TIP-092: Make T Great Again, Part 1 (Eliminate Inflation)

Proposals
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Background on T Emissions
Currently, Threshold Network uses token emissions to incentivize stakers to run nodes via the “Stable Yield” model. This incentive model targets a 15% annual yield for stakers who run both tBTC and TACo nodes.

Given historical staking rates since the launch of Threshold, this has resulted in an effective annual inflation rate of ~5% (or 500M T per year). At the current price of ~$0.025 per token, this is an annual emission cost of ~$12.5M.

tBTC Beta Staker Program
tBTC currently operates under the Beta Staker model (tBTC Stakers FAQ | Threshold Docs), where only a DAO approved subset of stakers are eligible to be selected for DKG ceremonies to become signers on custody wallets. Currently, there are 35 addresses approved as Beta Stakers, which are operated by 21 distinct legal and economic entities.

The DAO pays 18 of these operators between $2,000 and $3,000 per month to run nodes as part of the Beta Staker program, which is currently expected to sunset with the upgrade to Schnorr signatures in early 2025.

Extend the Beta Staker Program and Eliminate Inflation
The DAO could elect to extend the Beta Staker program through the Schnorr upgrade, maintain the permissioned operator set, and transition all 21 operators to paid, DAO-provided delegations (~$500,000 annual cost). This would enable eliminating T inflation rewards.

The fixed annual Beta Staker payments of ~$500,000 per year are less than the minting and redemption proceeds earned by the network, especially with the likely reinstating of the minting and redemption fees to 0.1% and 0.25%, respectively. Other major tBTC-related costs are bootstrap nodes ($360,000 annually) and optimistic minter and guardian role payments ($132,000 annually).

If this proposal is approved it’s likely that tBTC will achieve profitability at the protocol level (excluding other DAO-related costs). Surplus fees can optionally be directed to the T buyback program, potentially making T deflationary.

Path to Permissionless Signing
Signing will become fully permissionless with the introduction of BitVM2 vaults, rather than the Schnorr upgrade and there will be no incentive for non-Beta Staker nodes to stay up in the meantime.

Operational Details
Along with the cessation of staking rewards, this proposal would allow for immediate unstaking by non-Beta Stakers without the mandatory 45-day and 6-month cooldown periods for tBTC and TACo, respectively.

The Beta Staker nodes with delegations that are not from the DAO treasury will need to unstake and spin up new nodes with DAO delegations. Additionally, any operators running multiple Beta Staker nodes will unstake their duplicate nodes so that each independent operator is running a single Beta Staker node. The end result will be 21 beta staker nodes operated by 21 distinct legal and economic entities. The DAO can of course approve additional Beta Stakers at any time.

Deprecated Beta Staker nodes will need to be safely removed from any active tBTC wallets and TACo cohorts, via inter-wallet sweeping and the appropriate handover+refresh mechanism, respectively.

Finally, since the DAO will control all Beta Staker delegations it can reduce the amount of its staked T tokens to at or near the minimum stake for all the Beta Stakers, allowing the 90M T tokens it is currently delegating to be reallocated for alternative use.

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Apologies, newbie question. So – assuming this was all implemented, and BitVM2 vaults are live, then at that point, what is the utility of T or the reason for its existence? What role is it playing at that point?

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I appreciate our rethinking of how value flows through the DAO, and more specifically the T token, although I fear this structure would re-envision our community in a way that would exclude my participation; not by my choice, I deeply want to remain involved, but by the economics and new relationships of this proposal.

I think other stakers would find themselves in my same circumstance - without earning some return on our stake, we can’t afford to continue staking T; more directly, we are asked to stop our financial back and forth with the Threshold community. I fear that with that decreased economic investment there is a paired decreased emotional and social investment that could impact our community negatively,

My concerns with this are threefold:

  1. What our community would become
  2. Collusion as governance
  3. Stripped view of inflation and its role in our community

1.With the new proposed structure, as we look to manage tokenomics and costs, we change those who participate in the threshold community. As mentioned above, many of us stakers (who don’t have the relationships, time, or know-how to bid for Beta Staker positions) would be asked to end our financial relationship with one another and our broader community. The Threshold Network would continue (as strong as before) but the Threshold community would likely be devastated. I am here to be around great people supporting great tech with a possibility that I contribute to that tech in my own way (participating as a staker after Schnorr signatures). Being asked to spin down my node and just hold T would not have the same ring and I’m not sure it would be enough to keep me meaningfully engaged. There are likely others who feel this way and the above proposed economic arrangements may serve to change incentives such that the engaged community becomes only the 21 Beta staker set - they have the financial buy-in to be involved but what I mean to emphasize here is that the financial relationship is a vehicle for greater investment of identity and community and only having the 21 Beta stakers in an ongoing invested bidirectional financial relationship with the DAO could change how our community feels (one could say HODLers have a financial relationship with the DAO but HODLing is principally concerned with price and not the sustainability of the underlying organization or ideals).

