Changing Fuse Network Inflation Rate

Fuse Network
1

Changing Fuse Network Inflation Rate

This post is an opening to a discussion for the community about changing the Fuse Network Inflation Rate. Please add your thoughts and ideas.

Current Inflation Mechanism

At genesis in August 2019, Fuse Network inflation was set at 5% per annum:

  • 15,000,000 tokens were minted in Year 1
  • 15,750,000 tokens will be minted in Year 2 - roughly 43,500 tokens per day.

Inflation is used to reward validators and those staking fuse tokens with validators.

There is a general consensus that the inflation rate is too high, causing devaluing price pressure on the token.

Additionally, validators and stakers are disproportionately rewarded over other holders and investors of Fuse token.

It is now the time to think about the ongoing inflation mechanism for Fuse, and to have this confirmed within the next few months, ready for implementation before the end of year 2 (July 2021).

Inflation Mechanism Requirements

There are various inflation/deflation models in blockchain, some more complex than others.

The main requirements of a Fuse Network inflation model are:

  1. To have a knowable and predictable inflation rate. As a financial ecosystem, it’s sensible to have an easily understandable inflation structure. Unknown variance creates uncertainty for participants in that ecosystem. That needs to be avoided. A simple and functional mechanism is the best solution.
  2. To be technically achievable and secure – not open to exploitation or abuse.
  3. To be adaptable should/when circumstances change without requiring hard forks or major technical work.
  4. To create value for the token via scarcity.
  5. To continue to support validators and stakers whilst ensuring they are not disproportionately rewarded, creating a more equitable investment ecosystem for other DApps.

The Proposed Inflation Model

I have discussed a wide range of potential inflation models and mechanisms with stakeholders and other network participants. This is the result, and my proposed inflation model.

As shown in the following table, the proposed inflation model moves from a % inflation rate to a fixed number of tokens minted per year.

  • Years 1 and 2: 5% inflation
  • Year 3: 2% inflation
  • Year 4: fixed 972337 to bring the total tokens to : 330,000,000
  • Year 5 onwards: fixed 300,000 tokens minted per annum. (equivalent % inflation in [ ])

image

For validators and stakers, the reduction in inflation tokens will be supported by the increasing token price, and number and value of transactions, such that it will always be beneficial to run a validator and stake tokens, yet allow other Fuse token investment mechanisms to be competitive.

Please add your thoughts and ideas below.

5 Likes
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I totally agree with your points here Rob, 5% inflation currently is too high (given the currently circulating supply and amount staked). However personally I feel a 300k a year fixed rate is too low, by 2024 the circulating supply will be ~200million assuming 50% of which will be staked to the network this will yield a 0.3% APY which is far lower than the market average of 5-10% offered by most other POS chains. 0.3% will not be attractive to people and solely relying on transaction fees will result in more validators running multiple nodes (which we have seen in the past isn’t beneficial to the network and also doesn’t compensate delegates)

Maybe a fixed inflation of 3million a year ~3% APY will be better and can be reviewed quarterly.

Or look into ways to distribute transaction fees across delegates. Maybe we could use 1559 also.

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Yes, network inflation won’t be enough to ensure a market average 5-15% APR for staking. However, transaction fees will increase over time and these can (and should) be distributed across all stakers in the same way network inflation is currently.

That then means staking rewards are directly related to the value of the network as determined by network fees and token price, not just an arbitrary inflation rate.

Also, a low network inflation rate supports a high token price, which means that even if APR is lower, $$ rewards are actually increased.

There will also be other ways to earn an return with Fuse token - lending protocols, other investment mechanisms, LP rewards, LP provision etc. Staking won’t be the only option. To allow these other options to have a space to function in, staking APR has to be brought under control and be more reasonable.

Having an easily understandable and technically simple inflation mechanism means that it’s easy to change should the community want that in the future, and market conditions require it.

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I don’t think distributing fees to stakers is simple. Fees are done on the network level where are block rewards are done via a contract. Having the fees distributed to stakers would be a fairly in depth network change afaik.

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Hi Rob,

Thanks for starting a healthy discussion about the current 5% inflation rate of the Fuse network.

I wonder if the current selling pressure will still exist in the future if the Fuse ecosystem keeps growing, i.e.

