ICP’s Economic and Governance System Explained

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ICP's Economic and Governance System Explained

The Internet Computer is the world’s first fully adaptive blockchain. The network of Internet computers, and the special node machines that host the network, operate under the full control of the Network Nervous System (NNS).

The NNS is a decentralized token governance system that is completely non-accessible. Anyone in the world can submit a proposal to the NNS, and if it is voted in, it is executed immediately, all completely automatically, allowing the network to adapt and evolve in real time.

The NNS can perform tasks at any time, such as upgrading node machines to update protocols, securely repairing applications, adjusting economic parameters, or creating new subnet blockchains to enable expansion. It operates within the protocol of the Internet computer and can perform these upgrades and modifications without stopping the operation of the blockchain or breaking security.

The NNS network neural system allows users to create voting neurons using ICP governance tokens. Anyone can create a neuron, and we expect tens of thousands of neurons to be created after Genesis that will collectively express the will of the community, mediated through algorithms.

A neuron is like a savings account, with a set exit period, the length of which is configured using a “dissolution delay”. The voting power of neurons, and the voting rewards they receive, are proportional to the number of ICPs placed in the neuron, the length of the “lysis delay”, and the “age” of the neuron’s existence.

Neurons can either vote manually or automatically, in a follow, rather than delegate, mode, where neurons can automatically follow other neurons in a form of fluid democracy.

Neuron holders are placed in a game of cryptoeconomics, where the system provides incentives to vote to “pass or reject” proposals, and where holders automatically vote in the desired way by configuring neurons to follow experts in governance, economics and security, thereby driving the value of ICPs over time.

For the first time in history, this is a self-directed, automated governance with a decentralized infrastructure designed to compete with proprietary centralized infrastructures governed by the leaders and boards of directors of commercial organizations.

Governance Overview

The purpose of NNS is to allow Internet computer networks to be governed in an open, decentralized and secure manner. It allows complete control over all permissions of the network.

For example, it can upgrade the protocols and software used by the node machines hosting the network; it can create new blockchain subnets to enable scaling; it can split subnets to equalize the network load; it can configure economic parameters such as the exchange ratio of gas tokens Cycles to ICPs; in extreme cases, it can even freeze malicious software containers to protect the network, and so on.

The NNS works by accepting proposals and deciding to adopt or reject them based on the votes of “neurons” created by the network participants. Neurons are also used by participants to submit new proposals. After a proposal is submitted, it is either adopted or rejected, a process that ends almost immediately, or after some delay, depending on how all neurons vote.

Each proposal is an instance of a specific “proposal topic”, which determines what information it contains. For each topic proposal, the NNS has a corresponding system function that it calls whenever a proposal on that topic is accepted.

When a proposal is adopted by the NNS, it invokes the corresponding system function by extracting information from the content of the proposal to populate the parameters. Each topic proposal belongs to a specific “proposal topic”, such as “#NodeAdmin” or “#NetworkEconomics”, and the proposal topic determines the details of how the proposal will be processed. To prevent users (neurons) from spamming the NNS with proposals, if a proposal is rejected, the neuron submitting the proposal is charged a fee.

NNS decides whether to adopt or reject a proposal by counting the votes of neurons. Anyone can create a neuron by locking the Internet Computer’s native token (ICP), the balance of which is hosted on a sub-ledger within the NNS. When a user creates a neuron, the locked ICP balance can only be unlocked by dissolving (“destroying”) the neuron.

Users are encouraged to create neurons because they can earn ICP rewards when voting on proposals. The reward comes in the form of an allocation of new ICPs minted by the NNS.The number of ICP rewards allocated to a neuron comes from the following factors.

the number of locked ICPs

the minimum remaining locking period (“lysis delay”)

the length of time the neuron has been present

the proportion of votes it participates in, and the sum of the voting activity of all neurons

At any given time, each neuron has a “lysis delay” of the current configuration. This determines how long it will take to dissolve if it is in “dissolve mode”. Once a neuron enters “dissolve mode”, its dissolve delay decreases over time, like a kitchen timer, until it reaches zero, at which point its owner can perform the final payment action to unlock the ICP.

For neuron owners who want to get the most value out of their ICPs, the “lysis delay” creates a reasonable financial incentive. Neuron owners are free to configure the Dissolution Delay for a maximum of 8 years. Once created, there is no way to accelerate the dissolution rate other than to wait for the natural passage of time. The higher the “dissolution delay”, the higher the voting incentive paid by NNS, which encourages users to join an economic game in which a long-term economic incentive is created and users vote to govern based on a very long-term vision.

