Dragon 8 : Tokenomics 2.0
Executive Summary of the Governance Proposal for Chiliz Chain Tokenomics Evolution
Purpose of the Proposal
This governance proposal seeks to address and resolve the foundational challenges faced by the Chiliz Chain by evolving the tokenomics of its native asset, $CHZ. Initially designed as a transactional token within Ethereum, $CHZ's role has fundamentally transformed with Chiliz Chain's emergence as an open, decentralized Layer 1 EVM-compatible Proof of Stake Authority protocol. The adaptation aims to ensure the sustainability, security, and growth of the Chiliz ecosystem by introducing a dynamic economic model that reflects its current and future operational realities.
Proposed Changes to the Tokenomics
Dynamically Decreasing Yearly Inflation: Implementing an inflationary model based on the formula
y = 9.24e(-0.250x)+ 1.60, which decreases over time until stabilizing at 1.88% whenx>13years. This change aims to incentivize participation from validators, delegators, and the broader community, ensuring long-term security and engagement within the Chiliz Chain ecosystem.Incorporation of a Perpetual Burn Mechanism: Alongside inflation, a perpetual burn mechanism will be introduced to balance the token supply, enhance value stability, and maintain scarcity over time. This mechanism is inspired by the successful standard set by EIP-1559 in other EVM-compatible protocols, but now on the Chiliz Chain.
Expected Benefits for the Chiliz Chain Ecosystem and $CHZ Holders
Enhanced Security and Sustainability: By incentivizing validators and delegators through inflation rewards, the proposal aims to bolster the security and robustness of the network, ensuring its long-term sustainability.
Increased Community Engagement and Governance Participation: The proposed economic incentives are designed to deepen community involvement in governance decisions, fostering a more vibrant and participatory ecosystem.
Economic Stability and Growth: The introduction of a perpetual burn mechanism and EIP1559 aims to create a balanced economic model that supports both the stability and growth of the $CHZ value, benefiting all stakeholders within the ecosystem.
This proposal represents a forward-thinking approach to tokenomics, addressing the evolving needs of the Chiliz Chain. By carefully considering the economic dynamics and incentives necessary for a thriving blockchain ecosystem, the proposed changes are expected to secure the future of Chiliz Chain as a leading decentralized protocol, ensuring its competitiveness, security, and community engagement for years to come.
Audit report by Halborn
You can read the full audit report from Halborn here:
Background
Historical Context of $CHZ as a Transactional Token and Its Evolution
The journey of the $CHZ token commenced as a pivotal element within the Chiliz ecosystem, initially designed to serve as a transactional medium on a sidechain of Ethereum. This design catered to the early objectives of the project, focusing on facilitating transactions within the sports and entertainment sectors. The token's architecture, including its capped supply of 8.888 billion units, was optimal for its initial use-case, mirroring the standards of many ERC-20 tokens aiming for stability and predictability in their economic model.
As the blockchain landscape evolved, so did the vision and operational requirements of the Chiliz project. The transition from a transactional token on a side chain to the native asset of a sovereign, Layer 1 protocol marked a significant pivot in the token's utility and the economic model it supported. This evolution into the Chiliz Chain, an open, decentralized EVM-compatible protocol, necessitated a reevaluation of $CHZ's role, transforming it from a simple medium of exchange to the cornerstone of governance, security, and economic activity on the network.
Explanation of Delegated PoSA and Its Significance
Delegated Proof of Stake Authority (PoSA) combines the efficiency and scalability benefits of Delegated Proof of Stake (DPoS) with the security and decentralization ethos of Proof of Authority (PoA). In this consensus mechanism, validators are selected to produce blocks and secure the network based on their stake in the network's native token and their reputation or authority within the community. This model offers a balanced approach, ensuring high transaction throughput while maintaining a high degree of decentralization and security through the stake-based selection process, in which no central player can change the consensus rules of teh blockchain on its own without first passing a governance proposal that must be accepted by a majority of the different entities that run the validators and have enough capital (in the form of $CHZ) at stake..
It facilitates a governance model that empowers $CHZ holders, allowing them to participate directly in the security and operational decisions of the network through delegation. This aligns the incentives of token holders with the long-term health and success of the blockchain, fostering a community-driven approach to network governance and development.
Overview of the Current Tokenomic Structure and Its Limitations
The existing tokenomic model of $CHZ, characterized by its capped supply and absence of allocatable inflation or burn mechanisms, was well-suited to its initial purpose but has shown limitations in supporting the broader needs of a sovereign Layer 1 protocol. The static supply does not accommodate the incentivization required for validators in a Delegated PoSA consensus mechanism, nor does it provide mechanisms for rewarding community participation or governance engagement.
