Supply Analysis

A look at ICP supply for 2022 and beyond

One of the great things about the tokenomics of the Internet Computer is that half of the supply-demand equation is accurately known and predictable for the short and medium-term. This article will be your one-stop-shop on what the ICP supply will look like in 2022 and beyond.

First, let’s review sources of ICP supply into the circulating supply:

1. Node Rewards paid to node operators

2. Governance rewards paid to ICP-stakers on the NNS

3. Dissolving ICP of neurons on the NNS

At this time, those are the major sources of new ICP to the circulating supply. That dynamic will change as the Internet Computer ecosystem grows and ICP is used more as a medium of exchange but for now we can focus on the three sources above.

Node Rewards

Node rewards have averaged about 60k ICP per month, which is two orders of magnitude less than dissolving neurons, so we can ignore node rewards for short and medium term supply dynamics.

Governance Rewards

Governance rewards should be a large contributor to increases in the circulating supply, but as I explained in a previous article, the vast majority of the governance rewards are remaining as maturity. In addition, what little maturity is being converted to ICP, most of that is being re-staked on the NNS. Since the merge maturity feature was released in late September 2021, I calculate only 82k ICP in governance rewards have been added to the circulating supply. For context, since late September 8.5M ICP has accumulated as maturity and 2.4M ICP governance rewards has been staked. You read that right… of all maturity that is converted to ICP, 96.6% is being re-staked in the NNS (through Merge Maturity). Given the lack of governance rewards hitting the circulating supply (~28k/month), we can ignore this in our short and medium-term analysis. However, if/when the price of ICP increases significantly, then I would imagine the dynamic would shift and more governance rewards would be transferred to the circulating supply.

Dissolving ICP

ICP dissolving off the NNS will be the primary source of new supply to the ICP circulating supply. This is true by one or two orders of magnitude at this time. As the bar chart below shows, you can think of this supply as 4 different “zones”.

Zone 1

Zone 1 is comprised of the first 4 months of 2022 (and December 2021). As I wrote in in a previous article, there is A LOT of ICP dissolving off the NNS during this time… about 2.5-3x more than the average during the IC’s first six months! You can expect 5.4M - 5.9M ICP dissolving and most likely moving to exchanges during this time. I would expect this new supply would put some pressure on the price of ICP.

Zone 2

The next zone is a prolonged period lasting from May 2022 to June 2024. This zone is characterized by slowly decreasing dissolve rates that range from 2.1M - 3.7M ICP per month. These dissolves, while slightly higher than the average for the first six months post-Genesis, are far lower than the dissolve rates in zone 1. This zone also has a lot of locked ICP (blue bars, about 1M ICP per month), some of which will most likely be unlocked during this time, however keep in mind that these neurons are currently locked, so they will continue to move to the right along the x-axis with time until they are placed in dissolve by their owners. The supply in Zone 2 is still significant, but given that zone 2 lasts for two years, demand for ICP could pick up and become the bigger driver of ICP price during this zone.

Zone 3

Zone 3, starting in June 2024, will be a time marked by considerable decreases in dissolving ICP each month. During this time, June 2024 through June 2025, there is currently only 1M ICP dissolving. Given that this zone starts in 2.5 years, it’s likely things will change by the time this zone starts, but I don’t think things will change too much. Here’s a couple reasons why:

• It’s possible that ICP staked over the next two years could be set to dissolve during zone 3, however consider that only 18% of newly (non-genesis) staked ICP is staked for less than 3 years. Also consider that 95% of newly staked ICP is still in the locked state. I personally do not think many new stakers will set a dissolve delay for 2024 or 2025 AND dissolve those neurons.

• It’s possible, or even likely, that some neurons dissolving in zone 3 will re-lock their neurons between now and 2024, which could offset neurons that are currently locked in zone 3 that start dissolving.

I believe zone 3 will be an incredible time for the Internet Computer as multiple product-market fits lead to mass demand for ICP at the same time as supply from dissolving neurons is greatly decreasing… the classic supply-squeeze! This zone is also probably where node rewards and governance rewards increase to be on the same level of magnitude as dissolving neurons. This is due to expansion of nodes and subnets as well as the likelihood that higher ICP prices will encourage more governance rewards to be liquidated. However note - increases in ICP price will also decrease the amount of ICP inflation due to node rewards, so it’s possible that node reward dynamics remain muted during this time.

Zone 4

Zone 4 is anything beyond mid-2025. At this time, there is hardly anything dissolving in zone 4, but that is likely to change. It seems that people like to stake for 4 years (20% of newly staked ICP is staked for 4 years), so there will most likely be a small build up of neurons dissolving in 2026 and beyond. Also remember though, new neurons, even if staked for only a few years, are remaining locked so far.

Zone 4 is probably the time when the NNS starts absorbing a lot of the circulating supply and is probably the earliest we could reach Dfinity’s stated goal of 90% of all ICP being staked in the NNS. If we approach that number, then managing the circulating supply of ICP through changes to the governance inflation rate, the node rewards and the burn mechanisms will become paramount for the NNS participants. And given that the estimated annualized rewards for staking on the NNS are projected to remain high for some time (see this previous article), I would predict that many early NNS stakers would be liquidating their governance rewards as passive income.

One Fun Fact

Notice in the chart above that the x-axis is cut short at 2027. Had I included 2029, 8-year neurons would have completely swamped the y-axis, because over 52M ICP is staked in 8-year neurons. (This statement was written before the 15M ICP was added to the #8YearGang.)

Conclusion

We have a lot of supply coming to the ICP circulating market in the near-term, but that decreases over the coming years. This picture will most likely not change much in the next two or three years, leading to easier analysis of the supply side of the ICP supply-demand equation. In 2022 I look forward to writing more about the demand side of the equation as new dApps and use cases emerge for the IC.

A Small Update

I wrote the above article before the chaos that ensued yesterday (January 1st) around the huge increase in voting power (read more about that here). The changes in voting power did not affect the analysis in this article because it was mostly locked neurons that were changed. However, what did change is the likelihood of the above analysis. Let me explain…

What happened on January 1st is about 15M ICP went from being locked in neurons dissolving in zone 1, zone 2 and the beginning of zone 3 to being locked for 8 years. The result of that is between 0.4M and 0.8M of locked ICP is no longer in the months of zones 1,2 and 3 (in some months that was about half of the locked ICP!). And since locked ICP being converted to dissolving ICP is one of the bigger risks of the above analysis, a big portion of that risk is now moved to 2030.

Later this week I’ll investigate more into what happened on Dec 31/Jan 1st and discuss the effects it will have medium and short term.

In the meantime, feel free to leave some comments/questions below.