  • CEX listings
  • Growing community (brand awareness)
  • Making it easier to buy Fuse tokens

The above will most likely result in more buying pressure than selling pressure. It seems that the low brand awareness currently and high staking rewards (especially for validators) are causing the devaluing price (more selling than buying). We should, however, not forget that the price increased from $0.03 to its peak of $0.46 in just 6 months.

The Fuse network is not well known yet, on top of which it seems complicated for newbies to join the community via DEX buying, and, therefore, we are having a problem with the current selling pressure.

In regards to your comment:

“Additionally, validators and stakers are disproportionately rewarded over other holders and investors of Fuse token.”

Not sure why this is a problem. Talking about validators, maybe yes, but everyone in the ecosystem is free to start staking. And the staking rewards will go down once more stakers join (balancing out the disproportionately rewards you are referring to).

I wonder if the selling pressure for holders/stakings remains if we assure that the Fuse ecosystem motivates around holding the Fuse token (i.e).

  • Staking
  • FuseStudio
  • FuseCash
  • Other future Fuse Ecosystem initiatives

I instead focus on building an attractive Fuse ecosystem that motivates holding the Fuse token rather than selling the Fuse token.

In regards to the Validators:

  • I wonder if the current selling pressure is coming from individual stakers and not just from the current 20+ active validators.
  • The validators are making the most rewards, with some of them having more than 1 million staked Fuse.
  • I rather see a staking proposal that allows validators to lower the block rewards they charge to individual stakers. What happens if a new and smaller validator is enabled to ask 10% of the block rewards instead of 15%?
  • Creating a competitive block reward environment for Validators might cause them to lower the % of rewards they ask from staking and will reduce what they make (and therefore the selling pressure).

On top of all of this, with the current 5% inflation rate, I instead look at adopting proposals like EIP-1559. If the Fuse ecosystem is successfully built out, burning Fuse with every transaction will automatically decrease the inflation rate (more is burned than issued).

Anyway, I hope this all makes sense?emphasised text

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Thanks for the response Luc,

Interesting points - here are my thoughts:

I think devaluing pressure will always be there at 5% inflation regardless of growth.

Inflation only benefits stakers, so it’s quite a 1 dimensional attribute. It has no benefit out side of staking rewards. The hardware costs and overheads of running a node on Fuse are nothing like Eth or other POWs, so there’s really no justification for the high rewards for validating, and even less so for staking.

Solutions such as EIP1559 is a technically (and economically) complex ways to manage it. My thoughts are, why risk EIP1559 when we can just lower the inflation rate and move staking rewards to real network value - tx fees and token value.

EIP1559 hasn’t been implemented yet and the communities long term feelings for it are unknown. Its instability could lead to hyper in/de-flation, especially when we look to near term off chain and roll up solutions.

To me, a simple, secure and easily changeable way to resolve excessive inflation is best.

Disproportionately rewarding stakers reduces the space for other DeFi products to function. I agree, staking APR will drop as more Fuse is staked, but it will be +15% for quite a while and this limits opportunities for lending protocols and third party DApps.

Fuse needs to be an open ecosystem, and if native staking remains the highest earning APR it shuts out all other options. Again, this staking APR comes only from inflation, not from network performance or token value. It’s an entirely arbitrary value that’s restricting growth for other DApps on the network.

Infact, as inflation has a devaluing pressure on token price, it will probably be better for most stakers to have a smaller APR and much higher token price growth.

The fixed 15% validators fee brings stability to the network. It’s a small charge to cover the costs of running a validator node. Without it there would be a ‘race to the bottom’ in fees which would lead to staking being withdrawn by most validators as it would be uneconomical to keep nodes open. The less staking the better for validators (higher APR), so there needs to be some incentive to keep nodes open to delegation.

I agree better marketing and CEX listings etc will add significantly to Fuse buy pressure and raise token value. I don’t think there is enough Fuse exposure for inflation to be a major sell pressure yet, but it will be, especially wrt a CEX listing and wider interaction with the ecosystem.

So, it would be good to finalise a way forward now, and set the tone and model for the future fuse eco-system.

