This proposal aims to address the issue of inefficient resource allocation in NEXA caused by a predetermined emissions schedule. By implementing an on-chain voting system, we can empower NEXA holders to make informed decisions regarding the emission of new coins. This will ensure that those most impacted by the decision, the holders themselves, have a say in determining the emissions rate. The proposed system involves using UTXOs time-locked in a specific smart-contract type for voting, with votes tallied annually at a specific block height. The outcome of the vote will then determine the changes in the emissions rate. The process will be fully decentralised and open to everyone who holds NEXA.
Currently NEXA uses an inflexible supply schedule essentially identical to Bitcoin’s where every 2 minutes 10 million new coins are produced and given to miners as a reward for securing the network and processing transactions. Every 4 years this rate of emissions will be cut in half. This schedule will occur whatever the market conditions are, rain or shine so to speak.
For some perspective, Bitcoin currently spends about $11 billion per year on miner rewards. No one chose this value. It is simply a result of the original emissions schedule decided by Satoshi 15 years ago and the current demand for Bitcoin. This $11B spent annually by the network is completely arbitrary.
While predefining an emissions schedule is an effective method of removing centralised control, it comes with certain disadvantages. The primary disadvantage is that the emissions in dollar terms and in native coin terms are essentially arbitrary. This causes two issues, it drives down price early in the project when emissions are high and therefore wastes scarce and valuable resources.
The two questions I aim to answer with this proposal are:
<aside> 📈 How do we efficiently use resources in terms of coin inflation?
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<aside> 💵 How do we efficiently use resources in terms of dollar value spent?
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PoW cryptocurrencies follow an economic model similar to that of gold, an indestructible commodity which has an ‘above ground’ stock and flow of new stock as gold is extracted from the ground. This is of course very analogous to PoW cryptocurrency where there is an existing pool of coins in the market and new coins being minted. In stock to flow systems where the stock to flow ratio is low (i.e. a large amount of new stock is being created relative to the existing stock) the impact of supply changes on prices is large. For example, if you halved the annual global production of wheat, the price would increase significantly. In stock to flow systems where the stock to flow ratio is low (i.e. a small amount of new stock is being created relative to the existing stock) the impact of supply changes is small.
To put some made up but relevant numbers to give a clearer picture:
A stock to flow ratio of 1 could mean a change in emissions could have a 1:1 impact on price. I.e. mining reward in dollar terms will stay the same. E.g. if emissions are cut in half then price could double.
A stock to flow ratio of 10 could mean that a change in emissions could have a 1:10 impact on price. E.g. if emissions are cut in half price could increase by 10%.
What this means in simple terms is that we currently have the ability in Nexa to reduce the emissions significantly right now without meaningfully reducing the mining reward in dollar terms.
Essentially, our current emissions are deflating the Nexa price and wasting resources. Reduced emissions would provide the same amount of security and reduce inflation of the currency.
I propose we implement a simple on-chain voting mechanism that is incorporated into the network consensus model, the results of which would affect the emissions rate and put the control of emissions into the hands of those that it impacts, holders.
The change in emissions would start with a drop in emissions by 90% to stop the significant impact of emissions on price. My expectation based on the current stock to flow ratio of Nexa emissions is that this would potentially have a roughly equivalent order of magnitude impact on price, e.g. a 10x increase in price. Therefore the amount spent on security will remain roughly the same in dollar terms but inflation will be significantly reduced and therefore inflation will be used much more efficiently.
Emission rate changes from this point will have a much more direct impact on price due to a larger stock to flow ratio and therefore will make emission rate changes a control mechanism for the dollar amount spent on security. This will allow the network to control the amount spent on security in dollar value as price fluctuates over time.