| IIP | 0006 |
| Title: | Deflationary Drivers |
| Author: | Michael Pfeiffer and Adam Mattlack |
| Status: | Draft |
| Type: | Standards track |
| Created: | 08-30-2019 |
This IIP substantially reduces inflation; introduces deflationary mechanisms; and introduces Proof of Transaction (PoTX).
“Substantially reduce inflation” — Reduce block reward to 0.5 ION per block.
- Effect: By reducing the generation of new ION, this IIP mitigates dilution of network value.
“Introduce deflationary mechanisms” — Permanently destroy blockchain transaction fees.
- Effect: Burning ION transaction fees concentrates the network value in diminishing ION coin supply at a rate proportional to growth of network utilization. Deflation further incentivizes acquisition and tenure of ION. Deflation also incentivizes entrepreneurial behaviors that contribute to the value to the ION ecosystem.
“Introduce Proof of Transaction” — Establish a way for individuals and entities to document and verify activity on their platforms using blockchain technology. This is accomplished by creating an on-chain token transaction that parallels each on-platform transaction.
- Effect: Each platform-based transaction verified using the POTX API channels fees to the ION blockchain. A portion of the fees is burned and a portion is distributed to the ION blockchain assets (e.g., masternodes). POTX is a blockchain based service that provides value to centralized platforms and leverages platform activity to drive value to the ION network.
The goal of this IIP is to shift from a moderately inflationary network to a moderately deflationary economy driven by increased network transaction fees and increased network utility. The new Proof of Transaction (POTX) utility will be implemented to provide radical transparency and verification for activity on participating platforms. This implementation ties ION burn rates to adoption and usage of the ION ecosystem via the POTX API. Newly established token transaction fees (for tokens other than XDM) will also be distributed through the ION network and burned, further tying the network’s economy to the uptake and utilization of ION tokens in the broader ION ecosystem (e.g., gaming assets, etc.).
From the start, ION development focused on incentivized gaming. Digital and mobile games remain fertile ground for cryptocurrency as the gaming sector grows and as blockchain technology makes it possible not only to buy in-game assets, but also to own and trade them. The implementation of IIP0002 (tokens to the ION blockchain) allows the ION ecosystem and the gaming space to realize this potential on the ION blockchain.
Prior to IIP 6, the ION protocol incentivizes acquisition and tenure of ION through multiple mechanisms: (1) masternode block rewards, (2) staking rewards, (3) Dark Matter (XDM) transaction fee rewards allocated to masternodes (pending token implementation), and (4) timelock advantages based on the duration of commitment to masternode operation (pending timelock implementation). These advantages are presently mitigated by moderate inflation on the ION blockchain (roughly 8.5%, declining to about 7% over the next five years). After five years of the current block reward size, the inflation rate is scheduled to sharply decline.
Proportional rewards for masternode timelock commitment enhance incentivizes for masternode operation. To the extent this timelock incentive increases the number of active masternodes, it also drives ION acquisition and decreases the circulating supply. Increased masternode operation would, in turn, intensify blockchain security and expand the masternode’s capacity for token transactions and advanced data storage.
In addition to the benefits that will be brought by tokens and timelock IIPs, the current proposal allows ION holders to benefit from innovations developed on the ionomy platform and the GameGrid platform. The mechanism that benefits ION holders occurs initially through Dark Matter airdrops, and in an ongoing manner as Dark Matter transaction fees are distributed to masternode operators each time game developers, gamers, and crypto enthusiasts adopt, use, and trade tokens on the ION blockchain. The linkage between owning ION and adoption of the ION ecosystem is created in two ways. The first is through the establishment of a network transaction fee for tokens and the distribution and burn of this fee. The second is through the Proof of Transaction (POTX) functionality.
With the introduction of POTX, this IIP creates a pathway for any centralized third-party service to achieve a new degree of transparency and accountability while simultaneously tying their platform’s activity to the ION network’s economy (via proportional distribution and burn, improving incentives for the operation of ION masternodes or staking wallets.
The legacy incentive system relies upon generating new ION and distributing block rewards to network participants. Current network security relies on an inflationary model; but the present IIP 6 facilitates a deflationary model.
