View source for Staking, voting and rewards

== Staking & Voting Rewards ==

Stakeholders can earn significant returns on their staked ICP tokens in
the form of voting rewards. The Internet Computer is a decentralized
platform whose evolution is decided by the voting power of its
stakeholders. This scheme ensures that those making decisions impacting
the future of the Internet Computer are personally vested in the
outcome. In return the Internet Computer gives out voting rewards.
Voters can vote actively, or they can use the liquid democracy on the
Internet Computer to automatically follow other voters.

== Key Concepts ==

=== Neurons ===

In order to become vested and obtain voting power, ICP tokens must first
be staked, and then locked up for a length of time greater than 6
months, to at most 8 years.

Just as tokens are held in a user's account, stake is held in a special
account called a "neuron". Each neuron has its own identifier, and
several attributes relating to its stake. These include:

* the length of time it is locked for (the "dissolve delay");
* whether it is currently dissolving toward liquidity;
* and how much reward it has accrued as a result of voting on proposals (the "maturity").

Once a neuron is locked for more than six months, it gains the ability
both to submit proposals and to vote on them. Voting in turn generates
voting rewards, based on how active a neuron is in voting on proposals.
If you vote on every open proposal, you gain the maximum reward.

A neuron can also "follow" other neurons, which causes it to
automatically vote the same as the majority of the neurons that it
follows. All new neurons by default follow neuron 27 held by the ICA, so
any newly staked neuron will generate voting rewards as soon as it is
locked for more than six months. The default following is applied to
most proposal topics, except for proposals with topic Governance, where
neuron holders have to explicitly vote to earn rewards.

=== Voting Power ===

The voting power of a locked neuron is determined by several factors:

* Principally, by its stake. 1 ICP = the power of 1 vote.
* Next, by its lock up duration, or dissolve delay. 6 months grants a 1.06x voting power bonus, and 8 years grants 2x. All other durations scale linearly between.
* Lastly, by its age, or length of time spent locked up without dissolving. 4 years grants a 1.25x bonus, multiplicative with any other bonuses. All other durations between 0 seconds and 4 years scale linearly between.

This means that the maximum voting power, of 2.5 votes per ICP staked,
is only achievable by locking up your neuron for 8 years, and leaving it
in that locked up state for 4 years. At that time you will have the most
voting power for the stake committed.

=== Maturity ===

Maturity represents the voting rewards accumulated in a neuron. Each day
the network rewards participants by allocating to every voting neuron a
portion of the total reward, based both on its voting power at the time
proposals were made, and the number of proposals it voted on.

Some look at maturity as similar to a "dividend" or "interest", but
please note that your tax authority may take a different view on the
subject. Please consult the appropriate professionals before deciding on
an interpretation of when maturity becomes income.

For those who wish to compound the gains in their neuron, the most
natural activity is to "merge maturity" at intervals, which has the
effect of minting the neuron's maturity and adding that minted amount
back into the neuron's stake. If you wish to harvest income from the
neuron, you "spawn" maturity into a reward neuron, which mints the
parent neuron's, and moves this maturity into the stake of a new neuron.
It should be noted that if you do neither, and leave those gains in the
form of maturity, it will not add to the minted total of ICP, nor
contribute to your voting power.

== Why Staking Matters ==

To some, staking is seen as an income generator, a way to perform "yield
farming" by locking up ICP and enjoying the benefits of the accrued
maturity. However, staking is not intended solely as an income vehicle.
It is a way of allowing those who invest in the Internet Computer to
decide what happens next with the platform.

When the Internet Computer first launched, all proposals required a
majority vote to pass. Gradually, however, this is changing. After a
recent update it is now possible for proposals to pass with only a
majority among 3% of the total voting power, meaning that proposals
stand a chance even if large entities abstain and the majority of the
network does not vote.