2.If our community relationships change, to be paired down, such that the DAO only has a longitudinal and bidirectional relationship with the 21 beta stakers, some T whales may stay around and participate in governance, but generally, the DAO becomes the 21 beta stakers. This is still decentralized amongst 21 entities but these entities, economically, are most interested in their contractual relationship with the DAO. Now our 21 beta stakers are also quite ideologically aligned with our current DAO and the following statements may be unfair but it speaks to the incentives and relationships that the proposed incentives compel: If the beta stakers see themselves most interested in the contractual relationship with the DAO, their purpose and voting power becomes more uniform and interested in maintaining annual contracts. The success of the network, or its integrations is generally secondary - unless that may serve as a vehicle for future contracts or contract increases. This collusion could provide the main governing pressure for the DAO.

3.Our present concern with inflation is perhaps misguided. I am in full agreement that inflation through token minting should not be our longterm strategy but rewarding stakers for their participation is not that same thing as inflation. T currently inflates related to staker rewards because our DAO has chosen to mint T to pay stakers. This was needed because we did not have a reliable revenue stream to deploy. This is changing. tBTC and TACo fees could be used to buy T off the market which is then distributed to stakers to do with it what they will (sell, restake); this would change staking rewards from an inflationary pressure to market bids and change an event that decreases T price into one that increases it. The specifics of how to do this are beyond my post here but I mention this to say that there are ways to solve T inflation that keeps our community intact, and may even increase T price. Centering a need to reduce or eliminate inflation is likely over emphasizing the importance of inflation by underestimating the importance of bidirectional relationships with stakers, made possible by staking rewards (above), and limiting our horizons about how to reward stakers while improving market conditions for T.

Apologies on not being able to be more concise in my thinking but I wanted to provide some contrast to the proposal. I greatly appreciate Maclane and others’ participation in seriously considering how to move our community forward and address a previously thorny issue like T price. I hope to continue the discussion and further understand how to retain our great people and our great tech.

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Thanks for the proposal @maclane.

With the proposed changes, the network would not make use of non-beta staker nodes, which makes me wonder if we would need the bootstrap nodes established by TIP-045: Bootstrap Node Proposal v2 and extended under TIP-074 Bootstrap Operator Agreement Extension.

TIP-074 is set to expire at the end of January 2025, and I have been working on a continuation proposal. Bootstrap nodes are not an insignificant expense at $30K per month.

Bootstrap nodes provide Electrum connectivity for nodes when using default settings, and aid in peer discovery. Beta stakers are expected to run their own Bitcoin and ElectrumX/Fulcrum instances (incorporated by reference in TIP-067 part1 and part2, more detail here). With this proposal, peer discovery could rely on the set of beta stakers until the network becomes fully permissionless and the beta staker program is retired.

If that is the case, I propose ending the bootstrap agreements as part of this proposal, or not renewing TIP-074.

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I’m struggling to understand why we would want to do this. This feels like throwing out the baby with the bathwater.

Our north star for tBTC is decentralization. It’s our defining feature, and primary differentiation from competitors — as well as the fact that BTC isn’t rehypothecated.

Instead of killing inflation and shoe-horning the tBTC mechanism design into today’s market, wouldn’t it make more sense to address the core issue? And that is demand.

I’d propose we break the problem into two pieces here

  • Find the minimal viable emissions (MVE) that secure the network. Eliminating staking rewards is a huge move… why not cut them in half instead, or consider a model where only stakers who custody actual BTC are paid? This is a problem that should be solved by the market, not a 0-to-1 governance change.
  • Fix the demand. We know what people want from Threshold and tBTC — a working, capture-resistant BTC bridge, support on their favorite chain, incentives for a particular pool, a pet feature or integration, credible neutrality that they can verify (eg Aave). Those are all well supported by a ve-nomic model.
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Governance, sink for minting and redemption fees, and, eventually, permissionless staking to be a signer post-BitVM2. In practice, the utility from the perspective of the network won’t change at all, since staking T doesn’t currently allow you to be a signer.

