Origin
In April of this year, just a few days before Dubai’s Token2049 event, the well-known media outlet in the Polkadot ecosystem, Kusamarian, announced the return of the “Behind the Code II” interview series and launched a new series called Web3Thinkers. The first installment featured an interview with Dr. Gavin Wood, focusing on his recent proposal of JAM and his Gray Paper, as well as discussing the significance of Polkadot and his recent thoughts.
Towards the end of the interview, the discussion shifted to a topic of interest – what will happen to our DOT after the relay chain upgrades to JAM. From a technical standpoint, it is likely that these DOT will be duplicated to a parallel chain called the relay chain parallel chain, or more likely to AssetHub, a universal asset chain, or even duplicated to a Staking parallel chain (or directly convert the relay chain into a Staking parallel chain). However, these decisions have not been finalized and are still under research.
Nevertheless, there is no need to worry as this will not result in any substantial changes for DOT holders. However, Gavin then raised questions regarding the tokenomics of DOT.
Originally, the inflation rate of DOT was 10%, with a portion of the inflation funds going into the treasury based on the variance between the optimal Staking ratio and the actual Staking ratio, while the rest was allocated to Staking participants. However, there is an accepted RFC (Request for Comments, a way for developers to propose and discuss significant changes or new features) to change this, ultimately allocating 2% of the inflation funds to the treasury to ensure stable income, with the remaining 8% used for Staking rewards.
Gavin also pondered whether a stricter economic system was necessary, suggesting there were enough reasons to constrain the economy to prevent easy changes. With the JAM chain set to replace the relay chain, new DOT issued will be through JAM, potentially leading to a new economic system running on the JAM chain.
So, what would the new tokenomics system look like? Gavin mentioned it could take various forms, possibly having a fixed annual growth rate of 10%. Alternatively, drawing inspiration from BTC’s halving curve, Gavin discussed the concept of a Schelling point, a natural solution or focal point that people gravitate towards without communication, akin to the actions taken around BTC’s halving point. This could lead to fluctuations, consensus, and consistency, but Gavin remained unconvinced of introducing a similar economic Schelling point for Polkadot.
As for the specifics of the new economic system, Gavin suggested a gradual decrease in the inflation rate, aiming for stability rather than deflation. One possible solution discussed was to fix a percentage of the supply as a set amount issued annually, leading to a gradual reduction in the issuance rate with increasing total supply.
Furthermore, Gavin considered a more radical possibility involving a step-like issuance curve similar to BTC, setting a maximum quantity for DOT. This approach would involve doubling the current DOT total to approximately 31.4 billion, with the remaining unreleased amount issued annually based on a percentage of the total. This cycle could be adjusted as needed to maintain stability.
Gavin believed that such a gradually decreasing step-like curve each year would be intriguing, providing a smooth transition from current rewards to a fixed final amount. Additionally, a safety mechanism would be in place to adjust the economic model through a hard fork if deemed too aggressive, allowing for increased issuance if necessary.
Gavin viewed this as an interesting possibility, with the safety mechanism ensuring no major drawbacks while significantly enhancing financial certainty and introducing Schelling points.
These were some of the potentialities discussed by Gavin regarding the new DOT economic model. The full Chinese interview video with Gavin can be viewed here: 
. The complete English version of the video can be found here: 
.
Recently, someone proposed a referendum based on Gavin’s idea of a fixed maximum supply of DOT (i.e., the example of a total supply of 31.4 billion) to provide financial certainty. Details can be found here: 
. This proposal falls under the Track of Wish For Change, usually used for hypothetical discussions without substantial changes even if the proposal is approved, primarily serving as a means to gather opinions.
While Gavin elaborated on this example in detail, as long-time researchers, we do not support this idea. Why oppose this concept?
Firstly, for PoS systems (Polkadot is NPoS with similar logic), a relatively stable Staking income is crucial as it affects network security. If Staking rewards decrease annually, combined with a falling coin price, node operators’ income will rapidly decline, leading to a downward spiral similar to PoW mine shutdowns, compromising network security.
Furthermore, this design disrupts some of PoS’s inherent advantages. A stable Staking income serves as a risk-free rate of return for coin holders, leading to the development of mature financial products and DeFi projects, enhancing the ecosystem’s vibrancy and user utilization. However, excessively high or low rates could impede overall ecosystem development.
In addition, Staking rewards are a vital revenue source for the treasury, supporting public interest proposals. Ensuring stable cash flow is essential to meet basic public interest requirements. Introducing a Schelling point similar to BTC’s halving cycle, designed for halving rather than a Schelling point, may not be suitable for Polkadot’s governance.
Given Polkadot’s treasury governance similarity to national governance and centuries of economic exploration, relying solely on fixed mechanisms to regulate the economy is impractical. Instead, ongoing assessment and adjustment of critical data are necessary to manage economic conditions effectively.
The entire crypto industry is influenced by decisions made by the U.S. Federal Reserve through interest rate adjustments, impacting the crypto industry. This approach aligns well with Polkadot’s governance.
As for adjusting values based on specific metrics, focusing on inflation as the ultimate goal (similar to the current U.S. Federal Reserve practices) could be effective. The treasury currently burns 1% of its total every 24 days, a dynamic adjustment mechanism could be implemented to raise or lower this percentage based on inflation conditions, akin to Polkadot’s regular interest rate meetings.
If implemented as a Schelling point, such an approach would be more reasonable. To adjust inflation, reducing the total inflation rate from 10% to 5% and using controlled burns to manage inflation could lead to a final inflation rate of 2-3% annually.
If maintained at a 3% annual inflation rate, the total supply would only grow by 142.7% over 30 years, compared to the 1644% increase with a 10% annual inflation rate.
However, achieving the 5% inflation rate is the goal, with the means of reaching this rate open to discussion. Whether implementing an immediate adjustment or gradually transitioning to this rate, many projects opt for immediate adjustments to boost user confidence significantly.
While the final form of Polkadot’s new economic model remains uncertain, discussions around this topic are likely to increase. It is essential for Polkadot enthusiasts to express their views actively to prevent any misinterpretations by designers.
Although the new economic model for DOT is yet to be finalized, as discussions intensify, it is crucial to avoid situations like the Brexit referendum miscalculation. Engaging in the proposal discussions and expressing opinions is vital for all DOT holders.
To share your thoughts on the proposal, please visit: 
. Our account name is (Polkadot Eco Researcher), where we have shared our views and welcome your support.
In conclusion, while the specific details of Polkadot’s new economic model are still evolving, ongoing discussions and input from the community are crucial to shaping its future. Let’s continue to actively engage and contribute to the development of Polkadot’s ecosystem.
