Changing Fuse Network Inflation Rate

Fuse Network
21

Thanks for that link Lucas.

For the sake of clarity in the discussion can we separate the talk of rewards from the talk of inflation?
that is to say… agreeing that inflation needs to be reduced by a certain amount is not automatically saying the staking rewards need to be reduced by that same amount. These are 2 separate issues.
Although this raises the discussion of where the staking rewards should now come from.

So the primary discussion here is what constitutes an acceptable level of inflation?
Any proposals affecting inflation must also outline how the staking reward obligations will be met.
Which in turn generates the question of what is an acceptable level of staking rewards.

This has already been talked about but not specifically separated like this.
This separation will also remove any confusion between the inflation percentage which is currently 5% of total circulating tokens per year; and the APY of rewards which is currently somewhere around 40% of whatever you stake as a validator, and a non validating stake is 85% of that.

(According to staking.com the APY is 35.89% but I’m not sure the accuracy of this because they also state that 50% of eligible tokens are already staked and that is way off, its closer to 12% if we have 38M staked from a possible 315M.)

22

When you stake Fuse at the moment, the APY is about 36%, so I bet the 35,89% is right. The percentage staked is calculated by the circulating supply, not the total supply.

I understand rewards is not the same as inflation. What I’m basically trying to say, is that in my opinion inflation is not the question, because it is only a result of other parameters, which are:

  • rewards the network want to give to stakers (maybe even a fixed APY?)
  • fees that the network earns from transactions

Those two will automatically result in an inflation (or, with enough income from fees, deflation)

If the fees will be used for token burning, then inflation will end up being the same as the APY, depending on how much of the network tokens are staked. In that case, I think inflation should not be the question, but APY should be, because we want to make the network attractive for investors.

Does that make sense?

23

Yes, my post wasn’t aimed at you, I just opened thanking you for the link.
My post was hoping to gain traction in the broader discussion so we can discuss the issues without creating overlapping confusion.
Yes your post makes sense.

24

Ah, sorry, misunderstood. Thanks for clarifying.

25

Some good discussion. The primary aim of this is to support the token value and network as a whole. The outcome should be a positive move for Fuse and all participants on the network.

I think these are the points of agreement:

  1. APY for stakers has to remain competitive to the market.
  2. Generally projects have a higher APY in the early years, which decreases to a sustainable level as the product matures.
  3. Network Inflation and Staking Rewards are separate issues - although they are currently related as inflation provides 100% of the staking rewards.
  4. Inflation, as currently set, as a fixed % leads to ‘runaway inflation’ as more and more tokens are minted each year.

Framework for a solution:

  1. Staking APY should ultimately be in the 5-15% range to remain competitive
  2. Network inflation should be low or 0
  3. There should be significant token velocity in the network i.e not a solution that promotes holding, but promotes the utility and circulation of the token.
  4. Token value should be supported and the network opportunities grown by the solution.

Options to achieve this:

  1. Use transaction fees as staking rewards, reducing inflation as tx volume increases such that APY targets are hit.
  2. Fixed APY% but rewarded with a new staking rewards token “sFuse”.
  3. Fixed APY%, or fix it within a defined range based on network performance.
  4. EIP1559 style tx fee burn
  5. Oher ideas …

Discussion:

Option 1 - transaction fees and volumes aren’t yet high enough to support a market level APY. It may be technically complex to implement. Estimates are required to set Inflation to balance tx volumes. These will probably need to be set each quarter to ensure APY targets are hit in the early years. But it would base staking rewards on tx volume (a network parameter) which is a better basis for rewards that an arbitrary value.

Option 2 - what is the value of the token if it doesn’t have any utility? Over time there will be more sFuse than Fuse, and therefore the value of sFuse will drop. Do we need a staking token?

Option 3 - With the current model of a fixed inflation rate, as more Fuse is staked, the APY goes down - modelling network maturity and rewarding early adopters. Changing to fixed APY will mean a variable inflation rate that will increase as more Fuse is staked. 40m staked at 10% APY mints 4M tokens, 150m staked at 10% mints 15M tokens.

Option 4 - Tx fee burning would not make a significant difference to overall inflation in year 2-4, it would also penalise validators who are the sole recipients of tx fees.

Option 5 - anything else you can think of.

