We’re very pleased to share our initial proposal for the NuCypher network’s staking economics along with a call for community feedback (paper) (spreadsheet). Nodes are compensated in both inflation (NU tokens) and fees paid by users (ETH). This proposal only attempts to address inflation compensation dynamics.
Economic design is one of the most important attributes of a decentralized network, on par with its consensus protocol and governance mechanism. It provides the incentive structure that ensures individual actors behaving out of self-interest take actions that are beneficial to the network. As such, we have and will continue to invest considerable time and resources to analyze the optimal economic design NuCypher prior to its mainnet launch.
While economic design for decentralized networks is a nascent field that remains more art than science, we’ve examined the economic parameters of other networks in an attempt to learn from their experience. This has helped us design incentive mechanisms, inflation schedules, staking locks, and slashing conditions.
For NuCypher, it’s important to incentive nodes to provide re-encryption services. This means high availability (nodes are consistently online) and long-term service (in order to support long-lived access policies).
With the specific goals of the NuCypher network in mind, we determined that an ideal incentivization model should have the following properties:
- The inflation distributed to stakers should be proportional to their stake;
- The amount of work assigned to stakers (and their compensation) should be proportional to their stake;
- Stakers should be incentivized (likely by a higher inflation compensation rate) to run nodes for longer periods in order to ensure support for long-lived access policies;
- Periods of high inflation should not significantly depreciate the token price, maintaining liquidity for new stakers;
- Stakers should be strongly incentivized to stay online all the time, in order to maximize availability to users requiring re-encryption services;
- Stakers should be incentivized to re-stake their compensation in order to maximize their long-term compensation;
- Short-term staking should also be encouraged and compensated, albeit at a lower rate.
The paper addresses each of these desired properties, calculates expected miner compensation, and devises optimal mining/staking strategies.
It proposes a mechanism similar to that of other networks, in which miners are initially subsidized via an inflation schedule that decays over time as fees increase along with network adoption. It also proposes differential compensation rates based on the length of time one commits to staking, which is a key requirement to ensure adequate network capacity for long-lived access policies.
We’re also releasing a (simplified) spreadsheet which models the inflation dynamics described in the paper so that it’s easier for readers to get a sense for the impact different parameters have.