Staking wallets and masternodes perform increasingly important roles in the ION ecosystem, maintaining transactional security and, with implementation of tokens, offloading token transaction security from ION’s core transactional layer. In the future, masternodes will take on increased roles contributing computing power to other aspects of the ION ecosystem. The masternodes and staking wallet services are currently funded through inflation. That means qualifying ION wallets and masternode addresses that contribute to the network receive block rewards, earning newly generated ION.
The downside to the legacy model is that it can lead to a degree of inflation that surpasses demand, potentially devaluing the ION cryptocurrency, and, in the process, devaluing the block reward itself. This IIP proposes a remedy. The immediate diminution of newly generated block rewards effectively eliminates inflation from the ION network and replaces inflationary block rewards with utility-driven distribution and burn of existing ION as incentives for the operation of staking wallets and masternodes.
The legacy block reward size is 5.75 ION/block. This block reward size is currently scheduled to remain static through February, 2024 unless the community votes in favor of this or another proposed modification. This results in moderate inflation. The inflation is scheduled to decline year over year as the denominator (total supply at the end of the previous year) grows. Approximately three million new ION are generated per year under this model.
| ION_rewards/block | * | blocks/hour | * | hours/day | * | days/year | = | ION_Rewards/year |
| 5.75 | * | 60 | * | 24 | * | 365 | = | 3,022,200 |
| Fig. 1 ION block reward structure |
This IIP replaces static block rewards with a dynamic incentive structure via a protocol that increases rewards and simultaneously diminishes total coin supply as utilization of the ION network scales. Network utilization includes on-chain transaction of ION and secondary tokens on the ION blockchain. Network utilization, in turn, is expected to grow in scale as ecosystem platforms achieve broader adoption.
The following incentivizes are expected to encourage ION holders to operate staking wallets and masternodes:
- Systematic burn-by-protocol destruction of a fixed portion of network fees (denominated in ION and XDM).
- Systematic distribution of network fees (denominated in ION and XDM).
- Periodic distribution of the Block Reward Fund (see below).
- Network fees include
- Increased ION transaction fee
- Token transaction fees
- Voting fees
- Blockchain hosting fees
The combination of deflationary mechanisms and participation in organic network growth improves ION’s tokenomics, adapts to emerging market conditions, and incentivizes contribution of value to the ION network in a variety of ways including:
- network security maintenance
- operating staking wallets
- operating timelocked masternodes
- contributing to the ION codebase
- contributing to the broader ION ecosystem
- producing and promoting applications and services related to:
- incentivized gaming
- game development
- game developer tools and services
- trading
- masternode hosting
- producing and promoting applications and services related to:
- Integration of the Proof of Transaction (POTX) functionality
- POTX blockchain-based transparency functionality leverages the distributed network. POTX will be used within the ION ecosystem (for platforms like ionomy, GameGrid, Jumpstart, or games) as well as beyond (governments, voting, other exchange platforms that need to solve the problem of verifying transactional claims by systematically creating parallel on-chain transactions that incur non-negligible proportional expenses).
This IIP effectively turns the community of ION and ION token holders into beneficiaries of, and contributors to, the growth and development of the ION ecosystem, its code, and its platforms.
Increase the ION transaction fee by 100x to 0.01 ION//kb (the current fee is a negligible 0.0001 ION/kb). 50% of the ION Core transaction fees will be distributed to masternodes, 30% to staking nodes, and the remaining 20% will be burned.
Establish Atomic Token Protocol (ATP) network fees for ION token transactions. 50% of ATP fees will be distributed to ION masternodes. The remaining 50% will be burned.
Network block rewards are reduced to 0.5 ION/block. This is a variable amount that can be changed by network proposal and vote. 70% of each block reward goes to masternodes; 30% goes to staking nodes.
This proposal alters the block reward structure and introduces new mechanisms to transmit and burn fees. Implementation requires a hard fork of the ION blockchain.
Voted adoption of this proposal would nullify IIP 0003 (Revised block reward schedule) and IIP 0005 (Masternode collateral halving).