Lots to think about. I’ll spend the weekend doing so and looking at other options.

2 Likes
26

What are the differences and similarities of FUSE compared with BNB and MATIC ? BNB has a clear deflation program of burning BNBs, why FUSE couldn’t take the same approach ?

27

Bonus APR Fixed Term Staking Pools

One way to resolve the issue of inflation being the only source of staking rewards is to create staking pools that have bonus rewards for fixed term staking.

e.g. stake in a pool for 3 months and get +15% APR over base line inflation APR.

So inflation provides the base line staking APR, and the pools have a bonus APR over that. The longer people stake, the more bonus APR is given.

The bonus Fuse tokens would come from the Fuse Foundation pool which is designated to support the network and is used for LP rewards and other DeFi incentivisations.

A possible pool structure is:

image

The normal staking continues, APR is provided by inflation which will drop in line with the previous model. The base line 7.17% APR is an estimate based on 90M staked tokens and 2% inflation.

The pools are fixed term, and once entered, tokens can not be taken out until the end of the term (it could be that taking out is possible for a 2-5% fee on the staked amount). Bonus staking tokens are paid at the END of the term when the pool closes.

The pool size is the maximum amount of tokens that can be staked in a pool. The individual staking limit is 1/100th the pool size. This means if you hold 90k or less tokens, ALL your tokens can be at the highest APRs. This provides a massive boost to APR for smaller Fuse holders, supporting and incentivising investment in the network from the wider crypto community.

To stop people exploiting the pools staking would have to be through the fuse.cash app, from a verified wallet – one that has had a fiat transfer into it. It is very hard to run multiple verified fuse.cash apps as each would need its own bank account or CC card. This is probably the best method to stop multiple accounts from 1 person in a decentralised way. It also will drive use of the fuse.cash app.

Pools can run multiple times if full – i.e. the 3 month pool could run every 3 months.

There are various ways to manage the pool – only starting when full, only open for staking for a fixed period, no unstaking/ unstaking for a fee etc. These can be decided later.

The great thing about using Fuse Foundation tokens is that these are not new minted tokens, but tokens moving from the foundation to the community. This will have a huge positive effect on token price, without any inflation price pressure.

Possible issues:

  1. Fuse.cash Ramp doesn’t work for US customers/bank accounts, therefore limiting the number of people who can stake in the pools.
  2. Why limit pool staking to fuse.cash users? As most fuse token holders don’t have more than 90k tokens, there is only a limited number of entities that could stake multiple times, therefore the risk of exploitation is low.

What do you guys think?

28

Hi Rob,

Thanks for again thinking of a fair inflation model for Fuse.

I like the proposal and the idea of starting with pools, but I am not sure about the following details:

1. The bonus Fuse tokens would come from the Fuse Foundation pool designated to support the network and is used for LP rewards and other DeFi incentivisation.

I rather see that Fuse uses the funds of the Fuse Foundation to fully support the Fuse ecosystem by offering grants to a broad scope of projects. Instead of using the tokens for bonus rewards, I rather see the foundation spending the token on projects that will build on / and integrate with Fuse to positively affect the ecosystem and, therefore, the token price in the long run.

2. A 3-month pool, 6-month pool, and a 12-month pool

I’m not sure if we should incentivise stakers after 3 months. Especially not with a 15% bonus APY. The lock-up period should be longer > 12, 18, 24 months for the health of the ecosystem.

3. To stop people from exploiting the pools, staking would have to be through the fuse.cash app, from a verified wallet – one that has had a fiat transfer into it. It is very hard to run multiple verified fuse.cash apps as each would need its own bank account or CC card.

This almost feels like KYC. It will also not be waterproof. There is never a way to stop people from abusing the rules. I don’t think it makes sense to force people into a wallet for staking. It will also prevent certain countries from taking part (if we determine quality based on a fiat transfer).

Additional:

  1. What about a burn mechanism? I still think that a fee burn per transaction will battle the 5% inflation. The bigger the ecosystem, the more transactions we will see, and, therefore, the lower the yearly inflation. This way, we are (including the community) pressured to grow the ecosystem (instead of just staking and making more bonus rewards by doing nothing).

