Continuing discussions on Inflation

[awma]

Thanks for your feedback @Joel and @Wiser — since you raised an overlapping set of points, I hope you’ll forgive me for addressing them at the same time. I’ll also add these points to the FAQ on the LIP discussion thread.

@Joel

Until, there is clear evidence of fees moving in a real sustainable positive direction, it just doesn’t make sense to me to make material reductions to inflation, especially when considering anyone who stakes will not get diluted.

Orchestrators need emissions-funded rewards to support their operations until fees are enough to make an unsubsidised O sustainable. That subsidy isn’t going away. We’re talking about walking emissions back towards levels they were a year ago, when fee income was even less than it is now: this isn’t unexplored territory for Os. We don’t have to wait until fees ramp up.

@Joel

So catering to non-stakers should not be the priority

Catering to non-stakers is not the priority. It’s a question of balance: managing emissions-based rewards is about managing a tradeoff between diluting non-stakers and incentivising staking. Our proposal is to fine-tune this balance, because the incentive to stake is already enough to sustain adequate levels of staking — not to prioritise non-stakers above stakers.

@Joel

But the idea that tweaking the inflation materially now, and that will have a decisive positive impact on the token, just doesn’t feel like anything near a certainty.

@Wiser

I don’t believe that lowering the participation target (the “threshold”) at this stage would improve the token’s value.

While of course every proposal ought to serve the long range goal of increasing the value of the network, we don’t claim this is going to have any immediate impact on token price. Our proposal is about preserving the capital pool and limiting wastage, not pumping the token.

@Joel

In the interim, what can work is putting a cap on inflation, so that it can not rise above say the maximum it was over the past 12 months.

@Wiser

Rather than adjusting the target participation rate, it might be more judicious to discuss implementing “guardrails” (caps and floors) within the protocol’s smart contract. Setting a hard maximum and minimum for the inflation rate would provide more long-term predictability for investors and operators, protecting the ecosystem from extreme fluctuations in the future.

Our proposal is a soft touch approach to the same goal as an emissions cap: prevent emissions from growing uncontrollably. It recalibrates the existing system without introducing new dynamics or requiring a contract redeployment. Implementing this proposal does not rule out introducing guardrails (nice word) like an emissions cap later on.

@Wiser

My Takeaway: In my opinion, the current staking-based regulation is doing its job perfectly. It incentivizes participation while naturally adjusting as the network matures.

Every mechanism deserves to have its objectives (i.e. its job) and performance (i.e. whether it does it perfectly) reviewed to see if they still serve the community’s objectives. That’s what we’ve done with our community survey, proposal, and risk report.

• We asked the community what they think about the 50% target, and almost no one considered it a red line: anything over 40% bonding rate is perfectly fine. So if the price adjustment mechanism’s job is to keep the bonding rate over (or at) some threshold, there is no reason to insist that threshold be 50%.
• We studied the performance of the adjustment mechanism from a theoretical and empirical perspective, and found little evidence to support the claim that very high emissions are necessary or sufficient for high participation. If they aren’t, it’s really unclear how they can be worth the risk of externalities, which have been discussed at length elsewhere.