FRC04: From Inflation to Revenue. Upgrading the Staking Model for FUSE

[Misha]

Simple Summary

FUSE staking has been funded by inflation since day one. That model served its purpose: it bootstrapped the network and rewarded early validators. But we’re now approaching the end of that runway. With supply nearing the 400M cap and inflation winding down on a fixed schedule, this is the right moment to ask what replaces it.

This proposal upgrades the staking model with a clearer separation between staker and validator roles, introduces a cooldown mechanism to liquid staking, begins capping inflation, and allocates treasury funds to bridge the transition to revenue-funded rewards. It’s a temperature check. We want community feedback before formalizing anything.

Background: Where FUSE Stands Today

FRC02 proposed a max supply of 400,000,000 FUSE. While that hard cap was not enforced in the contract, the step-down inflation schedule it introduced is live and well underway. We’re currently in the 1.5% phase (Aug 2025 to Aug 2026).

At the final step, 0.5% on a ~400M supply means roughly 2M FUSE in annual emissions. Staking yields funded purely by inflation become thin at that level, particularly for delegators without validator economics to supplement them. This is a structural shift that needs a structural answer.

On FRC03 and the L2 Direction

FRC03 explored an L2 staking model for Fuse Ember. We’re closing that chapter. As announced in the Fuse Network Roadmap Update published earlier this month, Fuse is staying on L1. The performance gap that originally motivated the L2 direction no longer exists: the Nethermind node upgrade (v1.29.0 to v1.36.2), developed in collaboration with Liquify, brings throughput to a level that meets the network’s needs without the tradeoffs of L2.

L2 node holder considerations are being addressed in a separate process and are not part of this proposal.

What We’re Proposing

Four changes, introduced together.

1. A clear separation between staker and validator roles

These are two distinct roles with different economics, different responsibilities, and different mechanisms.

Stakers delegate FUSE to validators through liquid staking. They receive sFUSE as a liquid representation of their position and earn rewards from the staking pool (currently inflation, transitioning to treasury and eventually protocol revenue). Entry and exit are relatively low friction, subject to the cooldown period described below.

Validators run the infrastructure. They register through an onchain process, are required to lock up a minimum FUSE stake for a defined period (see governance question below), and earn the standard 15% fee on top of delegator rewards in addition to their own staking yield. Validators can also set their own fee rate, giving them a market-based lever to attract delegation and, in turn, voting weight.

2. Cooldown period for liquid staking

Liquid staking without any cooldown creates an incentive to extract yield without meaningful commitment. We’re adding a 7-day unbonding period for stakers who want to exit. This applies to everyone by default.

If you need to exit faster, there are two paths: convert sFUSE to FUSE through Voltage Finance and pay the DEX fee, or trigger a fast withdrawal and pay a 5% early exit fee. We’re proposing 5% as a starting point and welcome community input on whether that’s the right number.

3. Validator unbonding period

Validators operate under a longer lockup. Entering and exiting the validator set takes approximately 4 days, following the unbonding model used by networks like Polygon. This is an economic safeguard: validators are making a longer-term commitment to the network and the lockup reflects that.

4. Treasury allocation to bridge the transition

To keep staking yields meaningful as inflation winds down, we’re proposing an initial allocation of 50M FUSE from the Fuse treasury to fund staking rewards over approximately two years. This is not inflation. It’s a finite, transparent commitment from the protocol to support the transition.

To give a rough sense of scale: 50M FUSE distributed linearly over two years is approximately 68,500 FUSE per day. At current prices, the annualized yield this generates for stakers depends heavily on total staked supply. We’re working through three scenarios (FUSE price appreciates, holds, or declines) and will share the full simulation before this moves to a formal vote. The 50M figure is our working proposal and may be refined based on that analysis and community feedback.

5. Gradual inflation cap

Rather than allowing inflation to passively wind down toward 0.5%, we’re proposing to introduce a formal on-chain cap and accelerate the transition away from emissions-funded rewards. The exact mechanism will be proposed in a follow-on technical FRC. The principle is simple: staking rewards should increasingly come from product revenue and treasury, not from diluting token holders.

