ICP Tokenomics
Introduction
The Internet Computer is governed by on-chain governance system called the Network Nervous System (NNS). To participate on governance, users need to stake [[ ICP tokens. This section will explain how the NNS works, ICP tokens, staking, and options for managing one's ICP.
Background: Tokenomics
It is important to understand a bit about the Tokenomics of ICP. ICP is the utility token of ICP blockchain. The following are the core use cases that outline how the ICP token helps in the functioning of the Internet Computer blockchain.
1. Node Provider Rewards: The node providers that offer compute/storage infrastructure to the Internet Computer blockchain receive ICP rewards. Each node receives a flat monthly reward calculated in fiat and paid in the form of ICP tokens. This model ensures that the cost that the network bears for running a node is always constant in fiat terms. The reward varies slightly based on the geographical location of the node to ensure the IC is able to achieve a wider geographical distribution of nodes. Each node provider continues to receive rewards as long as they guarantee the right quality of service. The rewards are paid by minting new ICP tokens, causing inflation.
2. Governance: ICP token holder can stake (lock) their tokens to create Neurons. Holding neurons enables them to secure voting rights via the IC’s on-chain open governance system, the Network Nervous System (NNS). The NNS enables the neuron holders (people staking ICP) to vote on proposals related to aspects like upgrading the IC protocol and software running on node machines, onboarding new node providers, adding node machines into the blockchain network, and creating new subnet blockchains to increase capacity. The NNS implements liquid democracy: neurons can follow other neurons a delegate voting power. The neuron holders receive rewards from the IC protocol for participating in the voting process and helping with the governance. These voting rewards are also paid by minting new ICP tokens, causing inflation.
3. Fuel for Computation/Storage: Canister smart contract computations running on the Internet Computer blockchain are fueled by “cycles”. These cycles are derived by burning ICP tokens. The cycles play a similar role to “gas” on Ethereum. There are several major differences, however. One of the most fundamental differences is that Ethereum leverages “user pays” while the Internet Computer has “smart contract pays” model (sometimes called “reverse gas”) model. Whereas the Ethereum blockchain requires end-users to send payments for the gas that smart contracts consume with every transaction, on the Internet Computer, Canister smart contracts are pre-charged with cycles, such that contracts effectively pay for their own computation - freeing users from the responsibility. Cycles are generated by burning ICP utility tokens, causing deflation.
4. Transaction/Proposal Fees: When any ICP holder transfers their ICP from one wallet to another they incur a small transaction fee paid in ICP. Additionally, ICP holders pay a small fee while submitting new proposals to the NNS. These fees are burnt as a part of the transaction, causing deflation.
To summarize, ICP inflation happens for rewarding node providers and governance participants while deflation happens when ICP is burnt for computation or for transaction/proposal submission fees.
With that concept under our belt let's dive deeper into understanding the ICP token supply. Understanding the supply of a token is important to many people in the crypto community.
The total supply of ICP is variable, with both minting (inflationary) and burning (deflationary) mechanisms. The circulating supply of ICP is also variable, and in addition to being affected by minting and burning, it's also affected by the unlocking of neurons from early contributors (e.g., neurons of seed round donors are on a multi-year unlocking schedule).
Background: the design intent
The design intent of the tokenomics of the IC is to create a self-sustaining ecosystem that can balance the following goals and constraints:
- Developers pay very low storage and compute costs.
- Node provider rewards are high enough to incentivize node providers to be part of the network.
- Voting rewards are high enough to encourage staking and governance participation (but not too high).
Since this is a dynamic system, it is up to the community to keep an eye on the system and adjust its levers accordingly, evolving and optimizing the IC's tokenomics via NNS proposals.