  2. What about granting governance tokens to long-term stakers? This instead of actual Fuse tokens.

  3. What about the validators? Why not come up with a model where validators can lower staking fees for stakers that use the same validator for a fixed time (f.e. 10% instead of 15% after 12 months). We are thinking about changing a lot, except for the 15% validator fees. That does not sit right with me.

  4. I like the idea of transaction rewards that will go to the Fuse Foundation to fund development of the ecosystem. That said, we need to exponentially grow the Fuse community to get enough transactions to pull this off. But growing the community should be the goal. And I don’t believe that just lowering inflation is going to help with this mission.

  5. Have we ever considered a Fuse Gitcoin project where we, as a community, can fund potential Fuse ecosystem partners?

By the way, the discussion is good, but let’s get Fuse going first. The token price is extremely low, there is no CEX listing, and the community is still very small. We won’t get a lot more stakers in currently by lowering yearly inflation. Other projects are more known, have more prominent and bigger communities, a higher token price, and are still offering more APY than what Fuse is offering today. I don’t think that the inflation discussion should be a priority for now.

29

I agree with many points Luc brings up, although I have to agree right now that at this point in time, scarcity is an issue. The rewards being paid out seem to have a negative effect on the token price. Because APY is also much higher than on many other chains, I do think it would be smart to reduce the inflation rate.

I’ve had some talks with several community and team-members about the inflation. My main focus with those talks was to try and find a system to make it sustainable for longer term out of the viewpoint of keeping the APY at a competitive edge in the growing DeFi landscape.

Considering this there are multiple factors at stake, which are:

  • Rewards on farming and on staking;
  • The Dev fund of the foundation and the way those tokens will come into circulation;
  • Rewards for validators;
  • New use cases like ICHI’s OneFuse;
  • The result of all of these on the amount of tokens staked.

These factors together have an effect on the APY, which I have made calculations of. Conclusion of those calculations is that the parameters can have pretty drastic effects on the development of the APY over years, mainly depending on the amount of rewards that are being restaked.

The results of the calculations are as follows, with the first table showing the effect over the years of the APY with 100% of rewards restaked and the second table showing the effect of the APY with only 20% restaked.
APY over years

In these calculations the spending of the Fuse foundation/ dev fund (except for the farming rewards) is not taken into account, because budgeting and prognoses were not available.

Conclusion was that because there are so many unpredictable elements, it is very hard to find a solution for maintaining the APY at a certain level that would work over the course of multiple years.

I agree with Rob that the current rewards are unnecessary now the Fuse ecosystem is developing the way it is. Scarcity would be the better strategy in my opinion.

Having said that, I think it would be smart to offer an APY a tad higher than that of other chains like Cardano and ETH. 2% seems to do that trick for now and probably the coming 2 years (depending on the spending of the Fuse foundation and the Dev fund).

My proposal would be to go with the proposal by Rob and to re-evaluate semi-annually if the offered APY is still competitive or should be adjusted.

The idea of the Bonus pools is brilliant in my opinion, although I think it is smart to offer smaller size pools and introduce new pools periodically on the basis of how quickly the last pool sold out. This creates extra buzz and sense of urgency to lock tokens for a longer amount of time.

By the way; it seems that the team is willing to fund the bonus pools from the Foundation. Over time this could be adjusted to be funded out of tx-fees or other network income.

30

Thanks Lucas,

The vote will be solely to reduce network inflation from 5% to 2%.

Whilst the bonus pools are a key factor in maintaining a competitive APY for Fuse staking, we can’t actually vote for these to be built, as they are not a network parameter. They are new development and funded by the Fuse Foundation.

The best we can say is that the Fuse team is committed to building these bonus pools and are fully behind the need to offer a competitive APY to stakers.

I’m arranging the vote. Full details of when and how to vote will be published here soon. There will be plenty of notice and advertising of the vote to ensure the widest participation.

31

The change to inflation rate has been put on hold until a broader approach to Fuse Tokenomics has been discussed.

The first part of that is discussing the ‘end game’ - where do we want to be in 3-5 years time.

It’s been raised that we should have a Max Supply of Fuse token. Many projects are moving forward in this direction. Also inflationary projects are looking to implement deflationary tactics, to boost token value (EIP 1559 for example).

Fuse are in a position where we can set a path to a Max Supply, thus giving holders, stakers and investors a clear token value proposition.

