Tokenomics of PRV (according to raz)

[raz]

Andrey suggested to bounce ideas about tokenomics of PRV

PRV token information & economics (tokenomic)

Hey @doc, I think its one of the most interesting questions. Thanks for asking, it’s a good chance to answer all in once PRV usages in the network: Running the Network The most important for PoS network is Validators. User have to stake X amount to joint he validators pool and start generating blocks. It’s a major criteria of PoS networks. You can find such model in projects as Tezos, NEO, EOS, etc. Transaction fee for the native coin It’s mandatory to pay transaction fee …

As we know, PRV is inflating heavily in the first few years. This is an intended mechanism to reward early users and make distribution more fair than a public sale. Clever strategy and reminds some of us the early days of crypto.

I would like to share my ideas in favor of making PRV a more stable utility token in the future and to balance this kind of inflation to protect the value of PRV more:

• Idea A, voting rights: as you may know Incognito will soon become a DAO and we will govern the network & its development together. This idea is an additional utility to nodes: What if users will be able to vote through the “My nodes” screen on different proposals & decisions. One node = one vote.

• Idea B, decreasing supply: burning mechanisms are a significant part of many tokenomics, what if we increase transaction fees in PRV by 100% and burn that in favor of long-term price stability? (a more radical version of this idea is to increase fees by 2,000,000%, that way every 5000 tranactions give 1 PRV, but keep burn at 100%, which means 500 billion transactions burn 5 million PRV) (another variation of the radical version is to increase burn to 1000% or even 10,000% but stop the burning mechanism, once all the PRV were earned)

• Idea C, mint privacy stable coins: stable coins have a great part in successful token ecosystems, we use them too for example trading PRV - pUSDT or cUSDC, but we cannot create a new privacy stable coin atm. The pDEX is not great for a 1:1 exchange, as the price moves easily. Is it possible to add 1:1 swaps into the pDEX in the future? For example: I created a privacy token SPRV (Staked PRV) which I would like to sell for PRV and SPRV holders will get staking rewards as a service to their wallet by the amount how much SPRV they hold. The only way to do this atm is trading SPRV - PRV manually.

I hope my ideas were useful to share and PRV will benefit from the discussion we are starting in this thread.

[andrey]

Hey @raz, your idea reminds me about the voting rights

PRV holders will have the voting rights on making decisions when we implement the process of making decisions on the chain! But the way how it will work is not designed yet.

To be honest all your ideas sound quite interesting for me. Let see what other people says on it

[abduraman]

@raz

what if we increase transaction fees in PRV by 100% and burn that in favor of long-term price stability?

I do not support this. In fact, the common transaction fee has increased by around 10x since the mainnet launched. I hope it does not increase so much anymore. Why? To me, one of main use cases of the crypto will be the “instant” micropayments. Once someone does something which causes rewarding, she will get its reward immediately. This requires small transaction fees. Besides, if the team has a view/intent for increasing the fees, it should declare asap. The development ideas in my mind assumes that small transaction fees will last so long.

[raz]

My “radical idea” is to increase transaction fees to $0.00012, I think its still very microstransaction-friendly.

The problem with zero-like fee is: things aren’t free to maintain. Servers & pNodes cost us a lot actually. According to my calculations, the Incognito network consumes more than $10,000 / month now. Once we grow big, this will rise over $200,000 monthly, and we didn’t leave money on the table for node owners…

If we would raise fees according to my radical idea, we still need 83 million transactions / month to pay the node owners electricity cost.

Currently they are compensated in PRV, but that only works in the first stage. Once we grew big & all PRV is distributed the network operators need a new source of income. If you don’t want to pay them anything, they will stop their nodes, abandon the network and leave your microstransactions worthless.

In my opinion we need a way to collect $10,000 / month in transactions as soon as possible! Otherwise long-term investors will not trust Incognito and dump their stacks if a similar event happens like the big 2017 hype and the price of PRV skyrockets, because it will not worth them to keep participating further and risk a price drop. This could cause the end of Incognito really fast.

