SIP-14: Set baseline issuance to 3% in Streamr 1.0

Background

The Streamr 1.0 milestone will be released by the end of 2023. An earlier proposal SIP-7 introduced a 2% annual issuance to be spent as incentives in the Brubeck milestone mainnet until the launch of Streamr 1.0, also defining that a new decision needs to be made to define the emission rate in the new network.

The 2% rate has been a success. Around 80M DATA is staked by node operators on the Brubeck network, earning around 25% in annual rewards for the work.

In Streamr 1.0, there are important changes concerning node operators. More active management is needed from node operators in order to allocate stake to sponsorships to maximize their earnings (although such allocation strategies could also be automated via scripts). For increased work and expenses, somewhat higher pay is appropriate. On the other hand, the milestone brings a new opportunity for node operators to scale their earnings, as they can now receive delegations and therefore potentially earn rewards beyond their personal capability to stake.

The incentive tokens are deployed through sponsorship smart contracts that incentivize node operators to relay and secure the associated streams. The allocation of tokens to specific streams is a complex topic and requires experimentation to discover what works. This proposal also suggests such experimentation to take place by the core dev team, before eventually automating the process.

Proposal

• Set the network baseline incentives rate in the Streamr 1.0 mainnet to 30 million DATA / year, corresponding to a roughly 3% annual supply growth.
• Continuous governance: allow future proposals to adjust the rate
• Empower the core dev team to experiment with different methods of allocating tokens to stream sponsorships based on observable factors such as data volume, stream topology size, project visibility on the Hub, and other variables. The goal is to find a transparent allocation algorithm which will then be later proposed and confirmed via project governance.

Reasoning

A few reasons to slightly bump the baseline issuance rate upon transitioning to the new network:

• Node operators need to be motivated to onboard to the new network, so it’s good if the rewards are attractive in the beginning.

• Roughly 8% of all DATA is staked in the Brubeck network—we can expect that the Streamr 1.0 network could attract an even larger share, since delegation becomes possible. This allows DATA token holders that are unable or unwilling to run nodes to participate in the network incentives. Broader participation also means that rewards per staked token may decrease if the baseline issuance stays the same. A slight increase can compensate for that.

• It should also be noted that the 2% rate was set in late 2021, at the peak of the bullish market valuations, and after the 2022 crash the rewards have decreased in fiat terms. Node operators have operational expenses which the rewards need to cover.

The issuance rate should be continuously re-evaluated and adjusted to balance inflationary rewards with organic growth, operational expenses, market conditions, and other variables.

All in all, the proposed rate is quite conservative when compared to other web3 infrastructure protocols. To provide some reference points: The Graph protocol has a 3% annual issuance, while Chainlink supply grew more than 9% in the past year. The POKT network has gone through multiple rounds of inflation management via governance to bring down the inflation rate from around 100% to 18.5%. (To be fair, the high inflation on POKT is partially explained by the fact that the inflationary tokens also fund DAO operations, as opposed to node operators only).