Demand Driver - Staking
Why Staking on the NNS is driving demand for ICP
How much ICP has been staked on the NNS since Genesis? The answer may surprise you…
Quick Background
The largest driver of demand for ICP in 2021 was for it to be used for staking on the NNS. Staking ICP locks the token for a duration of time (defined by the ICP owner) and in return provides the ICP owner governance voting rights and rewards. ICP owners can stake their tokens from 6 months to 8 years (called the dissolve delay) and can choose to keep that dissolve delay constant (called locked) or start winding it down (dissolving). The staker’s governance voting rights and rewards are proportional to the amount of ICP staked, the length of the dissolve delay, and the length of time they have kept their stake locked.
Where we are at today
From May 2021 through January 2022, an average of 711k ICP per month was newly staked on the NNS (that’s a total of 6.4M ICP!). The average dissolve delay of the newly staked ICP is 5.9 years and the vast majority of this staking has remained locked (97% remains locked!). A total of 3.7M ICP was newly staked for 8 years by 419 different neurons, making it clear that the #8YearGang is real (#8YearGang is a term on Twitter coined by @wizyang to recognize these stakers). In an industry known for short term thinking, new participants are staking on the NNS for extremely long periods of time and keeping their neurons locked. Note – these numbers are incomplete (actual numbers will be higher) due to a lack of indexing of neuron IDs, which will be resolved by Dfinity. Also, these numbers do not include the insane staking on 31DEC because I believe that to be a one-off event.
It’s clear that new participants to the NNS are investing for the long run. And with good reason. Currently, the governance rewards payout an annual yield of 21.8% for a newly staked 8-year neuron, however a neuron owner can “merge maturity” (re-invest the yield back into the neuron) and achieve a higher yield through compounding:
These are very tempting yields, particularly if you believe the value of ICP will increase over time. In addition, ICP holders are drawn to the governance aspect of the NNS and their ability to have a say in the direction of the Internet Computer.
Where we are going
It’s hard to predict where staking will go, particularly given the highly variable staking totals per month (see chart above). However, it's clear that those who do decide to stake on the NNS heavily favor an approach that will keep their ICP locked for 6 years or more. This effectively takes that ICP out of the open market for extremely long periods of time.
There are a few factors that will determine if 2022 sees more staking than 2021:
Whether the annual yield increases or decreases. It seems likely to decrease over time due to the lower inflation rate, higher number of ICP locked into the NNS and a general decrease in ICP dissolving off the NNS. However, for the next year or so, I predict the age bonus of a neuron will offset those small declines.
Tax changes or clarifications. In the US we’ve seen some signs that, in the future, crypto staking rewards may receive favorable tax status, which could drive demand for crypto staking.
The price of ICP. Total staking is almost certainly correlated to the price of ICP because investors will most likely use a fiat currency for their unit of account in making a staking investment.
Despite this uncertainty, I believe we could continue to see heavy demand for staking on the NNS in 2022, to the tune of 0.4M - 1.0M ICP per month. The important thing to remember about staking on the NNS, particularly given that the majority of staking remains locked for 4 years or more, is that it:
1. Shows a desire of the Internet Computer community to participate in governance of the IC.
2. Shows a long term commitment from ICP investors.
3. Reduces the circulating supply of ICP for a considerable amount of time.
The length of dissolve delays and the locking behavior of any new staking is as important of a metric to watch as the quantity of staking.
What’s Next
This concludes my Demand Driver Series, which covered ICP Transaction Fees, Computation, Liquidity Pools and Staking. The next article will bring together the demand drivers with my supply analysis from earlier and will show the potential Supply-Demand dynamics of ICP and discuss its potential impact on ICP price. You won’t want to miss it, so be sure to subscribe and share below. Thanks for reading!