PRV being a utility token is not a symbolic thing and staking is not the main utility we need. We need people to hold PRV, because they pay their anonymous DeFi transactions with it, not just close to zero amount, but reasonable sums.

I understand you aim to protect the use case of microstransactions, but my idea is not a threat to it.

[raz]

Update:

I actually made more calculations and my idea is to raise fees by 20,000,000% to ~$0.001 / tx in favor of the long-term stability of the network. And lower it dinamically once the price of PRV increase. ( i am not sure if it is possible, but since the pDEX is on the network: maybe )

This could generate $50 / month in transaction fees already and has a possibility to keep the network safe by providing long-term profit for node operators.

A solution for protecting microtransactions could be the following:

Only smart contract executions and transactions in PRV or privacy versions of external coins (pUSDT, pETH etc) would be raised, but privacy token fees made on the Incognito platform are not.

This way we could protect our ecosystem and give privacy tokens on Incognito an advantage.

So for example: @abduraman and his community still able to use Tipcoin for microtransactions, but they have to pay higher fees ($0.001) in PRV when they use the pDEX to buy/sell their token.

[Joe_Moffett]

@raz

interesting, I tend to agree with the thought process surrounding long term stability of node stake holders by providing further incentive. Overall, I think it’s going to be a necessity to increase the transaction fee based on those calculations.

@abduraman has a point as well, but I would have to point out @raz is correct point out “economic self interest” trumps a collective goal. If any rapid spike in PRV value happens, which I think to an extent we all would like to see, it will be hard for users and stakers decide to hold if they can cash out with a high ROI when the monthly return doesn’t cover enough of the costs.

I’m waiting to see what the return is on my vnode but depending on the server it’s not “cheap” to host even the minimum. Yes it’s cheaper than many others with bigger requirements, but a return will be important.

I would suggest a gradual increase to offset the diminished output of PRV. A 100% increase is fairly small. I suggest a month over month compounding increase to eventually hit a higher transaction fee agreed upon by the team and community.

[ELDAD]

$0.001 for txs fees is kinda much as there will be many trxs on the platform. I don’t know but I’m guessing that on pkyber for shielding your asset u pay txs fee, for trading your pAsset you pay a txs fee, unshielding your pAsset you pay a txs fee, and each txs you pay $0.001$. I think $0.0001 will be reasonable

[davoice321]

Thanks @raz for raising these important issues related to PRV tokenomics.

I’ve also had my concerns about the PRV token economics and I’m not sure if the team has put enough though into them beyond the staking use case.

TL;DR: The current Incognito fee model is not sustainable and I’m afraid the network will suffer the same fate as other PoS networks where the network token constantly depreciates in price and the economic security of the network is damaged beyond repair. The team needs to get smarter about the network tokeneconomics to ensure that the PRV token retains its value and fees provided to those securing the network are more than adequate.

First, one thing I’ve noticed is that the more capacity the network generates, the more competition for the "(few) nodes that mine PRV each epoch. This means that as the network expands the overall earnings for Node operators will shrink. For example, at 5,000 capacity, you can expect that average monthly earnings will decline.

The other issue is that in most networks, there is continual sell pressure on the token as node operators take profit on their earnings, and it’s not clear that PRV token demand will continue at the current rate.

-Also, I think there hasn’t been enough thought about the benefits for the PRV token/miners of linking to Kyber, Uniswap and other dexs. Yes, there will be more private transactions on the network, but there will be fewer ETH, BTC, etc. rewards, because Kyber and other exchanges will take the lions share of trading. I don’t see the only way to trade PRV on pDex lasting for long because there really isn’t enough liquidity on the network. Once the token is listed on another exchange, the trading fees on pDex will drop.

With the current fee structure (very, very low), there is a very limited security budget for the blockchain. Unlike ETH where transaction fees are higher due to the auction mechanism, PRV is supposed to be a largely frictionless, almost “free” from a transaction perspective.

We may get many, many more private swaps on the network, but the current per node earnings are not even allowing Node operators to break even on their networking costs.

Eventually, the price appreciation of the PRV token will stop because it won’t make economic sense for new players to come on board who want to profit from mining, etc., because the transaction fees and (limited ETH, BTC, etc. income from swaps) won’t be enough. People will sell PRV to break even or take profit and leave.