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A devaluating currency means a lack of interest in the project itself, it does affect the subjective perception of the value, so I think it’s good to reduce inflation, as a general measure.
Also, 1 cent cap of transaction fees is a good idea, transaction cost will reduce with time due to fiat inflation.
A predictable inflation reduction timeframe and a cap in transactions fees provide an easy-to-understand trust framework for community adoption (please don’t complicate things).
Validators in DLTs networks work as economies of scale as adoption increases. If the network succeeds, the risk is reduced, and that’s fine because economies of scale reduce the transaction cost. We ourselves are validators and understand this.

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I appreciate the idea that we need to keep the system fair and balanced, and I agree that our ultimate aim is to keep the value of the Fuse token up and the number of investors as high as possible.
I also agree that the inflation rate should be set as a fixed number and not a percentage to curtail the snowball effect currently happening.

But I disagree with some of the points raised.

  • Firstly: Quote “There is a general consensus that the inflation rate is too high, causing devaluing price pressure on the token”.
    Is there really a general consensus or is this the opinion of a vocal few?
    and that “this is causing price pressure on the token” is a very subjective opinion and I dont think there is any evidence for this.

  • The second point: Quote “Additionally, validators and stakers are disproportionately rewarded over other holders and investors of Fuse token.”
    I disagree totally. As has been stated everyone in the ecosystem is free to start staking. So every single Fuseholder has the same opportunities. So disproportionate to whom?

Now to suggest that the selling pressure is in any way related to the inflation created by the rewards system is a strawman argument. There is no evidence to support this suggestion.
Proven by the fact that the value of the token continues to rise strongly irrespective of inflation caused by rewards.

The token value has risen steadily since late last year until a sudden recent selloff by major holder has plummeted the price, I dare say this selloff is completely unrelated to the number of token in circulation or the factor of inflation in play. There is absolutely nothing to suggest this is the cause and I actually remember hearing someone say the reason was to liquidate fuse in favor of an NFT project that the investor was interested in. So almost proof that this dump wasnt the result of any inflation. This happens its the nature of the game, nothing you do or say or adjust will ever change this. You cannot blame the inflation for this selloff.
The price drop immediately following the sudden ATH a month ago was also to be expected as a major dump is a regular effect of a sudden price rise (we are all familiar with the term “pump and dump”). Now the token resumes its gentle rise in value after the dump, regardless of inflation.

Even ~3% APY is one of the lower rates I have seen and will result in people abandoning the platform, but 0.3% will surely precipitate a mass walkout as people switch for a better return. We will go from one of the most attractive to one of the lowest ROI in the game. A major walkout will result in a drop in the token value, this is not what we are aiming for. Do you not consider one of the reasons some people choose Fuse is because of the promised high returns? Remember global interest rates are currently at an all time low and people are turning to crypto as a way of investing their money to generate an income. Fuse has positioned itself as an attractive investment option. That is part of the reason for its growth, dont take that away. Investors are fickle and will quickly dump if the rates dont stack up.

I concede the value of rewards may seem excessive to someone who has multiple millions delegated and staked and sees his token numbers grow by a staggering number each day, but these individuals are very few and they don’t reflect the thoughts of the majority, and the fact that they dont need the extra rewards shouldn’t become a stumbling block for those who do need (or even depend on) a regular flow of income from their investment.

The rewards for the many people who have small amounts of fuse to stake have already dropped from an attractive level when there were less than 9 million staked when I started, to quite a low level now that there are near 38 million staked. Our rewards have dropped by 75% since then. The opening proposal suggests an ultimate drop down to less than 2% of the current inflation level, for 99% of the stakers its not worth getting out of bed for that. We need to step out of our bubble and wear the shoes of the average Fuseholder.

Furthermore the more the platform is understood, the more fuse will be staked and this will continue to reduce the actual rewards to those already participating in the validation staking program by further reducing the percentage per Fuse that each staked Fuse now gathers.

The proposal suggests an ultimate drop down to < 2% of the “current inflation level” from 5% to an actual level of < 0.1%, this would be an extraordinary slap in the face to virtually everybody and would result in people simply not bothering to delegate at all, its pitiful to anybody with less than a million Fuse to stake. I have done the math, at the current rate with the 38M staked we are getting a return of 113 Fuse per day per 100K staked, at the suggested final inflation rate one could expect a mere 2.3 Fuse per day per 100K staked, yeah 16 Fuse per week, and thats at the current levels this will of course reduce as more people stake. Imagine what 85% of that looks like. Have you really thought about this from the point of a normal person with 10k - 100k to stake and not as someone with multiple millions staked?