Moreover, the lack of inflationary and deflationary tools limits the protocol's ability to dynamically adjust to economic conditions or to incentivize behaviors that enhance the network's security and ecosystem development. Such limitations can lead to challenges in maintaining competitive validator rewards, engaging the community in governance, and ensuring the long-term economic sustainability of the Chiliz Chain.
As the Chiliz Chain looks to its future, addressing these limitations through an evolved tokenomic model becomes necessary. The introduction of controlled inflation, coupled with a perpetual burn mechanism, aims to provide a dynamic economic foundation that supports the network's security, incentivizes participation, and aligns with the best practices of leading EVM-compatible Layer 1 protocols. This evolution marks a critical step in the ongoing development of Chiliz, ensuring its position as a vibrant, secure, and community-driven blockchain ecosystem.
Rationale for Tokenomic Evolution
The evolution of the Chiliz Chain's tokenomics, encompassing the integration of allocatable inflation and burn mechanisms, is not merely a cosmetic choice but a necessity for its sustained growth, security, and community engagement. This section delves into the multifaceted rationale behind these proposed changes, illustrating how they are essential for the Chiliz ecosystem's flourishing in a competitive blockchain landscape.
Analysis of the Need for Allocatable Inflation and Burn Mechanisms
Allocatable Inflation: The introduction of a controlled, dynamically decreasing inflationary mechanism is pivotal for several reasons. First, it provides a sustainable model for rewarding validators and delegators who are essential to the security and operational efficiency of the Chiliz Chain. Unlike a static supply, which limits the ability to offer ongoing incentives, allocatable inflation ensures that contributions to network security are continuously recognized and rewarded. This approach not only enhances the chain's security but also encourages long-term commitment from network participants.
Second, allocatable inflation facilitates the growth of the ecosystem by providing resources for community initiatives, development projects, and liquidity pools. This is critical for fostering innovation and ensuring the adaptability of the Chiliz Chain in the rapidly evolving blockchain sector.
Burn Mechanisms: Implementing a perpetual burn mechanism addresses the potential devaluation concerns associated with inflation. By systematically reducing the total supply of $CHZ, burn mechanisms counterbalance inflationary pressures, supporting the token's value over time. This deflationary aspect is crucial for maintaining investor confidence and stabilizing the token's economic model. It mirrors the principles of sound monetary policy, where supply and demand dynamics are carefully managed to ensure long-term value stability.
Discussion on the Role of Incentives in Blockchain Security and Community Participation
Incentives play a critical role in the security and vitality of blockchain networks. For Delegated PoSA systems like the Chiliz Chain, where security is underpinned by the active participation of validators and delegators, incentives ensure that these participants are motivated to act in the best interest of the network. Allocatable inflation directly supports this by providing a clear, tangible reward for their contributions, enhancing network resilience against attacks and operational failures.
Beyond security, incentives are instrumental in cultivating a vibrant community. They encourage active governance participation and attract new participants that would want to become validators given that there is a way for the protocol to reward their efforts, ensuring that decision-making is decentralized and reflective of the community's needs and aspirations. This participatory model drives engagement, innovation, and promotes a sense of ownership among stakeholders, critical components for the long-term success of any blockchain ecosystem.
Comparative Analysis with EVM-Compatible Layer-1 Protocols
A comparative analysis with other EVM-compatible Layer-1 protocols reveals a clear trend towards dynamic tokenomic models that incorporate both inflationary rewards and deflationary mechanisms. Protocols such as Ethereum have recognized the importance of these mechanisms for balancing security incentives with economic sustainability. The introduction of EIP-1559 on Ethereum, which introduced a transaction fee burn mechanism, exemplifies the industry's move towards models that sustainably support network operations while offering deflationary pressures to enhance token value.
Similarly, other successful Layer-1 protocols have implemented inflationary rewards to secure network participation, demonstrating that such mechanisms are not merely beneficial but essential for competing in the broader blockchain space. These protocols offer valuable lessons on structuring token economics to balance growth, security, and value retention effectively.
The proposed evolution of Chiliz Chain's tokenomics, integrating allocatable inflation and burn mechanisms, is grounded in an analysis of the blockchain ecosystem's needs and trends. This evolution is designed to ensure the Chiliz Chain remains competitive, secure, and community-focused. By aligning with proven practices in the blockchain industry and addressing the unique needs of the Chiliz ecosystem, these changes lay the foundation for a robust, vibrant, and sustainable future.