Governance

No changes to the governance model. The existing delegated proof of stake mechanism remains in place: validators participate in on-chain votes directly, and their voting weight is determined by the FUSE delegated to them by stakers. Stakers influence governance through their choice of validator.

This dynamic already creates a natural incentive for validators to compete on fee rates to attract delegation and, in turn, voting power. Validator fee flexibility reinforces this without requiring any changes to the underlying governance architecture.

The Path to Revenue-Funded Rewards

The treasury allocation is a bridge, not a destination. As Solid scales and generates product revenue, that revenue is used to buy FUSE off the open market and distribute it to stakers. This creates direct buy pressure from real commercial activity and keeps stakers aligned with the token’s long-term value.

Protocol revenue in scope in the first instance: transaction fees, Solid revenue, and Voltage fees. The percentage allocated to staking rewards is set by governance and adjustable by community vote over time.

Open Questions for the Community

1. Does the staker/validator separation make sense as described? Anything missing from either role?

2. Is the 5% fast withdrawal fee the right level, or should fast exits route exclusively through Voltage?

3. The validator minimum stake is not defined in this proposal. We’re leaving it open for community discussion. What should the minimum be, and should it vary by network role or be uniform?

4. Does a 50M FUSE treasury allocation feel right in size and duration?

This proposal is open for comment. We want to hear from validators, delegators, and FUSE token holders before anything is formalized.

[RB_1010]

Thanks for the FRC, I’ve some questions:

1. Currently, as long as 100k Fuse is staked on a node, the node is active. How does the proposed locking mechanism differ from the current mechanism?

Do validators need to lock Fuse with the actual validator wallet, or can any wallet be used to lock Fuse on the node (Due to security factors, currently most nodes are not staked from the node wallet but from a different wallet).

2. Disagree with nodes setting their own fees. It doesn’t promote a unified network, but creates competing nodes and a divided community. Nodes should have the same fee set by governance but within a defined range (say 1-20%). The range gives economic flexibility whilst restraining unjustifiable fees. Initial node fee should remain at 15% to start.

3. Min Validator stake of 100k is still reasonable.

4. 50M Fuse as staking rewards is a huge amount. For comparison, these are the previous and projected amounts of Fuse to be minted by inflation:

Yr: 23-24	18,232,594
Yr: 24-25	11,486,534
Yr: 25-26	5,915,565
Yr: 27-28	4,002,866

The consensus has 118M Fuse in it - 25M rewards per year is 21.2% apr, and that’s not even active Fuse. Active Fuse is ~100M at most, equalling 25% APR.

50M Fuse should last 4-5 years, at ~10M per year.

Staking in Solid should have a better APR than staking Fuse on a node for 2 reasons:

a) To support Solid as a savings/deposit bank

b) Because sFuse is liquid and can generate returns from DeFi activities, therefore it doesn’t need a super high APR which competes with Solid.

Why not have 10m Fuse for 3 years on nodes (~10%APR), and 20m distributed to fuse Stakers in Solid to boost APR to ~15%

5. sFuse fast withdraw would only be used if swap had poor liquidity, which it shouldn’t really. 5% seems fine imo.

6. Are the team entirely happy that the sFuse staking contract is 100% secure and working, including withdraws and fast withdraws.

[Misha]

Thanks Rob, really appreciate the detailed feedback. Going through each point:

1. How the locking mechanism differs from the current one

Currently, a node stays active as long as 100k FUSE is staked on it. Under the new model, the main change is the unbonding period: when a staker exits, their FUSE goes into a 7-day withdrawal queue before it is returned. Validators operate under a separate ~4-day unbonding period aligned with standard PoS networks. The activation threshold of 100k stays the same (see point 4). The goal is to introduce meaningful commitment without making staking operationally burdensome.

2. Which wallet can be used to lock FUSE on a node

Any wallet can be used to delegate stake to a validator, not just the validator’s own wallet. This is unchanged from the current setup and is intentional given that most nodes already operate with a separate staking wallet for security reasons.