I am serious people wont even bother if they have to stake 43,000 Fuse just to get one Fuse per day, What’s attractive about that? Its a non starter.

The simple formula is “More investors = higher price”
Anything you do to scare away investors will negatively affect the price of the token.

1 Like
9

Thanks Adrian,

A lot of what you say I agree with. This is a discussion, so nothing is decided yet!

1 - Token Price Pressure:
I agree - I don’t think inflation rate has a significant impact on the token price at the moment - bigger things such as marketing, number of people holding fuse, investors, liquidity, C/DEX etc all play a much bigger role in that.

But as we move forward inflation will become a negative pressure on the token, and one that needs to be justified to a wider range of investors and projects running on the network.

The aim of discussing and agreeing this now is to build a sustainable economic framework that will create the best environment for all participants in the network in the years to come.

2 - Inflation Rate:
Inflation is entirely arbitrary. There’s no economic reason why inflation is 5% - it’s just a number picked by the team at genesis that sounded reasonable. It could have been 1% or 20%.

I entirely agree that an APR less than ~5% would be below market rate and a negative to all investors. Ideally APR should be in ~5-15% range to be competitive to the market.

I’ve looked at transaction growth and discussed how tx costs will increase over time - I believe these fees should be shared between all stakers, and this should be the basis for validator/staking rewards, not inflation.

This directly ties rewards to network performance and is a justifiable economic model. It also promotes token velocity - moving tokens around - as projects who validate/stake will need to buy fuse to pay for txs, they won’t be getting them ‘for free’ via inflation rewards. This creates a ready market for fuse token.

My calculations show that there should be enough tx value to give a APR in the 5-15% range in a few years, and the reduction in inflation % is designed to balance that and sustain the APR during the transition period.

@Andy raised the issue of whether it was technically possible - this needs to be looked into. It could be based on EIP1559, but 100% of the tx fee is burnt (so the validator gets 0 at the time of the tx), but all the fees are then minted and distributed to validators/stakers at the end of that cycle, in the same way as inflation is - proportional to stake, validators taking 15% fee. It would require a staker lock-in of 1 cycle, but I think that’s being proposed at the moment anyway.

3 - A Balanced Eco-System

More and more projects want to build on fuse. If native fuse staking returns the best APR (due to the arbitrary inflation %) it is a barrier to these projects deploying and gaining traction - how can they compete? As we move forward we have to open our eyes to the bigger picture and see that there will be many other opportunities to earn a return on fuse token.

That being said, the greatest gain for all of us will be in token price, and we need to support that.

In controlling inflation and creating a equitable environment for projects to deploy, we build value into the network, which supports and builds the token price.

Overall, it’s better for all of us to have a lower APR with a high value token in a stable and well used network, than a high APR with a low value token in a fragile and unstable network.

1 Like
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We could look into a fixed APY rate i.e rewards scale based on total amount staked to the network. We could also look at adding incentives to longer term staking this way (higher APY if staked over X months). This will be an easy implementation on the contract level, and ensure network inflation will never be above the set APY (applicable if all circulating fuse is staked). I feel this is beneficial in a number of ways:

  1. Clear returns to stakers.
  2. Network Inflation will be tied to amount staked.
  3. Longer term staking adds security.
  4. Relatively easy implementation.
  5. Easy to adjust APY via voting (simple variable change)
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Interesting idea @Andy,

My only issue with it is that it’s still arbitrary - in that we pick an APR and run to that.

I think it’s important that any solution has some basis in the network economics.

There could be a set max and min APR % (5-15% based on market conditions). Then vary it each cycle based on tx volume. We know the maximum number of txs the network can handle, that sets the upper range. I would propose 20%-80% tx volume to relate to the lower and upper range of APR.

Tx volume: 0-20% = APR 5%
Tx volume: 20-80% = variable APR between 5-15% - ie 50% tx volume = 10% APR
Tx volme : 80-100% = APR 15%

So each cycle APR is determined by the % of the maximum transaction volume within the bounds of 5%-15%.

