ICP Tokenomics

Introduction

ICP tokenomics encompasses aspects such as ICP token supply, distribution, use cases, and mechanisms to maintain stability of the ICP network and drive DAO participation.

By establishing a well-designed token economy, ICP project aim to create sustainable ecosystems that encourage participation, growth, and reliability for ICP smart contracts, developers, DAO participants, node providers, and dapp users.

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 & stable storage and compute costs.
Node provider rewards are high enough to incentivize node providers to be part of the network.
Voting rewards are balanced to encourage staking and governance participation while also limiting inflation

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.

Uses of ICP token

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. Rewards are distributed in the form of maturity which is an attribute of a neuron. Neurons holders can convert maturity to ICP at a later stage. This process is subject to maturity modulation.

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.

Token Supply

The total supply of ICP is variable, with both minting (inflationary) and burning (deflationary) mechanisms. See: Total supply, circulating supply, and staked ICP.

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.

How to get ICP tokens

There are different ways you can acquire ICP tokens:

Purchase ICP tokens directly through an exchange that lists ICP tokens available for trade. Coinmarketcap maintains a reasonably complete list of exchanges that trade ICP tokens
Receive tokens as voting rewards for participating in the governance of the Internet Computer
Receive ICP tokens from somebody who sends them to an account you created
Receive a developer grant of tokens through the Internet Computer Association (ICA) or the DFINITY Foundation
Receive tokens as remuneration for providing computing capacity as a node provider

Key tokenomics concepts

Tokenomics series

The Tokenomics Series are a series of articles by the DFINITY Foundation presenting an ICP tokenomics framework that enables the community to analyze the relationship between various factors influencing the supply and demand of ICP. This framework will offer a quantitative basis for assessing the state of ICP tokenomics over time and evaluating potential changes.

May 11, 2023 - Projection of cycle demand and required network capacity of the IC
May 24, 2023 - Projecting total supply of ICP