3. Validator fee flexibility

We agree with your framing. Fees should be set within a governance-defined range rather than left fully open. We’re going with 1-20% as the range, with the default remaining at 15% for validators (10% base from global staking plus 5% for Solid stakers, see point 6 below). The range gives validators economic flexibility while keeping fees from going unreasonable in either direction.

4. Min validator stake

We’re actually reopening this one. Rob, you flagged that 100k is still reasonable, and we understand why historically it made sense. But at current prices 100k FUSE is around $300, which is a very low barrier for a role that will now earn meaningful yield and take a fee cut from delegators. We propose to raise the minimum to ~$3,000 worth of FUSE (1M Fuse tokens).

• 100,000 FUSE (~$300) - keep as is
• 500,000 FUSE (~$1,500)
• 1,000,000 FUSE (~$3,000)
• Other (comment below)

5. 50M FUSE treasury allocation and emission schedule

You’re right that 50M is large in the context of historical inflation. We’ve reworked the emission model to reflect your suggestion more closely. Here is the updated projection:

Year	1	2	3
Global Stake	69,884,772	78,424,585	88,007,951
Solid Stake	21,000,000	22,283,084	23,644,564
Global Emission (10% APR)	6,988,477	7,842,459	8,800,795
Solid Staking (15% APR)	1,050,000	1,114,154	1,182,228
Total Emission	8,038,477	8,956,613	9,983,023

Year
Global Stake
Solid Stake
Global Emission (10% APR)
Solid Staking (15% APR)
Total Emission

The model uses a 25% staking increase rate year-over-year (compounded), starting from current staked supply. Total emissions over 5 years come to ~50.5M FUSE, so the 50M allocation actually maps cleanly to a 5-year runway at these APY targets rather than 2 years as originally framed. The 50M figure holds, but the duration changes.

6. Solid staking should carry a higher APR than node-only staking

Fully aligned. The model above reflects this directly: global stakers (nodes) earn 10% APR, and Solid stakers earn an additional 5% on top (total 15%). The logic is that sFUSE is liquid and DeFi-composable, so it can generate supplementary yield, while Solid as a savings product needs to be the more attractive destination for passive holders. The two tiers serve different user types and different product goals.

7. sFUSE fast withdrawal

Agreed, 5% is a reasonable starting point. The primary exit route is the Voltage DEX swap. The fast withdrawal is a backup for thin liquidity situations.

8. Contract security

We are currently auditing the existing staking contract with the intent to build the new mechanism on top of it. We will share the audit output before this moves to a formal vote and will not ship without confidence in the withdrawal and fast withdrawal flows specifically.

[RB_1010]

Thanks Luka.

1. Given the change in responsibility with running a node I’m happy with 1m Fuse for minimum staking requirement - have voted as such.

2. 50M Treasury allocation - we’re already at 21m Fuse in Solid. I think it’s going to be much more than that over time and more than projected. “Global” staking on a node will be for people who want to use DeFi and other advanced products to gain additional yield with sFUSE - this will be a much smaller pool of people who are happy with the risk. I think the majority of ppl will just stake in Solid. Both will be staked through contracts now (rather than validator staking now where it’s staked directly on the node through consensus contract - ppl have the opinion that this is more secure than a sFuse/soFuse contract)

Question a - what’s to stop soFuse (solidFuse) being liquid? It’s asset backed and freely moved so in theory any protocol could use it as collateral? If it becomes liquid then that defeats the reason for any increase in APY.

Question b - is it possible to lock soFuse in the Solid wallet so that it cannot be transfered? It is designed just as a yield token, not a liquid one, so is there a need to be able to move it freely? If it can move freely then it will compete with sFuse as a liquid token, and architecturally makes sFuse redundant.

3. The 7 day Staking withdraw period - does staked Fuse earn emissions during the time in the queue?

4. Overall question at the moment is the architecture of soFuse vs sFuse in terms of being liquid. It would appear that at present both have the potential, unless I’m missing something wrt soFuse