Proposed Tokenomic Structure
The evolution of the Chiliz Chain tokenomics centers around an inflation formula and the introduction of a perpetual burn mechanism in the form of EIP1559. These changes will transition $CHZ into a dynamic economic model that supports the network's growth, security, and community engagement. Let's delve into the components and the rationale behind these proposed adjustments.
Detailed Explanation of the New Inflation Formula
The proposed inflation formula is:
y = 9.24e(-0.250x)+ 1.60
y: represents the annual inflation rate in percentage.
x: represents the progression of time in terms of years since the implementation of this new tokenomic structure (since the hard fork is introduced), estimating the passage of a year within the blockchain's operation.
9.24: is the initial inflation rate coefficient, signifying the starting level of inflation, prior to the correction of the decay factor.
e(−0.250x): is the decay factor, which ensures that the inflation rate decreases exponentially over time.
1.60: is the asymptotic value, the minimum annual inflation rate that the system aims to approach over the long term, prior to being added to the value of the current inflation after adjusted for the decay.
Inflation Supply Allocation
The strategic allocation of the newly introduced inflationary supply of $CHZ is a cornerstone of the proposed tokenomic evolution for the Chiliz Chain. This section outlines the breakdown of inflation supply allocation, provides a rationale for each segment's percentage, and discusses the expected Annual Percentage Rate (APR) for validators and delegators, including the methodology behind its calculation.
Breakdown of Proposed Allocation
Validators/Delegators: 65%
This significant allocation to validators and delegators underscores the paramount importance of network security and operational integrity. Validators and delegators are incentivized to act in the network's best interest, maintaining its health and defending against potential attacks.
This high percentage aligns with the protocol's reliance on a Delegated PoSA mechanism, where the security and efficiency of the blockchain depend on the active involvement of these stakeholders.
Community Vault, $CHZ LP & Possible Shared Security Restaking Rewards: 10%
This allocation is designed to support community engagement and ecosystem liquidity. It funds incentives for participating in liquidity pools on Chiliz Chain-native DEXs and other community-driven initiatives, fostering a vibrant ecosystem around the Chiliz Chain. This is vital for encouraging the development of a robust DeFi landscape within the Chiliz Chain, crucial for its long-term competitiveness and appeal.
Ecosystem and Operational (E&O) Distribution: 25%
The E&O distribution is allocated for ongoing development, marketing, and operational expenses associated with the Chiliz Chain. This ensures sustainable growth of the platform and its ecosystem, covering necessary expenses for innovation, ecosystem support, outreach and continuous growth of the ecosystem partnerships, which are essential for maintaining relevance and driving adoption.
Inflation Supply Allocation Addresses
The Mainnet and Testnet addresses are available here:
pageInflation Supply Allocation AddressesExpected APR for Validators/Delegators and Calculation Methodology
The expected APR for validators and delegators is a critical component of the inflationary model, incentivizing participation and investment in the network's security. The APR is derived from the total inflation allocated to validators/delegators, the percentage of the circulating supply that is staked, and the total value of the staked tokens.
The APR for delegators is calculated as follows:
The APR for validators is calculated as follows:
Where:
Total Annual Inflation dedicated to Validators (T): This variable represents the total inflationary tokens issued by the network that are allocated to validators annually.
Total Value of Staked Tokens (S): This includes the total value of all tokens that are currently staked on the network by validators and delegators.
Commission Rate of Validator (C): This is the percentage of rewards taken by validators from delegators as a fee for their services.
Delegated Tokens (D): This is the additional amount of tokens that have been delegated to the validators, enhancing the overall pool of staked tokens.
Given the proposed inflation model and allocation percentages, the APR will dynamically adjust based on the total staked amount and the inflation rate. In the first year, with an initial high inflation rate designed to bootstrap participation, the APR is expected to be higher, attracting early validators and delegators. As inflation decreases, the APR will adjust, but the growing value and utility of the $CHZ token are expected to sustain participation.
The proposed inflation supply allocation and APR calculation methodology are designed to ensure the Chiliz Chain's security, sustainability, and community engagement. By strategically allocating inflation and providing clear incentives for network participation, the Chiliz Chain aims to solidify its position as a leading decentralized protocol, fostering growth and innovation within its ecosystem.