I’ve been in other networks as a staker/validator and I generally give networks about a year to deliver profit before I decide to jump ship. And, I think the tokeneconomics of the PRV token need to be re-thought.

1. The team is reserving the limited PRV earning slots right now, and even when the numbers increase, earnings will do down as the network grows bigger.

2. There needs to be a clear way that the network/miners/node owners benefit from the Kyber, Ox integrations. The fees are so low that they won’t make much of a difference at current prices. Prices have to go up – privacy is a benefit, not just a feature.

3. The PRV token won’t appreciate forever, and the sell pressure will increase as miners/node owners seek to make profits.

4. Transaction fees from shielding tokens need to be increased so that miners can earn more ETH, BTC, etc. which have more value. Right now I’m not sure how this is going to happen given that the only fees miners will earn are from the (very small) transaction fees generated from tranfers between the bridge. Once the new dexs come on board, node operators won’t earn much income from other cryptos.

Privacy is hard to monetize, but there needs to be more of a balance between making sure node operators are making a good monthly income (in transaction/ETH/BTC, etc. fees, rather than simply relying on the PRV token appreciating in price), which won’t happen forever and is not guaranteed.

[raz]

I believe using the pKyber and other dapps will require privacy contract executions, which means $$ to node owners.

I don’t see the situation as pessimist as you, but I do understand your concerns.

What do you think about +20,000,000% increase in privacy contract execution fees, PRV and shielded coin transfer fees? Is it a possible solution?

Do you know other solutions?

[davoice321]

What’s the average transaction cost at that level?

Can you provide earnings per 1000s of transactions?

[raz]

@davoice321 Please read my update above: Tokenomics of PRV (according to raz)

[Kelsomatic]

I do agree that we need a way to preserve value for the node holders. It will be nice to see how much value in transaction fees the papps bring in once they become more popular.

I am a little gun-shy on letting 1 node = 1 vote for the DAO…partly because of what happened with Steem. I’m not sure what a good solution would be…possibly one vote per regular member that holds a node or if we allow multiple votes tied to the number of nodes that you own I think it should be capped at a certain number. In that way people can’t sway the vote too much through buying votes.

[raz]

The problem with voting based on the forum is it isn’t on the Incognito chain. People could hack it, fake it etc.

Imo because DAO decisions are economical, bigger stakeholders need the right to gain more power over them. Also my idea is a real additional utility for PRV and a cause for node owners to don’t sell their stakes when the price has a spike.

My main goal with my ideas is to provide additional utility to PRV and strengthen its “tokenomics”

[Kelsomatic]

@raz

problem

This is a great point and it would be hard to keep things anonymous as well.

I do agree with adding value to the strength of the utility. If you tie it to number of nodes owned it allows the possibility of further changes down the road through dao voting to tip the scale in the large owners favor through a vote.

Ex if you own more that 5 nodes you get an extra vote or an extra .01% of transaction fees.

Would something like this be a possibility?

[raz]

Yes, that way large owners would have a bigger impact. I am not sure if it is a problem.
In a PoS tokenomics bigger players take majority of the risks and if small holders vote them out easily in decisions that impact them the most, then they will just not take risk anymore and dump their stack, causing damage.

What we face is a massive economic game and democracy is not an option. Democracy is great for a government, but its not a coincidence that huge companies have a board of directors instead of a poll of employees and company owners have the most impact on strategic decisions.

Your idea is not really possible and I think it would be much more complicated.

1 node = 1 vote is simple to implement, easy to understand, impossible to fake and makes a great utility for PRV holders.

[davoice321]

I think a combination of raising the fee and introducing auction system for prv “gas” so that people can pay for priority listing

Although the argument was made about other networks having a small amount of revenue from fees, this revenue is actually an important part of the security and sustainability budget for the blockchain.

Fees for the Eth network (and btc) are much higher than what you propose, so if fees were increased and people could have a choice of speed, this would do a lot.

I haven’t seen the team chime in more on this, but I hope to see them evolve the token economics so that it is not only dependent on market demand/speculation.

