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" ather neurons, which causes it to automatically vote the same as the majority ofr the neuron 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.[]{#anchor-3}

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 would "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, NNS rewards are an important aspect of a voting neuron. 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*](https://dashboard.internetcomputer.org/circulation)

In the first year, the NNS allocates 10% of the total supply to generate NNS 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 NNS 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
• NNS 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.