In times of heavy governance, neuron owners may find that they do not have the experience to manually vote directly on every proposal submitted to the NNS: first, a large number of proposals are submitted to the NNS, and most neuron owners may not have the time to evaluate each proposal; second, neuron owners may lack the necessary expertise to evaluate proposals.

The NNS uses a form of what has become known as “mobile democracy” to address these challenges. Neuron follow rules can be set up so that for any proposal, a group of neurons can be automatically followed by a follow vote. It is also possible to define a universal inert follow rule, so that neurons can be rewarded for automatically following a proposal even on topics that have not been set. Assuming that neuron owners have the best interest of the network at heart to manage how their neurons follow other neurons, it is also in their own financial interest to lock in ICP tokens.

It is expected that a large fraction of the total ICP supply will be locked into the governing neurons for rewards. This ensures self-management of the Internet computer, as it prevents attackers from gaining a large enough share. Since neuron owners may want to maximize their returns by voting on all proposals, most neurons will be actively managed or configured to follow other neurons so that they can automatically vote.

In practice, once a followed neuron has voted on a proposal, most of the other neurons will also vote because of the follow relationship passing to them. This means that the NNS can usually quickly and deterministically determine whether the overall voting majority represented by all neurons wants to adopt or reject a proposal, and decide on the proposal accordingly.

More details on NNS governance will be presented in the next article

ICP tokens

ICPs are network-native utility tokens that play three key roles in the network.

Facilitating network governance
ICP tokens can be locked to create neurons that can be rewarded with ICP increments by voting to participate in the network governance.

Producing cycles for computation
ICPs can be converted into “cycles”, which act as gas tokens to power computations and are burned when used. cost of acquiring gas is stable and predictable.

Rewarding participants
The network minted new ICPs to reward people for the important work they do to make the network work, including: “voting rewards” for participating neurons; and “node rewards” for service providers running node machines.

The ICP Ledger

The ICP ledger is located within the NNS and records all balances of the ICP in a spreadsheet. Each row is referred to as an “account” and it has two fields (i.e., it has two “columns”).

Account Identifier
byte, a unique value derived from the identity of the controller who “controls” the account. There are currently two types of controllers: the owner of the key pair; and the smart contract (container) that is part of the NNS. The account identifier is derived from the concatenation of the hash field separator, the principal ID and the subaccount (or zero if no subaccount is given).

Balance
A positive integer with a minimum unit of one millionth ICP, the balance is the number of ICPs held by the account.

When the controller is a public key or a smart contract (container), they can apply the following actions to an account.

Send

Sends a portion of the ICP balance to another account. If all ICPs are sent to another account, then the original sending account no longer exists (i.e., it is removed from the ledger).

Notify
When the recipient of funds is an account of an NNS container (e.g., an account of a governance container), the sender can request that the ledger notify the recipient of the transfers received by the container. The recipient can then act on this notification. Two examples of using this capability are creating a neuron and refreshing a neuron’s pledge. These are described in more detail below.

Operations that require interaction between the ledger and the governance system (neuron).

Creating a neuron
When a controller is a public key holder, they can lock a portion of their balance within a new neuron. Technically, the creation of a neuron is done in two stages: first, the ICPs to be pledged are transferred to an account in the governance container (corresponding to a new neuron); then the governance jar is notified of the received transfers, and the governance jar updates its internal neuron records. In order to transfer these ICPs to a different account, for example back to the original account, where they can again be controlled as if they were normal balances, the associated neurons must be completely dissolved. The new neuron that has been created is controlled by the private key of the principal who created it.

Refreshing pledges

A neuron’s pledge can be increased by transferring it to its address/account in the ledger and notifying the governance container of the incoming transfer. Refreshing the pledge will change the maturity and age of the neuron proportionally. For example, if the stake is doubled, the maturity and age will be halved and the age reward will be the same as before (in absolute terms).

Token Economics

Neurons offer the opportunity to earn rewards by participating in governance. Rewards are issued to those who vote in the form of increased neuron maturity, and maturity accumulation eventually yields new neurons that contain incremental ICPs. however, the overall economic return generated by acquiring a new neuron also fluctuates with the value of the locked-in ICP balance.

To maximize the gain, neuron owners have a strong incentive to first ensure that their neurons can participate in every vote so that they can receive the maximum possible voting reward, and second to determine what proposal will best drive the overall value of the network before voting on the proposal.