[Kelsomatic]

@Kelsomatic

I’m not sure what a good solution would be…

These suggestions were not meant to be the answer. My intention was to discuss other possibilities.

@raz

In a PoS tokenomics bigger players take majority of the risks and if small holders vote them out easily in decisions that impact them the most, then they will just not take risk anymore and dump their stack, causing damage.

This is true although in the same right if the little guys are pushed out with lack of incentives the network becomes more centralized by the larger node holders which is not a good answer to me.

@Kelsomatic

Ex if you own more that 5 nodes you get an extra vote or an extra .01% of transaction fees.

Maybe it’s possible to write into the contract that these scenarios I listed above cannot be voted on(in the same way that no one can access Uniswap’s contract). So as you said 1 node will equal 1 vote and that one node will always earn on avg the same as any other node in the network. As a result these 2 characteristics cannot be changed through a vote.

[raz]

We are free to start the conversation and they will join. The founder team has worked a lot in the last 2 years to build what we use today, but the future is already depends on us too, as we are here at the foundation of this community.

Auction system is cool, but I think it has less relevance when the fees are really low all times.

Its a fascinating mission to finetune PRV tokenomics. We need to collaborate on this before its too late.

[raz]

I see.

Yes thats the other side of the coin. We need them as the majority provides true decentralization to the network.
One reason for them to leave the network would be if running one vNode isnt profitable while farmers still turn a profit with dozens of nodes.
Incognito was designed to counter this with low staking cap (1750) and I believe running 1 node is no different in terms of return than running 10 nodes in the long-term.

Ah i understand now what you meant with 5 nodes etc. I strongly agree, we should not be able to vote on things like that. The DAO will be mostly about ecosystem developments, not changing the underlying protocol.

[abduraman]

@raz

Only smart contract executions and transactions in PRV or privacy versions of external coins (pUSDT, pETH etc) would be raised, but privacy token fees made on the Incognito platform are not.

This way we could protect our ecosystem and give privacy tokens on Incognito an advantage.

Yes, this is applicable. Besides, it will encourage dapp developers to implement their ideas on Incognito ecosystem, which will lead Incognito to the fast-growing number of transactions.

On the other hand, imho to create profit for the node owners, we should focus on the number of transactions instead of the transaction fees. In fact, this (low fees) was the one of the main advantages of what the blockchain technology promises to us. We should think as if Incognito will succeed in the mass adoption (in its context). This means that Incognito will have many dapps (huge number of transactions). Besides, many dapps will create their own tokens and the developers ( like me ) of some of them will want PRV-free transactions. To be able to do that, they have to lock at least 10k PRV for their tokens’ pairs in pDEX.

As you said, Incognito is a ecosystem and we should try to grow it. For example, Incognito had a campaign with Autonomous. Similarly, PRV can be a payment coin in the privacy-requiring sectors. Maybe you know that there are some entities like Unstoppabledomains which try to realize the decentralized web. The main users of such entities will be the people who want themselves to hide from prying-eyes of autocrats which are troubles of our age. As a side note, in my opinion, this was one of the main goals of Telegram’s chain.

In the end, I have a rough calculation, too Let x be the cost of operating my node. I set PRV to $0.40 (very conservative price considering the current price ~$0.60). My monthly gross revenue is 15x but I assume 10x by a conservative approach. Assuming the price will not decrease below $0.40, to reach the break-even point, the number of nodes should be at least 15,000. To reach this number of the nodes, the node owners (except beacon nodes) must stake 26,250,000 PRV (~25% of total supply). The circulating supply will be ~34million PRV (including the premined amount) up to the end of 2023. So at least ~77% of the circulating supply will be locked. This hypothetical environment is valid even if a decent use case does not exist. So, I do not foresee an important risk for the node owners within the near future. Furthermore, I have economics psychology in my hand. To my observation/research, the people (especially ones with some technical knowledge) in the crypto use their spare funds (which are not required to meet the basic needs) in such investments. That’s why I do not expect strong sell pressure within the near future. So we have enough time to grow our ecosystem without increasing the transaction fees.