Just read through this thread. What is current sentiment about this topic, and what are the current blockers from moving forward?
@Gregory, Ethan Frey and I have been continuing this discussion with Regen Network, concerning our own token economics (currently our tokenomics are basically a fork of the ATOM).
Here is how I would summarize on a non-technical level:
For optimal network security, Proof-of-Stake systems rely on a high percentage of the total supply of staking tokens to be staked. Tokenomically, it was originally proposed (in systems such as Cosmos) that this would be achieved by disincentivizing non-staked tokens. By the time this theory was turned into practice, mechanism design morphed such that, rather than punish non-staked token holders, the chain would reward staked token holders through a mechanism erroneously dubbed “inflation” (inflation actually refers to the value of a currency, not its supply). Game-theoretically, these two mechanisms (demurrage of non-staked tokens and supply increase of staked tokens) have identical outcomes of incentivizing staking. In the real world, they have some notable differences.
As tax law doesn’t take into account the nuances of the economics of money supply, governments currently consider token rewards as income. This is detrimental to the bottom lines of validators, as they’re already operating in an ecosystem which has high price volatility and can have thin margins. And this isn’t just an issue for validators; the same can be said for anyone else staking tokens in the network.
I am not attempting to make an ideological argument here about tax efficiency. Rather, I’m calling attention the the fact that, if the intention of the mechanism is to punish non-staked token holders, introducing additional bureaucratic and tax overhead on those with staked tokens actually furthers the negation of this mechanism; if you don’t stake your tokens, at least you’re not paying taxes on them.
Some might say, “well, I’m earning income via those rewards.” Again, the original intent of the mechanism design was to minimize the number of unstaked tokens; economically, whether those tokens are taken via a total supply reduction via those with unstaked tokens (through a demurrage mechanism), or by increasing the supply and giving that supply increase to those with staked tokens, the theoretical economic results are the same. In this regard, the term “inflation” is actually useful, in that it at least infers that these additional tokens don’t actually add to the value of someone’s token holdings, even though the number of tokens they’re holding have increased.
I will also note that I am not attempting to make a general case against supply increase. In the case of developer grants, I think a supply increase is merited. That said, well-designed economic mechanisms work on as isolated an aspect of behavior as possible. The more complex and intermingled these mechanisms become, the less effective they can be.
For those of you unfamiliar to the use of the term “demurrage” in economic terms, it refers to the cost of holding a currency. Why would we want to impose a cost on simply holding a currency? The value of a currency is collectively generated; if you were the only person holding Bitcoin, it would be utterly worthless. The value of a currency is dependent upon the economy which it enables. Currency just sitting around doing nothing detracts from the utility of an economy. On the other hand, there are numerous uses of currency that add to the value of an economy, (or at least maintain current levels of viability). In Proof-of-Stake networks, this utility, or service one can provide with the native currency is staking. Although token “inflation” and demurrage instruments can achieve the same results in theory, the psychological story of demurrage is much more consistent with the underlying narrative here.
If this sounds interesting to people, Ethan Frey has said he could supply an overview of one path to technical implementation in the Cosmos/Regen context.