Internet Computer Association

DFINITY Foundation

Build long term R&D efforts for Tokenomics (from which multiple projects will emerge)



Here is the text of this motion proposal, thus far:

# Tokenomics Project Proposal

## 1. Objective

Evolve Tokenomics on the Internet Computer to best incentivize participation, both for those locking up their tokens to participate in voting activities, and those who will use tokens to purchase cycles and/or support various market activities.

## 2. Background

On May 10, 2021, the Internet Computer was launched, along with a ledger and governance system (NNS), and ICP tokens were brought to life.

With the launch of these two principle canisters: the ledger and the NNS: a series of choices were made concerning lock up, voting rewards, how and when minting can happen, initial supply, etc., all of which have an impact on the overall economy of the Internet Computer.

## 3. Why this is important

Every free market consists of multiple economic pressures, many of which cannot be predicted ahead of time, especially when novel influences are present. At the launch of the Internet Computer, certain factors were decided on as representing the best start to launch the network and begin inviting participation.

Over time, the community has gained valuable information as to inflation and burn rates, popularity of staking, accumulation of fees, open market valuation, etc. It becomes important, then, to re-assess the original choices in light of these factors, to determine whether adjustments should be made to further incentivize participation. In short, the tokenomics describe a dynamic system with multiple gauges for the community to observe and levers for the community to pull.

## 4. Topics under this project

While not an exhaustive list, the Tokenomics project will consider many topics, including the following:

* Adaptive inflation and deflation control;
* Remuneration parameter changes (node providers, neuron rewards, …);
* Modeling of the ICP market and its movements, to better assess the impact of future changes to the tokenomics;
* Staking forms and neuron reward parameters and management functionality;
* Proposals, voting and reward modeling and tuning.

In brief, the Foundation wants to help the community to create a clear and transparent view as to what all the existing parameters are; their real-world impact on market data; and a clearer understanding as to how future proposals may alter that impact positively or negatively. For example, if reward rates are increased for short-term stakers, or if rewards are allowed for neurons with less than six months remaining dissolve delay, would this be likely to increase the percentage of staked supply? Would it lead to more neurons being created?

## 5. Key milestones (and technical solution if known)

Some of the key milestones for this project include:

* Improve documentation, terminology and educational materials, in order to facilitate a clear and broad understanding of how the tokenomics for the IC works, what led to the current choice of parameters, and what aspects are likely to need tuning in the future. This also requires increasing transparency and allowing participants to better understand the flow of supply and how past choices may have affected future outcomes.
* Develop economic models that can offer insight into the possible outcomes of parameter changes.
* Define measurable objectives for our tokenomics with respect to inflation, amount of liquid supply, staking participation, and market volume. This creates a baseline against which we can measure the health of our current tokenomics.
* Create a series of motion proposals, based on community interaction and findings from the above, to fine-tune the tokenomics until we reach the desired goals of utility and equilibrium.
* Mechanisms to help regulate the liquidity and supply of ICP, new staking options and other economic instruments that allow the Internet Computer to offer a thriving market for all participants.

## 6. Discussion leads

John Wiegley, Johan Granstrom, Lara Schmid, Igor Lilic, Timo Hanke 

## 7. Why the DFINITY Foundation should make this a long-running R&D project

This should be a long-running project because tokenomics is the beating heart of the Internet Computer economy. If we overheat and supply increases too quickly, it can cause a depression in price that scares away investors; or if we freeze up and exhaust supply, it could lead to low volumes and high volatility that are unattractive to businesses seeking to stockpile ICP for their computing needs. The right balance of supply, engagement and volume, will lead to a healthy economy that works well for its participants, and not only for long and short speculators.

## 8. Skills and Expertise necessary to accomplish this (maybe teams?)

Some background in finance and economics is necessary, as well as a technical understanding of decentralized markets and how canisters like the Ledger and NNS are used to create such a market. There are many variables at play in this highly dynamic system, so insight into the long-term impact of economic decisions becomes critical to making well-timed decisions. This is a project that will likely have a lot of community participation.

## 9. Open Research questions

* How best to model and forecast the economic parameters specific to the Internet Computer remains an open question.
* With respect to ledger behavior and the operation of token markets, we can look to existing projects for guidance and inspiration.
* Explore existing and analogous financial structures (options, futures, CFDs, bonds, etc), DeFi opportunities, and smart contract mechanisms to best support the economy and ecosystem of the Internet Computer.
* For each structure created and employed at the level of the NNS, how can it best be offered to communities on the Internet Computer, in order to help build community economies in an adaptable way?

## 10. Examples where community can integrate into project

Discussions on the DFINITY Forum is probably the best place to begin integrating into this project, as well as open source projects for any modeling systems that are created to aid with analysis.

## 11. What we are asking the community

Please submit your questions, experiences, concerns, frustrations, hopes and fears, since it is the decisions of the market population that ultimately determine whether a Tokenomics proposal will succeed or not.

* Review comments, ask questions, give feedback

* Vote accept or reject on NNS Motion

Developer forum: https://forum.dfinity.org/t/long-term-r-d-tokenomics-proposal/9392/3






Long Term R&D: Tokenomics