== Staking Rewards ==

Even if you stake only for the purpose of voting on proposals, voting
rewards are an important aspect of neurons. At the very least,
such returns can be compounded to increase your total voting power. So
to better understand staking and reward, it may be helpful to look at
staking from two perspectives:

=== Short-term: NNS rewards each day ===

Every day, rewards are granted by the network to each voting neuron. The
percentage of those rewards received by each neuron depend on the
following factors:

* Amount of ICP staked
* Length of dissolve delay
* "Age" of the neuron (time spent in a non-dissolving state)
* Number of eligible proposals the neuron has voted on

For example, if on a single day the NNS has generated 1000 ICP in total
rewards (see below for more on how this is computed), and there were 10
proposals submitted which only two neurons voted on, and:

* Neuron A has a voting power of 20, and voted on all 10 proposals
* Neuron B has a voting power of 80, and voted on all 10 proposals

Then the 1000 ICP would be divided between these two neurons by their
proportional voting power:

* Neuron A with voting power of 20, gets 20% of the total = 200 ICP
* Neuron B with voting power of 80, gets 80% of the total = 800 ICP

If either neuron had only voted for X% of those 10 proposals, it's
reward would be decreased to X% of its maximum eligibility, with the
remainder distributed among the other neurons.

=== Long-term: NNS rewards over years ===

As of December 2021, here is the long-term NNS rewards curve: https://dashboard.internetcomputer.org/circulation

In the first year, the NNS allocates 10% of the total supply to generate
voting rewards. Note the term "allocates" rather than "mints", because
rewards are not minted until they are spawn, merged or the neuron is
disbursed, so total supply is not automatically increased by rewards
alone. This allocation rate drops linearly until it reaches 5% by year
8. Like all parameters in the NNS, the minting rate can be changed via
NNS proposals, but this is the current rate schedule.

Because the total supply of ICP is a dynamic system with deflation and
inflation, it is impossible to predict what voting rewards will be on any
given day or year in the future. It is relatively easy to predict what
the percentage allocation rate will be months from now, but it is much
harder to predict what the total supply will be both because of
potential changes to the rate, and how often stakeholders will mint
their maturity.

=== Inflationary and Deflationary Mechanisms ===

Deflationary mechanisms for ICP:

* Minting cycles to pay for compute and storage burns ICP to create cycles
* Burning of transaction fees
* Burning of the 1 ICP deposit for failed proposals; note that this only happens at disbursement or merging of neurons, so accumulated fees can persist for a while before finally contributing to deflation.

Inflationary mechanisms for ICP:

* Node providers are paid by minting ICP
* Voting rewards are paid by minting ICP, although this minting only happens at the moment rewards are spawned, maturity is merged, or the neuron is disbursed.

=== Network Factors Affecting Annual Percentage Yield ===

When considering potential Annual Percentage Yield (APY) for ICP staked
in a voting neuron, in addition to the primary factors of the dissolve
delay, neuron age, and amount of stake, there are also network factors
that can affect potential yield. Chief among them are:

* The amount of supply allocated each year to pay rewards;
* The total voting power across all neurons, since rewards are divided equally among neurons according to their voting power;
* Inflationary and deflationary pressures: primarily, minting to pay node providers and spawn rewards, burning to fuel canister cycles, and the other factors mentioned in the previous section.

These factors can affect future returns significantly. Firstly, the
amount of supply began at 10% at genesis, but will fall to 5% after the
first eight years. Secondly, as staking becomes more common and there
are better user interfaces to do it, there will naturally be more
competition. If no one else were staking, returns would be astronomical;
but if nearly everyone is staking, returns will be lower.

Economics are always at play, however. If staking is very popular, it
means the amount of liquid supply would reduce, which would drive up
demand and hence prices. So although returns would drop significantly,
price appreciation should offset the loss in income. Conversely, if most
people dissolve their neurons to trade on the open market, price would
likely drop while returns increase. It is reasonable to assume that over
time an equilibrium will be established, where rates and prices
fluctuate in sympathy based on the macro factors driving demand for ICP
tokens.