In the following proposal, the current incentive system of the network is analyzed and a series of modifications are proposed to optimize and decentralize the structure. The primary goal is to foster a more decentralized approach, which is essential for maintaining the trust and security integral to the network's operations.
Current Network Incentivization Structure:
• Number: 108
• Rewards (from minting): Each core masternode earns 42 XDC every hour.
• Annual Yield: This equates to an annual yield of 7.37% (or approximately 737,280 XDC) based on a staking requirement of 10,000,000 XDC.
• Subsidy: Additionally, each node is subsidized 22,500 XDC monthly from the Ecosystem Development Fund. This subsidy translates to an additional 270,000 XDC annually, pushing the total annual rewards for a core node to 1,007,280 XDC.
• Total Annual Percentage Yield (APY): The combined APY for core masternodes, factoring in both minted rewards and subsidy, is 10%.
• Number: 242 (as per the 350-node configuration)
• Subsidy: Each standby node is subsidized 66,666 XDC monthly from the Ecosystem Development Fund.
• Annual Yield: This subsidy translates to 8% annual yield, equivalent to 800,000 XDC, based on their identical staking requirement of 10,000,000 XDC.
The cumulative rewards for standby nodes are derived solely from the Ecosystem Development Fund subsidy, with no additional earnings from the minting process.
Current Incentive Dynamics Explained:
The network depends on minting an estimated 5.596 XDC every two-second block. Annually, this accounts for a mint of approximately 88,250,000 XDC. This freshly minted XDC is then proportionally distributed among the validators or core masternodes, all of whom actively contribute to the consensus.
In this scheme, the core masternodes, limited to a total of 108, jointly divvy up about 5.05 XDC. Each core masternode thus earns approximately 42 XDC every half-hour. Since this yields less than the expected Automatic Annual Percentage Yield (APY) of 10%, which is equivalent to 1M XDC annually, core nodes receive a supplementary subsidy of 22,500 XDC each month, drawn from the Ecosystem Development Fund, to make up for the shortfall between the 7.37% APY minted and the expected 10%.
The network also accommodates standby nodes. While they aren't actively engaged in the consensus process, they remain on standby to substitute any core masternode as circumstances dictate. To maintain their readiness, they receive a monthly subsidy of 66,666 XDC from the Ecosystem Development Fund, which equates to an 8% annual yield, or 800,000 XDC, on their identical staking requirement.
The recommendation presented here would eliminate the subsidy model, choosing instead to adopt a more direct minting approach. By doing so, core masternodes would directly obtain their due 10% APY from the protocol, and similarly, standby nodes would receive their 8% APY automatically (if not via the protocol itself, via smart contracts).
The minting for core nodes would adjust to 0.0634 XDC per block for each node, accumulating to 6.8493 XDC for all masternodes per block. The standby nodes, on the other hand, would transition from zero minting to a rate of 0.05073 XDC per block for each node.
The Rationale for Making the Proposed Changes:
The cornerstone of a robust decentralized system rests upon its ability to effectively incentivize validators. These incentives should be structured such that they dissuade malicious behavior, ensuring that each validator's interests align with maintaining integrity and upholding the network's health. A difficulty emerges when validators derive a significant portion of their incentives from third-party entities. No matter how trustworthy or competent such an entity might be, its involvement poses challenges to strict decentralization and, by extension, potentially compromises the security of the system. If the entity ever fails to distribute the rewards consistently, the fabric of incentives underpinning the network risks unraveling. As such, the practice of subsidizing from an external fund was only a provisional measure—a foundational step intended to evolve towards a system wherein the protocol autonomously generates and disburses rewards in a trustless manner.
The proposed increase in the rate of minting does not inherently pose a threat of inducing real inflation within the ecosystem. The logic underpinning this assertion is grounded in understanding the dynamics of supply and demand. Specifically, there exists no tangible difference between funds migrating from the ecosystem development funds (a non-circulating supply) into the circulating supply and those funds that are newly minted by the protocol itself into the circulating supply. From the perspective of market economics, both scenarios introduce equivalent quantities of assets into the circulating medium, rendering them indistinguishable in terms of their inflationary implications.