Implementation of EIP1559
The evolution of the Chiliz Chain tokenomics includes the integration of a transaction fee mechanism inspired by the EIP1559 standard. This implementation is geared towards enhancing the economic and operational efficiency of the Chiliz Chain. Below, we delve into the essence of EIP1559, its relevance to the Chiliz ecosystem, and the mechanics of its integration, focusing on the unique context of the Chiliz Chain.
Overview of EIP1559
EIP1559 introduces a dual fee model consisting of a base fee and an optional tip. The base fee is algorithmically adjusted, increasing or decreasing with each block depending on network congestion. This dynamic adjustment aims to standardize transaction costs, making them more predictable. The optional tip, meanwhile, serves as an incentive for faster transaction processing during periods of high demand. A distinctive feature of this model is the burning of the base fee, removing it from circulation, which introduces a deflationary pressure on the native token.
Relevance to the Chiliz Chain
For the Chiliz Chain, incorporating the EIP1559 standard into its tokenomics brings several advantages. The primary benefit is the stabilization of transaction fees, which is crucial for a blockchain that aims to support a vast array of decentralized applications (dApps) and transactions. Predictable gas fees enhance the user experience, making cost calculations more straightforward for developers and users alike.
Moreover, the token burn mechanism inherent in EIP1559 directly contributes to the economic sustainability of the $CHZ token. By periodically removing a portion of the $CHZ in circulation, the chain introduces a deflationary element that can support the token's value over time, aligning with the long-term interests of holders and participants in the Chiliz ecosystem.
Technical Details of EIP1559 Integration and Expected Impact
Integration Mechanics:
Base Fee Adjustment: The Chiliz Chain will adopt an algorithm to dynamically adjust the base fee per block based on network activity. This algorithm ensures that block space utilization remains optimal, targeting a specific gas limit per block. The adjustment mechanism increases the base fee when the network exceeds the target gas limit and decreases it when usage falls below this threshold.
Token Burn: The base fee paid by users for transactions will be burned, effectively removing it from the total supply of $CHZ. This process requires the implementation of a burning mechanism that is transparent, verifiable, and consistent, ensuring that the deflationary aspect of EIP1559 is faithfully executed.
Optional Tips: To incentivize validators to prioritize their transactions, users can include an optional tip. This feature requires updates to wallet interfaces and transaction creation tools within the Chiliz ecosystem, ensuring that users can easily specify tips based on their transaction urgency.
Expected Impact:
Enhanced Market Efficiency: By making transaction fees more predictable, EIP1559 is expected to improve the overall efficiency of the Chiliz Chain market. Developers and users will benefit from a more stable and transparent fee structure, facilitating the planning and execution of transactions and dApp interactions.
Economic Stability: The introduction of a deflationary mechanism through the burning of the base fee is anticipated to positively impact the $CHZ token's economic stability. Over time, this could lead to a reduction in supply-side pressures, potentially supporting the token's price.
Improved Network Security: While not a direct goal of EIP1559, the predictable fee model and enhanced user experience could lead to increased network utilization. Higher participation and transaction volumes contribute to the network's security by distributing activity more evenly across the ecosystem.
Incorporating EIP-1559 into the Chiliz Chain’s economic model represents a strategic enhancement, aligning it with leading practices among Layer 1 protocols.
Governance and Community Participation
Mechanisms for Community Involvement in Governance Decisions
Delegation System: At the core of the Chiliz Chain governance model is the delegation system, where $CHZ holders can delegate their staking power to validators of their choice. This system empowers $CHZ holders by allowing them to contribute to the network's governance indirectly, even if they are not validators themselves. By delegating their stakes, users grant validators more weight in governance decisions, ensuring that their voices are heard through the validators they trust and support.
Governance Portal: The governance process is facilitated through a dedicated platform, https://governance.chilizchain.com/governance.
Documentation and Proposal Context: To aid in informed decision-making, a section will be added to https://docs.chiliz.com detailing proposal contexts, implications, and expected outcomes. This resource ensures that community members are well-informed about the matters at hand, facilitating educated and meaningful participation in the governance process.
Economic Analysis
Supply Roadmap
Inflation will stabilize at an annual rate of 1.88% starting from the 14th year. Over time, this inflationary pressure will be partially offset as the volume of gas fee burn increases. Eventually, if the gas fee burn rate surpasses the annual inflation rate, the inflation could naturally turn negative and the model will become deflation.
