Death by Node Rewards?
Why Node Rewards Won't Be the Death of the IC
I’ve thought a lot about potential death spirals for the Internet Computer. One such death spiral could be caused by hyper-inflation of node rewards. This death spiral is caused by the fact that node rewards are paid out in ICP but are pegged to fiat terms. Therefore, if the price of ICP decreases dramatically then the amount of ICP minted each month for node rewards would increase dramatically. This inflation may cause further decreases in the price of ICP, which then repeats the cycle.
I think it is highly unlikely that node rewards would cause a death spiral for ICP. This is because of one simple fact - node rewards make up a very small percentage of the ICP inflation. Currently, of the ~7M ICP minted since Genesis, only 1.1M of that has gone to node rewards, and the bulk of that 1.1M was a one-time reward paid out in June for node operators who operated prior to Genesis. The average ICP paid to node providers is around 60k ICP per month since June. See the chart below (data from internetcomputer.org).
The fact is that almost all of the inflation in ICP (at least in the next few years) will be from governance rewards. In fact, the 6M ICP in governance rewards since Genesis is actually much lower than it should be (by a factor of 5), something discussed in my Maturity article. In order for the Internet Computer to enter a node reward death spiral, either the IC would need to increase nodes by a factor of greater than 10 or the price of ICP would need to hit levels below $3. Keep in mind too, the NNS controls the addition of nodes, so it is possible for the IC community to slow or stop the expansion of nodes.
Let me know your thoughts on this either in the comments below or via Twitter (@kylelangham). The IC is certainly in the Death Valley Curve and the risks are great, but my opinion is that Node Reward Death Spirals are low on the list. In future articles I’ll explore other affects of a low ICP price and whether the NNS community should consider changes to the inflation rate.
I think the risk is high now. It was less than 100k icp in node provider rewards before but now it is 600k icp per month . If icp token price goes down by another 66%, it’ll be 2 million icp tokens per month , just from node provider rewards. That’s a lot of supply of tokens which will further crash its price . I think we need a proposal to change this .