Given the nature of investments, having Max Supply reached within a 3-4 year timeframe is (I think) essential to it having a positive effect on value. If we push Max Supply getting reached in 10 years, it ceases to have any impact on the current value proposition of Fuse token.

Example
A route to a Max Supply of 350m Fuse Tokens could look like this:

image

Yellow cells highlight the inflation rate - either % or in the last year, a fixed amount to result in a 350m max supply.

Lets discuss.

The issues to do with staking rewards etc are the same, and have been discussed and solutions proposed previously.

Thoughts.

FYI @marksmargon

32

We also need to consider how the realignment of tokens described in the H2 document (Future Goals for Foundation Holdings / Token Burns) could affect max supply.

One method is to fix the number of tokens minted each year as described above (eg based of the % shown but a fixed amount), and ignore any token burns so that the max supply will be less than what we are aiming for here.

33

Thanks for the Rob, and i support 100% this proposal, i think that a fixed supply will create clarity with the community of Fuse holders and it’s vital for the future of the network to lower the inflation rate as the network grows.
Benchmarking with other similar networks it is clear that the a deflationary network with a fixed total supply is creating incentives for partners to join and contribute early and keep participation for the long term.
Another mechanism we should be here is burning fees so there is that more activity and transactions on the network affect the total supply which is a desirable connection for network participants.
I propose:

  1. Inflation will be deflationary - Total supply will be 350 M by 2026 (in 5 years)
  2. 50% of the fees will be burned, 50% will be sent to the validator

Happy to hear feedback and finalize a vote for this with the community and validators

1 Like
34

Hi Mark,
I also definitely agree that the Fuse token should be deflationary with a fixed supply, but before setting any numbers I think we should try to answer some questions:

  • If there will not be more tokens that reward the validators, does it mean that the validators will only earn transaction fees?
  • Afaik Fuse aims to be very low cost blockchain, if the only incentive for the validators will be to earn transaction fees and half of that will be burned, will it not disincentivize the validators to keep running their nodes? Or will Fuse lose it’s value proposition of being a very low cost blockchain at that point in time?
  • Instead of reaching the max supply at once and cutting the minting of new Fuse tokens, isn’t it better to have a more decremental approach like in bitcoin’s halving? For example every x number of blocks we can cut the inflation rate by half or something similar, so instead of reaching the max supply in 5 years maybe it will take longer time.
35

To answer you qestions:

  1. The validators will slowly get less rewards from the block reward and more from the transactions fees just like it works with most payment processors today.
  2. We published recently a post about scaling Fuse and also moving into a dynamic fee structure like it’s commonly implement in the space - which means that on some transaction the fees could be very low and some could be very high - depends on the type of transaction and the demand. This means that the network can be cheap for P2P transactions and still very profitable for validators.
  3. Yes, we only need to agree on the speed if deflation but i agree, we need a decremental approach similar to Bitcoin.
36

This is an option with a halving inflation % each year until August 2026. Would lead to ~355m tokens.

There could be an optional token burn to get the Max Supply to 350m.

Or leave Max Supply as a variable that is reached at the end of the inflation period. e.g. whatever supply we get to at August 2026 is the max supply. There could be token burns along the way, so we don’t actually know what the max supply will finally be - but we know the inflation rates.

A burn during the inflation years would affect the amount of tokens minted, so would be best to leave that to the end if it’s going to happen.

image

37

This inflation model does allow a managed transition to tx value for validators, rather than inflation earnings.

We could also bring in the reward pools should there be a need, but 10 more months at 5% seems enough time to develop the eco-system and token price so that 2.5% will still provide a suitable $ return for staking in 2022

38

Ok so i think we can send your last proposal to the validator group and other groups to start reviewing this and see how we can finalize this proposal and begin voting on it?

1 Like
39

I like the model. So that means that until august 22 we will keep 5%? I thought that we were not necessarily committed to cycles with inflation changes?

Also; could we maybe add a certain estimate on timing of change in fee structure?

40

We can reduce inflation at any time, but we need good support (products, users, token price) before lowering staking rewards. Don’t think we’re there yet. By August next year we should be, and the halving will be taken well by stakers. Before that, it may reduce interest in staking at a time we need to be growing.