Recently some community members have voiced concerns about whether the current staking rewards derived from protocol fees and early unstaking penalties are enough to incentivize Bitocracy stakers relative to other income-earning opportunities presented by the protocol (one example here). I think this is a valid concern. This raises an important topic that has been on my mind recently, which is about the emission schedule for SOV. I was asked on today’s staking rewards call to write up a forum post with my thoughts, so here it is.
In the Tokenomics section of the wiki, we can see that ~38% of the SOV supply has been earmarked for an “Adoption Fund”. This is where SOV for the recent Loot Drop campaigns comes from.
We could use some of this SOV from the Adoption Fund to incentivize staking as well. The SOV could be split in some way between liquidity providers in the AMM+lending pools and Bitocracy stakers. We would set an emission schedule and let it run on autopilot until the Adoption Fund runs out.
The inspiration for this idea comes from bitcoin mining, where early miners earned a significantly greater share of the total BTC supply than miners who joined later. There are several good reasons for why the bitcoin emission schedule was programmed this way:
Mining bitcoin early on was riskier than mining bitcoin later. Although the cost of mining was lower, it still took a significant investment of time to participate and the legal risk was not nonexistent given the history of digital currencies before bitcoin. Today, bitcoin mining is a relatively straightforward and predictable business (in some jurisdictions, anyways).
Bitcoin was most vulnerable when it was young. Since early miners received a larger share of the BTC supply, they were more likely to want to protect bitcoin rather than try to attack it.
The proportionally larger rewards attracted miners, which helped quickly bootstrap bitcoin security faster than attackers could potentially amass the hashpower needed to launch an attack.
There are similar reasons for why it makes sense to give Bitocracy stakers SOV subsidies:
Staking early on is riskier than staking later. There is a great deal of uncertainty regarding whether or not Sovryn will ever reach product-market fit and financial sustainability. Still, some stakers are locking themselves in (subject to early unstaking penalties) for up to three years. While one could argue that stakers are being compensated for that risk by the opportunity to purchase SOV at prices that are lower today than they likely would be later on if Sovryn is successful, by staking they are forgoing the opportunity to liquidate SOV at higher prices before their staking duration ends. Subsidies would help compensate for the extra risk and opportunity cost taken on by SOV holders who are staking early in Sovryn’s lifetime.
Sovryn is most vulnerable while it is young. We want to achieve a relatively high participation rate in staking to make it more difficult and expensive for an attacker to acquire a large stake in Sovryn to precipitate a governance or price manipulation attack. The quadratic formula used for staking is itself a nice defense against attackers, but increasing staking participation adds another layer of “defense in depth” that can further discourage would-be attackers. We could use subsidies to target a specific participation rate, increasing subsidies if we dip below that rate and lowering subsidies if we go over that rate.
As an example, let’s say we decided to split the Adoption Fund 75/25 LPs/stakers. The SOV allocated to LPs could be split evenly across all pools, or concentrated in particular pools. The SOV allocated to stakers would be split pro rata between all fully vested stakers i.e. SOV still subject to vesting terms would not be eligible for this subsidy. Then we decide on an emission schedule. For LPs, we could use bitcoin’s emission schedule as a reference: 50% of the supply emitted in the first 4 years, 25% in the next four years, 12.5% in the next four years, and so on, until zero. For stakers, we could use participation rate targeting, aiming to have at least 30% of the SOV supply staking and increasing or decreasing subsidies as needed.
(Keep in mind, these are just example numbers for illustration, and this is just an idea not a formal proposal. I’m totally open to feedback or alternatives if anyone else has thoughts on this!)