Not sure how rollups would effect that? Probably not relevant as there would still be a tx on the network.

With this model tx fees would still go to validators, and this would provide a substantial income in future years. Unless all tx fees are burnt and the APR is the only reward for vals/stakers.

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I have more to say on this but most urgently this discussion needs to be made more public, this is too important and affects too many people to be hidden away like this. It feels like a back room.

There are only 32 users registered on this forum.
And out of these only 8 people have been here in the last month.
Nobody is seeing this. Nobody reads this forum.

There are 2688 registered members on the general fuse channel in Telegram.
We all know ALL the fuseholders depend on Telegram for the news and discussions, why is this very important discussion not posted where everyone will read it?
It needs to be made as a new channel on Telegram because it is not getting enough coverage and we are not attracting enough participants in the discussion .

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It’s been tweeted about and posted in telegram, I’ll ask to get it in the sticky. But, quite often with these things most people aren’t bothered enough to contribute to the discussion.

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Perhaps people aren’t bothered enough because they don’t realize how devastating the decisions made here may be to them.
I trust you agree that the whole community has a right to know exactly what is being proposed here, and because they aren’t bothered to come to such an isolated and separated forum I find it necessary to bring the information to them.
Because I think it is unfair for anyone to decide to hold a discussion of such importance in a place that is not a generally recognized nor accepted by the fuse community.

Telegram is the accepted platform for the Fuse community, this forum is fine for side chats and banter but this discussion is on another level.

Seriously 32 users? There is something wrong with this picture.
Any discussions or decisions arrived at here should not be considered the opinion of the community.

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The more people that know the better, any help with raising the profile of the discussion in appreciated.

Any proposal will be put to a vote. The point of this discussion it to get to a model that works for everyone. :+1:

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And thats what scares me the most.

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How about instead of being rewarded with Fuse, being rewarded with a staked version of Fuse.
This stake token (sFuse) should be tradable. To reduce inflation and depreciation of this token, swapping it with fuse on fusenet, should burn the token. I don’t know if it’s possible, but it would be great if an erc20 and bep20 version of this token would exist.
The value should be backed by Fuse, but the price shouldn’t have a upper limit, to make holding more attractive.
Stakeholders should get more benefits for holding this token instead of swapping it directly, like governance possibilities or something else.

2 Likes
18

Interesting idea to remove staking rewards from Fuse token itself. Therefore there’s no need for Fuse token inflation. Will consider and look at how this could work :+1:

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Hello everyone :wave:
Some good points being raised. I also do not think the current price is solely due to the inflation mechanism. I think reducing inflation by reducing the staking rewards to ~5%-10% in order to deal with this will disincentivse hodlers. A system that rewards stakers to hold and support the network is beneficial. As an alternative way to control inflation have you discussed ways to burn Fuse? Perhaps through proceeds gained by investing on other platforms, or small increase in fees etc.?

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Hello guys.

In my opinion APY should be relative to risk/ reward (as all investements). In the end the market (i.e. crypto users) are going to decide which product with which APY they like best and so which project they are going to invest with.

Having said that; in the start of a project, risk is higher. APY should represent that. In practice this means that early investors get higher APY to mediate with potential losses.

I think the Fuse network, although we have a great product standing, is still in early fases. The network has a great amount of potential for growth, which is also necessary to be able to pay investors from tx-fees.

For the network to grow, we need visibility. For visibility we need investors. Investors bring buzz, word of mouth and opportunities for CEX-listing. All those things will help visibility, which will in turn lead to reaching more companies/ projects to start building on the network.

Since the project is still in it’s early fases, I think it would be wrong to cut the inflation rate. Many other projects or farming opportunities bring way higher APY’s and I am convinced that by cutting the inflation rate, we would lose investors/ fail to attract new investors. Especially since only 37 out of 57,5 million tokens are staked. APY has already been falling by almost 10% over the past month/ 1,5 months.

Seeing the risk/ reward (and comparing that on stakingrewards.com) the current APY seems very healthy or maybe even on the low side.

My conclusion is that the APY and/ or network inflation should only be discussed when TX-fees grow enough to be able to take over payment by network inflation.

Even better; I think Fuse Network should build a plan to burn tokens from TX-fees, which would counteract with the network inflation and would go hand in hand with the success of the network.