Disclaimer
The contents of this document, including all data, analysis, and insights, are provided strictly for informational purposes only and should not be interpreted as financial advice, investment guidance, or any form of solicitation or offer to buy, sell, or engage in any form of investment in cryptocurrency, including but not limited to the Chiliz Chain Token ($CHZ). Cryptocurrencies involve a high degree of risk and can result in the loss of part or all of your investment. Prospective participants should conduct their own research and, where necessary, consult with independent financial advisors to ensure that any investment decisions are made based on personal investment objectives and financial situation.
All information herein is provided without warranty of any kind, either express or implied, and any reliance you place on such information is therefore strictly at your own risk. The views, thoughts, and opinions expressed through this document belong solely to the contributors and do not necessarily reflect the official policy or position of any associated or affiliated companies or entities.
Furthermore, the content of this document is not directed at nor intended for distribution to or use by any person or entity who is a citizen, resident, or located in any jurisdiction where the distribution, publication, availability, or use of such information would be contrary to applicable laws or regulations or which would subject the issuing entities and their products or services to any registration or licensing requirements within such jurisdiction. Specifically, this document is not intended for distribution to, or use by, any person or entity in the United States of America or any U.S. jurisdiction.
This disclaimer forms part of the Executive Summary of the Governance Proposal for Chiliz Chain Tokenomics Evolution and should be read and understood in conjunction with the information presented throughout the document.
FAQ
FAQ 1: What is the reason behind introducing inflation to $CHZ?
The introduction of inflation to $CHZ is a strategic move to ensure the long-term sustainability and security of the Chiliz Chain. As the network evolves into a sovereign Layer 1 protocol, the need for continuous incentivization of validators, delegators, and community participants, such as users, developers and partners increases. Inflationary rewards create a dynamic mechanism to encourage active participation in network security, governance, and ecosystem development, aligning with practices of successful EVM-compatible Layer 1 protocols.
FAQ 2: Why is EIP1559 being integrated into Chiliz Chain?
Integrating EIP1559 into the Chiliz Chain introduces a mechanism for predictable gas fees and a perpetual token burn, enhancing the network's economic and operational efficiency. By burning a portion of transaction fees, EIP1559 reduces circulating supply over time, potentially offsetting inflationary pressures and contributing to the asset's scarcity.
FAQ 3: How will the inflation supply be allocated?
The inflation supply is allocated across validators/delegators (65%), the Community Vault and liquidity provisioning (10%), and Ecosystem and Operational Distribution (25%). This allocation is designed to optimize network security, community engagement, and sustainable development, ensuring that incentives are aligned with the long-term growth of the Chiliz Chain ecosystem.
FAQ 4: What are the expected benefits for $CHZ holders?
$CHZ holders stand to benefit from enhanced network security, more vibrant ecosystem development, and potentially increased token value over time. The introduction of inflationary rewards and EIP1559's burn mechanism contribute to a robust economic model that encourages participation, while also implementing deflationary pressures that can positively impact token value.
Additionally, holders who decide to delegate their $CHZ will receive staking rewards, providing an extra incentive for participation in the network's security and governance.
FAQ 5: What is the voting process for this proposal?
The voting for this proposal will be conducted in a permissionless and non-custodial manner, ensuring that all $CHZ holders can participate directly from their wallets without relinquishing control of their tokens. This approach promotes a transparent and inclusive decision-making process, allowing the community to shape the future of Chiliz Chain.
FAQ 6: How can I participate in the vote?
All $CHZ holders, including those who are not validators, can participate in the voting process. If you hold $CHZ but are not a validator, you can still engage in the governance of the Chiliz Chain by delegating your tokens to a validator whose views and governance approach align with your own. This delegation does not mean transferring ownership of your tokens; it simply means you are trusting a validator to vote on proposals on your behalf. Participation in the vote will be conducted in a permissionless and non-custodial manner, ensuring that you retain control over your tokens while contributing to the decision-making process.
FAQ 7: What happens if the proposal is accepted?
If the proposal is accepted, the Chiliz Chain will proceed with the implementation of the proposed tokenomics changes, including the introduction of inflation, the allocation of inflation supply, and the integration of EIP1559. A detailed roadmap and timeline for these changes will be shared with the community, along with regular updates on progress and milestones.
FAQ 8: How will this proposal affect the long-term vision of Chiliz Chain?
This proposal is designed to align $CHZ's tokenomics with the long-term vision of Chiliz Chain as a leading, sustainable, and community-driven Layer 1 protocol. By introducing economic mechanisms that support growth, participation, and security, we are laying the foundation for a vibrant ecosystem that can adapt and thrive in the ever-evolving blockchain landscape.
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