Tokenomics
Following the Dragon8 announcements, we're happy to introduce you to Tokenomics 2.0.
Chiliz Chain Tokenomics 2.0 πΆοΈβ¨
As the Chiliz Chain approaches the end of its first year, weβve gained valuable insights into the evolving economic dynamics of our $CHZ token. As a βsimpleβ transactional token initially, $CHZ has matured into the foundation of our ecosystemβs governance and gas token of an active, sovereign protocol. Despite all the significant progress, it has become evident that the original tokenomics can no longer meet the demands of our expanding ecosystem.
Thus at the start of 2024, we introduced our upgraded tokenomics model featuring a gradually decreasing annual inflation rate and a perpetual token burn mechanism.
So, why the upgrade? π€οΈ
Under the tokenomics 1.0, the protocol restricts capacity to bootstrap long-term incentives for our community in exchange for broad participation in governance and security. It also precludes the ability to bootstrap long-term incentives for community & ecosystem participation more broadly - whether this comes in the form of liquidity pool incentives for nascent Chiliz Chain-native DEXs, incentives to stake emerging Chiliz Chain-native community tokens, or the like. This strategic shift will align Chiliz with the economic strategies of leading Layer 1 protocols worldwide, enhancing the $CHZ token utility and ensuring its longevity in our ecosystem.
Gaining a thorough understanding of Chiliz Chain's tokenomics 2.0 is essential for making informed decisions. Below, we provide a comprehensive overview of the inflation mechanism, outlining key details such as the initial annual base, the decreasing year-over-year inflationary decay, and the allocation of the inflationary portion.
Tokenomics 2.0 Mechanism Specifics βοΈ
Initial (year 1) annual base inflation | 8.80%
Decreasing year over year inflationary decay (using the Formula below)
Annual inflation stagnation (inflation floor) in 14 years | 1.88%
Transaction Fee Burning Mechanism: The Chiliz Chain will implement EIP-1559 wherein the vast majority of accrued gas fees will be burned at a protocol level.
Formula
The updated tokenomics of the Chiliz Chain introduces a carefully crafted inflation formula that adjusts the annual inflation rate of the $CHZ token.
The formula is: y = 9.24e(-0.250x) + 1.60, which features a decreasing inflation model that reduces inflation swiftly in the early years. The coefficient 9.24 shows the initial magnitude of inflation decay while the decay rate of 0.250 determines the pace at which the inflation rate decreases. The offset of 1.60 adjusts the long term asymptote of the inflation curve, stabilizing the inflation rate at 1.88% annually after 14 years.
Where:
y = inflation percentage (%)
x = year of inflation (or time elapsed, denoted in years) 9.24 = The coefficient affecting the initial magnitude of the decay 0.250 = The decay rate 1.60 = The offset that adjusts the asymptote the function approaches over time Under the condition that when x >13, y = 1.88%
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.
To understand this better, take a look at the visualization of the inflation rate model below.
Visualization
Inflation Supply Allocation:
Validators/Delegators | 65%
Community Vault, $CHZ LP (liquidity provider) and possible Shared Security Restaking Rewards | 10%
Ecosystem and Operational (E&O) Distribution | 25%
Key Advantages of the Upgraded Chiliz Chain Tokenomics
The introduction of the new tokenomics for the Chiliz Chain is a significant evolution in our ecosystem. It ensures CHZ tokens remain a vital component of our network. The upgrade is a strategic realignment for sustainable growth, community engagement, and enhanced token utility. Here are the key advantages:
Incentivizing community participation with higher rewards
More sustainable growth for the Chiliz Chain ecosystem - this will allow long term incentives for all the participants of the broader Chiliz Chain ecosystem.
More opportunities for DeFi building within Chiliz Chain ecosystem
Long-term ecosystem funding - as a portion is allocated to the Ecosystem and Operational (E&O) Distribution, weβre making sure to continuously fund the development of Chiliz Chain, ecosystem projects, and community initiatives.
Still have more questions about Chiliz Chain Tokenomics 2.0? Check out our FAQ section π
FAQ
What is the purpose of introducing an inflation model to the Chiliz Chain?
The original Tokenomics 1.0 limits our ability to offer long-term incentives for community participation in governance and security, as well as broader ecosystem involvement. By upgrading, we align Chiliz with global Layer 1 protocols, enhancing $CHZ utility and ensuring ecosystem longevity.
What annual yield can validators/delegators expect from the new mechanism?
Annual yield for validators and delegators from inflation mechanism projected at minimum 5.72% APY (100% supply staked) and median/average 11.44% APY (50% supply staked). Yield adjusts based on actual staking participation rates and inflation rate over time.
What is the initial annual base inflation rate for the Chiliz Chain?
The initial (year 1) annual base inflation is set at 8.80%, with a front-loaded decreasing year-over-year inflationary decay formula applied thereafter.
How will inflation change over time?
Chiliz Chain's inflation starts at 8.80% on day one, then decreasing with a front-loaded year-over-year inflationary decay formula until it reaches 1.88% in the 14th year. It remains static from the 14th year. This approach balances high initial incentives with long-term sustainability. For a more visual display, please see our table above.
How is the inflation supply allocated? What will be the distribution among validators/delegators and the community?
65% of the inflation supply is for validators and delegators as a reward for their participation in network governance and security; 10% to Community Vault/$CHZ Liquidity Pools/Shared Security Restaking Rewards; 25% to Ecosystem and Operational Distribution, such as funding Chiliz Chain development and supporting ecosystem projects.
Will the $CHZ token supply keep inflating under the Tokenomics 2.0?
The inflation rate will keep decreasing year over year with an inflationary decay, and 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.
What are the long-term security implications of the new tokenomics for Chiliz Chain?
Chiliz Chain's new tokenomics uses a balanced approach of inflation and burning to incentivize a broad and active validator set, making the network more decentralized and attack-resistant. This helps maintain a sustainable economic model and prevents excessive inflation. Together, these mechanisms create a secure and adaptive ecosystem for us.
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