Polkadot Knowledge Graph is our entry-level article on Polkadot from zero to one. We try to start from the most basic part of Polkadot and provide you with a comprehensive understanding of Polkadot. Of course, this is a huge project. Engineering is also full of challenges. However, we hope that through such efforts, everyone can correctly understand Polkadot, and people who do not know Polkadot can easily and quickly grasp Polkadot-related knowledge. Today is the 12th issue of this column. Through a brief The article takes you to understand what is going on with the inflation in the Polkadot network.
Polkadot DOT is the native token of the Polkadot network, which can be nominated, community governance voting, and parachain distribution. The initial circulation of Polkadot DOT is 10 million pieces. In August 2020, the denomination of DOT was split. Therefore, the initial total issuance of the new version of DOT tokens is now 1 billion, and additional issuances will be made every year thereafter, with no upper limit on the total amount. So here comes the question, how does Polkadot issue additional shares, and how does it control the inflation rate?
How Polkadot is Inflated
Polkadot will inflate a portion of DOTs and distribute these DOTs to specific groups of people in order to support participants who maintain the Polkadot network and ecological construction.
As we mentioned before, Polkadot uses NPoS nomination proof of rights and interests to reach consensus. There are two roles: nominator and verifier. By staking tokens, you become a nominator and then nominate your own trusted verifier. The verifier passes Earn rewards for running nodes and confirming blocks. This reward comes from the additional issuance of tokens, thus forming inflation.
In addition, Polkadot’s treasury is an ecological construction that Polkadot uses to stimulate ecological development. It combines a part of the inflationary DOT, the DOT that was slashed by the system due to improper behavior, and a part of the transaction costs. Capital pool. Staking rewards and Polkadot treasury are the main destinations of Polkadot funds after inflation.
The complete Polkadot inflation is mainly composed of the following parts: (i1) Inflation to reward verifiers and nominators through additional issuance of tokens, (i2) Inflation caused by additional issuance of tokens for the treasury, (i3) Deflation caused by misbehavior, that is, deflation caused by Slashing, (i4) transaction fees. The formula is: inflation rate=i1+i2-i3-i4, and i1 means that the inflation caused by the need to issue additional tokens to reward verifiers and nominators accounts for the largest proportion, and is the main factor of overall inflation.
To understand this consensus more clearly, it is necessary to understand the mechanism of the treasury more clearly. Inflation funds mainly go to the i1 and i2 parts, but the i2 part of the treasury includes i3, i4, and the treasury meeting in addition to inflation funds. Some unused funds are destroyed (this is also the only burning mechanism of the entire Polkadot), but i3 and i4 are not originally part of inflation, so i1+i2 is equivalent to double counting i3 and i4. So here we need to subtract i3 and i4 again.
Therefore, the inflation rate of Polkadot is less than 10%, because a part of DOT is burned through the treasury mechanism.
The design of the best pledge rate
Part of the DOT for inflation will be rewarded to Staking participants, and the other part will be given to the treasury, so how are the two distributed? This is about the design of an optimal pledge rate of Polkadot.
Polkadot hopes to reasonably guide the number of DOT pledges, ensure the security of the network consensus and achieve good liquidity of the token. Through sophisticated algorithms, under the condition of an inflation rate of 10%, the optimal pledge rate is 50%, that is, half of the tokens are pledged in the consensus system. This can be roughly divided into three situations:
1. When the pledge rate is less than 50%, the security of the network consensus will be compromised, and more tokens need to be encouraged to pledge. At this time, the annual rate of return is greater than 20%
2. When the pledge rate is equal to 50%, the ideal state is reached. At this time, the annual rate of return of the verification node is 20%
3. When the pledge rate is greater than 50%, the circulation of the pass will be weakened. At this time, the annual rate of return is less than 20%, and the redemption of the pass is encouraged
The x-axis is the pledge rate, the y-axis represents the annualized inflation rate, the blue line represents the inflation rate generated by the validator node token, and the green line represents the annualized rate of return of the pledge.
So, what is the actual annualized rate of return of Polkadot’s Staking?
Theoretically, for staking people, the highest annualized rate of return is when the pledge rate is exactly equal to 50%, and the node’s annualized rate of return is 20%. Part of the inflationary funds will flow to the treasury, and the treasury has a destruction mechanism, so the total inflation rate will be 10%. In addition, because many participants are playing games with each other, the pledge rate cannot be reached in the actual operation process. It just stabilizes at 50% left and right situations. Therefore, the rate of return of staking cannot reach the highest point. Combining the above two factors, in fact, the annualized return rate of DOT pledge is around 10%-15%.
In addition, the best pledge rate of 50% we just saw was the ratio designed according to the time when Polkadot had a parachain, but in the actual process, because the current Polkadot does not have a parachain. Therefore, Polkadot temporarily adjusted the best pledge rate to 75% through a referendum. In the future, when Polkadots slot auction goes smoothly and Polkadot has a parachain, the best pledge rate will be adjusted to 50% of the original design, please be informed.
In the end, in Polkadot’s token design, the optimal distribution ratio for Staking, slot auctions, and circulation is 50%: 33%: 17%.
The inflation model is beneficial to the healthy development of the Polkadot ecosystem
In view of the endless emergence of Polkadot ecological projects, but the inferior projects and scam projects are full of them, it is worthy of vigilance. On the other hand, it is difficult for groups only on the Polkadot project side to understand the whole picture of the entire ecological development of Polkadot, and miss many opportunities. Therefore, we decided to establish a Polkadot ecological group, which can openly discuss all Polkadot ecological projects. Everyone can objectively share their views on each project, understand the development of each Polkadot project, and exchange information to seize opportunities together.
*The information provided by the Polkadot Ecological Research Institute does not represent any investment hints. The published articles only represent personal opinions and are for reference only. Since there are no policies and regulations related to digital assets in China, users in mainland China are requested to pay close attention to the development of Crypto.
In view of the endless emergence of Polkadot ecological projects, but the inferior projects and scam projects are full of them, it is worthy of vigilance. On the other hand, it is difficult for groups only on the Polkadot project side to understand the whole picture of the entire ecological development of Polkadot, and miss many opportunities. Therefore, we decided to establish a Polkadot ecological group, which can openly discuss all Polkadot ecological projects. Everyone can objectively share their views on each project, understand the development of each Polkadot project, and exchange information to seize opportunities together.
