A simpler inflation model modifiable by OpenGov and a reduction in DOT inflation are currently being discussed.
DOT is an inflationary token. On thePolkadot network, inflation isset to be 10% annually.Dependingon the DOT supply staked and the ideal stakingrate (more about this below), part of the DOTinflation is distributed to the stakers and part to thetreasury.
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DOT went through redenomination in 2020 that saw the DOT tokensupply increase by 100 times.
The current token supply on Polkadot can beseen here.
It is essential to understand that the primary objective ofDOT inflation is to incentivize networkparticipants throughNominated Proof of Stake (NPoS) and to grow thenetwork through funding the on-chain treasury. There is an opportunity cost of keeping theDOT tokens idle with the current inflation modelas the tokens get diluted over time. Economics and game theory suggest that setting an idealinflation rate is essential for incentivizing the network participants as well as the growth of thenetwork, and any deviation from it can have adverse effects. Reducing the inflation rate could limitgrowth, while increasing the inflation rate could break the incentive model of the token. Hence,token inflation rate is not a forever fixed value, and inflation can be updated in the futurethrough on-chain governance based on thorough tokenomics research.
Inflation Model
The chart below shows the inflation model of the network. Depending on the number of staked tokens,the distribution of the inflation to validators and nominators versus the treasury will changedynamically to provide incentives to participate (or not participate) in staking.
There is a dynamic ideal staking rate (in the figure set to 0.6 or 60%)that the network tries to maintain. The inflation model will incentivize network participants tostake when the current staking rate < ideal staking rate and disincentivize staking whencurrent staking rate > ideal staking rate. The goal is to have the staking rate meet the idealstaking rate. The current staking rate would be the total amount staked in the current era over thetotal token supply, where the total amount staked is the stake of all validators and nominators onthe network. The ideal staking rate accounts for having sufficient backing ofDOT to prevent the possible compromise ofsecurity while keeping the native token liquid.
Source: Research - Web3 Foundation
- x-axis: Proportion of DOT staked
- y-axis: Annualized percentage (inflation and staking rewards, see below)
- Blue line: Annual inflation rate diverted to NPoS, i.e., the total amount of tokens minted topay validators and nominators. For instance, 0.1 corresponds to 10% of token inflation diverted tostakers. Since annual token inflation is 10%, all inflation is used to pay validators andnominators, and 0% of token inflation is diverted to the treasury.
- Green line: Annual rewards rate for stakers. For instance, 0.2 corresponds to 20% of annualreturns on the staked tokens. You can determine the current annual staking rewards rate by lookingat the top bar of the staking overview onthe Polkadot Staking Dashboard.
Assuming that the ideal staking rate is 60%, all of the inflation would go to the validators andnominators if 60% of all DOT are staked. Anydeviation from the 60% - positive or negative - sends the proportional remainder to the treasury.Deviations from the ideal staking rate are referred to as staking inefficiencies. Thus, thetreasury does not receive an inflow of funds from inflation when the system staking rate equals theideal staking rate. See this page for more information abouttreasury inflow sources.
For those who are interested in knowing more about the design of the inflation model for thenetwork, please see here.
Ideal Staking Rate
The ideal staking rate can vary between 45% to 75% based on the number of parachains that acquired alease through an auction (this excludes the System parachains), based on the implementationhere.
Briefly, the ideal staking rate can be calculated as follows:
0.75 - auction_proportion
where auction_proportion is obtained by computing min(auctioned_slots, 60) / 300. Theauctioned_slots are all the auctioned slots without the slots for system parachains.
Assuming there are 50 filled slots, of which three are dedicated to system parachains (Asset Hub,Bridge Hub and Collectives), there are 47 auctioned slots. The auction_proportion is thus47 / 300 = 0.157. The ideal staking rate is 0.75 - 0.157 = 0.593.
If the amount of tokens staked goes below 59.3%, then staking rewards for nominators increase,incentivizing them to stake more tokens on the network. On the contrary, staking rewards drop ifstaked tokens exceed the ideal staking rate. This results from the change in the percentage ofstaking rewards that go to the Treasury.
