I am creating this post to discuss the possibility of changing the inflation rate to align more closely with our economic model. The intended economics model suggests an optimal effective emission rate of around 10%—half of what Archway’s current emission rate is. Currently a large portion of the total supply is locked and cannot be staked, and as a result the remaining portion is earning the total inflationary emissions at a higher-than-intended effective rate. For more context on this, visit Archway Blockchain Tokenomics & Whitepapers | Archway Network and download the Archway Economics Paper.
I am initiating this discussion on behalf of core contributors to the protocol, with the intent to see if it is in line with the community’s will. Please ask questions, leave feedback, and participate in the conversation. Thank you!
What’s the intended effect? All the proposals around cosmos cutting inflation did nothing to price performance as proposers seemed to predict.
WhisperNode is decently near the top of the validator set and I think we make about $800/month currently. This covers the $4-500 or so in infra costs, but leaves little to cover maintenance, upgrades, monitoring, etc. + all of the “extra” work that is expected of validators receiving delegations. I’m not saying this to be bitter, but to point out the very real economics and incentives involved in validating and expecting validators to perform work like relaying, running merch shops, staying on top of governance, etc. The reality is that time must be focused on profitable endeavors and making Archway less profitable at this stage may not be in the best long term interest of the chain.
I feel like the community wouldn’t vote for this in its majority, but what could help if we lower the inflation to 10% is to allow validators to increase their commission to 20%.
So, the change wouldn’t harm solo validators, but would benefit the chain.
Note that Archway inflation IS currently at 10%, with 7.5% going to stakers, and 2.5% going pretty much entirely to the Dapp Treasury, until remuneration to dapp teams is set up.
With a current bonded rate of 45.2%, staking APR = .075/.452 = 16.59% - commission.
This isn’t obscenely high, and as @WhisperNode mentioned, profit margins for validators are currently not great, with many of the active set operating at a loss.
If we do choose to lower inflation, with the goal of making staking APR more like 10%, that would involve a drop to around 7.5% inflation, with only 5% going to stakers, and assuming constant commission, lowering validator revenue by 33%, while we’re still largely relying on them for things like relaying.
If we do choose to lower inflation, I’d recommend upping the maximum commission level for foundation/phi labs delegations to 15-20%; there’s no real reason it’s capped at 10%, just has been industry standard during higher inflationary times.
Note that yes I’m part of Astrovault and run currently the #5 validator, but also that we don’t receive Foundation or Phi Labs delegations and this wouldn’t impact us that greatly. My thoughts here are simply for the overall health of the network.
I don’t think we should lower inflation at this time. If there is strong sentiment that staking APR is too high (I don’t particularly agree) we should rather raise the bonded rate, enabling the Foundation Grants to delegate part of those tokens, lowering staking APR a bit without strongly negatively impacting validators.
From the protocol perspective we have been asked why the APR is higher than the inflation rate and what could be done to bring these in alignment. We commented that the set inflation parameter could be lowered to bring the APR down to the expected 10% level; however, we commented that this would directly impact validators and dapp developers and hence the reason for this preliminary discussion to bring these concerns, impacts and alternatives to public attention. We want both our decision making and process behind it to be transparent!
I 100% agree with @Eric, that we should not lower inflation at this time. Regarding the bonded rate, please note that the circulating supply has portions that cannot be staked due to either technical (limited) and legal / regulatory restrictions (more prominent). As a result raising of the bonded rate may also be superficial at best…
Also, @Eric correctly points to the fact that even if block scanners report, for example, an APR of 22.5% the actual APR (for stakers) should be discounted to 75% of that, i.e. 16.875%, due to 25% of inflation being allocated to dapps (currently the dapp treasury);
Thank you to all participants for this meaningful discussion, it helps to bring community concerns and underlying facts to light in an open (the entire community can participate) and transparent process. So I would also like to invite any strong supporters of an inflationary decrease to raise their comments and reasoning here…
Just want to add to the discussion that increasing commission is not a possibility for us.
We serve our delegators and they trust us for having 5% commission everywhere, we are not open to changing that to earn more of the foundation delegations as its only a part of our total stake.
16% APR is quite normal for the current cosmos token model, and although i believe validators should be able to be profitable at way lower inflation rates, just lowering the inflation is not enough. You will need a different narrative (one of real yield for example), add a Stipend/base pay for validators, reduce the active set or take other similar actions to be able to reduce inflation without significant impact on validator contributions.
Validators that are underwater will 100% sell all their commissions, validators that earn enough will potentially only sell a little and have the power and incentives to keep contributing. In a still maturing ecosystem like archway it seems the latter is most benificial (for now).