflation rate and x is the number of years since initiation. The curve can be viewed in the Desmos curve linked below.

At a high level, this would result in the following impact:

Year Inflation Staking APR (@ 66%) Staking APR - Inflation
1 10.00% 14.24% 4.24%
2 8.54% 12.16% 3.62%
3 7.89% 11.23% 3.35%
4 7.50% 10.68% 3.18%
5 7.24% 10.31% 3.07%
6 7.04% 10.03% 2.99%
7 6.89% 9.81% 2.92%
8 6.77% 9.64% 2.87%
9 6.67% 9.49% 2.83%
10 6.58% 9.37% 2.79%

Note that inflation will not maintain a fixed rate throughout the whole year but will be gradually decreasing per block. Also, note that the numbers include a 4% tax going to the Community Pool (which I have proposed to be used by the Senate in the other post) as well as a 2% tax going to the Secret Network Foundation. These are just illustrative numbers and not in the scope of the Proposal.

Items to Consider:

  • We need to understand if this is feasible from SCRT Labs’ perspective
  • We do not want to add significant complexity to the core chain such that it places difficulty in upgrading the chain in the future

Feel free to poke and prod on the idea and I shall do my best to communicate my thoughts better so we can shape this into something better than I have conveyed!

Ideas for the Future:

  • Set a “max inflation” threshold, such as 5%. Inflation is streamed at a maximum of that amount but reduced for any transaction fees earned by the Network. This retains a level of premium to staking for all events except for when transaction fees are in excess of 5% APR. When APR reaches 5% in the period (potentially do this as a daily epoch-style system used by Osmosis), burn the remainder of the fees.

OJ

3 Likes

I’m fine with this proposed schedule and I’d rather the SF tax be the greater of the two taxes proposed.

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It should be noted that Lisa from the Secret foundation publicly said a foundation tax would not be considered at these prices.

Aside from that, I’m a strong proponent of tax rates not being bundled changes anyways. So if you can break those params (community pool and sf taxes) out of this proposal and into their own, I think there is a starting point here.

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Yup, as mentioned in the original post “These are just illustrative numbers and not in the scope of the Proposal.”

The inflation schedule won’t set the tax rates, I agree with you that we shouldn’t bundle things together.

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I have no problem with the taxes being inversed. Both of these will need separate proposals for their parameters though!

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Roger. Cool. Thanks for putting this together.

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It is important to keep in mind that significant drops in inflation can affect validators who may start leaving the network, running SGX infrastructure is a bit more challenging than on other Cosmos chains.

So an instant inflation drop to 10% seems excessive and could damage the network.

My question is, are you suggesting a bump ( like once a year ) or gradual ( like in each block ) reduction?

If the gradual route is chosen it may give more room for the validators to prepare ( raise fees etc ).

Like you said, I’d love to hear what SCRT Labs says on this proposal. Great post!

My opinion is that it should be bumped down to 10% and then gradually decrease per block (with year-end figures shown in the table below).

Validating is already a loss-making venture for at least a quarter of the validator set but yet they remain. Furthermore, it is illogical to suggest that the token should depreciate and effectively reduce the economic security of the Network for the sole purpose of subsidising validators.

Validators are not forced or obligated to run their validator. All of those currently making a loss can shut up shop right now and it would have little-to-no impact on the security of the chain because they have a negligible amount of voting power between them.

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I agree with you. We are at the bottom of a bear market. If validators are expecting to be profitable, they may need to switch to another token. If validators choose to stay and take a loss, they may be rewarded when we return to a bullish market.

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I personally think this is important from a network standpoint and stability of the economics of the SCRT token.

I think what you propose is reasonable, we can always assess if this was a good economic setup after a duration of time like every year.

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Am in support of this.

Currently, ~132k SCRT a day is going towards stakers + validators. By lowering inflation, we lower the security budget which I think we are well within a comfortable spot for proof-of-stake security to do so. Additionally, lower SCRT inflation means lower opportunity cost which will help stimulate DeFi growth on Secret Network as the hurdle rate will be lower with less inflation. Finally, giving community a clear inflation schedule that heads towards much more sustainable emissions is a net positive from a reliability and narrative standpoint.

Kind regards,
Carter Woetzel (Shade Protocol Lead Researcher)

4 Likes

My (personal) take is:

  1. Good proposal. I suggest starting from 9% and not 10%. There’s a psychological element here that’s important (single digit inflation).

  2. We may still want to do the funds a-la Secret 2.0 vision from last year. In general, I think the tokenomics deserve a bigger revamp. But there is no reason to delay things until we get there. I’m in support of reducing inflation immediately to 9%.

  3. There’s no point in extra dev effort and doing this per block. Just do a single week-long proposal for the schedule, then update the parameters once every 3 months with an expedited proposal.

4 Likes

Supporting the 9% inflation. I’ll put out an on chain prop for 9% inflation soon.

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Please note that BlocksPerYear should also be updated.

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I‘ll formulate an extra forum post outlining every change that we need to do and give it an extra week to discuss this. Thanks a lot for the input :smile:

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