Dissolution Delay

When someone wants to sell a locked ICP balance, they will gain the most benefit if it reaches the maximum possible value at the exact moment it can be unlocked and sold in the future. Neuron owners will gain the most from the long-term value growth of the network if they take a long-term view to vote to maximize the value of the network in the future. For this reason, the NNS incentivizes neuron owners to make the dissolution delay as long as possible by giving out larger rewards to neurons.

Since the votes of neuron owners are more useful in decision making when they have a long-term horizon, the NNS also gives more voting weight to neurons with larger dissolution delays, while neurons with less than six months of dissolution delay cannot vote at all.

Of course, because locked balances are transferable, this scheme gives less benefit to the network because it would give neuron owners the option to “sell their neurons” at any time, even if they have to discount them relative to unlocked balances.

51% Attacks on governance

A key security concern is to prevent attackers from gaining 51% of the vote, or driving those unwise voters to successfully compromise the network. (The term “attacker” here applies equally to voters who wish to harm the network, to voters whose unintended effects have bad consequences, and to voters who may simply over-concentrate power.)

Fortunately, the enormous value of ICPs locked within the NNS makes the cost of obtaining such votes very high. Moreover, the required investment in the attack would be difficult to recoup, as the ICPs that have been purchased and locked down would be significantly devalued if the network were compromised. Even if an attacker tries to hoard a large number of ICPs, because the vast majority of the supply of ICPs is locked in neurons for rewards, unlocked ICPs are unlikely to be bought quickly on an exchange. This forces attackers to slowly build up their positions over time, and the buying pressure generated by buying ICPs in bulk drives up ICP prices so that purchases become increasingly expensive.

Calculating Voting Rewards

Predictions suggest that 90% of the total ICP volume may be locked into neurons. Regardless of the current lock-in level, a fixed number of incremental ICP rewards are allocated so that participants will receive larger rewards until the participation rate reaches 90% and the market is able to convince those who are not currently participating to do so.

We estimate the required return as a percentage of the current supply and allow this percentage to decline over time to account for the risk of declining lock-in balances as the network becomes more stable. The initial incremental issue might be 10% of the total supply (on an annualized basis), which decreases over time until it is reduced to 5% after 8 years.

Algorithm

The maturity of a neuron starts at 0 and increases with voting activity. When the maturity of a neuron grows above a certain threshold, then it can generate a new neuron containing incremental ICPs and then reset its own maturity to zero.

The number of incremental ICPs in the new neuron is expected to be equal to the ICPs locked in the parent neuron and is factored by the maturity of the parent neuron. For example, a neuron that contains 100 ICPs and has a maturity of 10% can generate a new neuron that contains 10 incremental ICP tokens. The newly generated neuron has a lysis delay of only one day, and the ICPs locked inside can be easily retrieved if needed.

There is an approximate equivalence between the maturity of a neuron and the voting rewards it collects that have not yet been retrieved by spawning the next neuron. (This equivalence is approximate because maturity only determines how much ICP will be inside the spawned neuron, since there is a degree of uncertainty in the “spawning” operation.)

Every 24 hours, we had to calculate how much to increase the maturity of each neuron involved in voting. We started to calculate the maximum number of ICPs that could be created and distributed as rewards, which would be reflected in the increase in neuronal maturity. Once we have this number, we can calculate what relative share of rewards each neuron should receive when considering, for example, the number of locked ICPs, the dissolution latency of the configuration, and the age.

We derive the maximum number of ICPs that can be cast and assigned from the current supply of ICPs and the number of days since creation. First, this is equal to 10% of the ICP supply divided by the number of days in a year. Over the course of eight years, this number drops to 5%. Note that since the supply of ICPs may grow or decline during this time, the voting incentive may not be reduced by half in practice.

The incremental rate for the first year is 10 percent

The incremental rate for the eighth year after Genesis is 5% and remains constant thereafter

Incremental rate is a quadratic function of time

Calling the incremental time G, the total reward R(t) for time t at any time t between G and G+8y is given by

R(t) = 0.05 + 0.05[ (G + 8y – t) / 8y ]²

R(t) = Rf + (R0 – Rf)[ (T – t) / (T – G)]²,

where R0 is the initial rate (10%), Rf is the final rate (5%), and T is the time at which the rate plateaus (G + 8y).

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/icps-economic-and-governance-system-explained/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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