But, more broadly, this proposal addresses the supply side of the equation. The demand size also needs to be fixed. Other contributors are working on ideas for token value accrual, which can follow in a future Part 2 if/when they are ready.

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Permissionless signing + network sustainability from fee revenue alone is definitely the long-term goal. However, the network is not yet generating sufficient revenue to replace the existing token subsidy for all stakers.

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If it’s accurate that Beta Stakers do not rely on the bootstrap nodes, then this is another $360K protocol expense that can be eliminated to improve protocol-level profitability even further.

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Do you think that making signing permissionless with Schnorr will be a major catalyst for tBTC growth? I personally do not. Especially with BitVM2 bridges launching soon(ish). Better to achieve that North Star by taking the most direct route from here to the end-game model (i.e. BitVM2 vaults)

That’s what this proposal is! Right now the network’s largest expense (by an order of magnitude) is paying stakers who aren’t actually doing anything.

The memetics of no inflation (or possibly even deflationary) tokenomics is much stronger than “less inflation than before”. It’s also much easier to underwrite since there’s no uncertainty re: the future actual inflation rate.

This proposal only addresses the supply side of the tokenomics equation. A strong demand side redesign for better token value accrual would be very welcome as a Part 2 followup, and several other contributors are working on this.

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I don’t! I think Schnorr is a technical upgrade that makes the network stronger, and fine for marketing — but it doesn’t grow the network.

Unfortunately, until we have covenants or another soft fork on Bitcoin, the end game model will still need stakers. BitVM2 is a huge PITA to implement and it cannot be the sole security model for tBTC as it works today without sacrificing the ability for end users to easily bridge.

Instead, in the new model we’d want 10-30% of the custodied BTC to remain in the current infra (+ Schnorr) and call that “hot”, and roll out BitVM2 vaults as a per-chain “cold” component of the security model.

That’s my favorite part of the proposal! Except the part where it reifies a permissioned staker set indefinitely :sweat_smile:

I firmly believe we can have memetics without throwing out our core value proposition.

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Nothing is being thrown out: the current and future core value prop is the same. The only difference is that inflation can be turned off today without changing tBTC’s existing security model at all, just extending it for a longer time period.

If an inflation subsidy is necessary in the final design, then let’s revisit when it becomes necessary and add it then, instead of paying >$10M per year for nothing in the meantime.

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@mhluongo @maclane I may not be the target audience for these types of conversations but this community has always been respectful of the HODLer types so I feel ok voicing my opinion here. To be honest, I dont know how I feel about ending inflation (some of it feels good, and some seems like it could drive important players away).

What I can share is what my journey with Nu/Keep/T has been like. Found Nu in Oct 2020, very much believed in the privacy values of the project, looked into the team and saw that they had vision and experience. Bought, held, learned to stake with the help of a provider. Made some money staking, but more by just sticking with the project and believing when others didnt. Took profits on Nu Day, strategically bought back in (just as much as before) as prices fell (sorry 10x overnight isnt natural lol, but it sure as hell was fun). With T the technicals quickly got a little too hard for me to keep up with, but I remain committed. The uncertainty around staking where Im at meant a staking provider is not an option and although I have started to work through the docs, I am nervous to try to spin up my own node (in addition, the rewards arent enough incentive at this point, I just buy more on dips to stave off dilution). I say all of this because I do believe the demand side has the potential to be there, but its a pretty big barrier to entry right now for lots of reasons despite T being THE truly decentralized BTC bridge out there (nuanced project, desire to not have too many huge players controlling DAO decisions, etc). If a shmo like me who has been around for 4 years cant lock it up and stake maybe there is a way to build community stakes (although I dont know how to make that safe) What would be nice is to know that HODLers do not feel like holding will result in eternal dilution, but if ending inflation is a detriment to the network I dont want that either. Ultimately voices like mine are small (and admittedly underinformed), but I feel like incentivizing HODLing helps with the demand no? Not my most elegant contribution, but If the stupid dog coin can go up???

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I support carefully modifying tBTC’s top-line reward rate in order to reduce the absolute number of dumpable tokens distributed per month, provided that we’re certain that change won’t negatively impact:

  1. the Threshold community – one of our most defensible assets, given that everything else is open source.
  2. tBTC & TACo’s primary differentiators versus competitors – i.e. services not controlled by a semi-permissioned coterie of insiders
  3. tBTC & TACo’s burgeoning demand, which ultimately drives network valuation, as noted by @mhluongo

Taking a step back, the core assumption on which this proposal is based – that reducing the reward rate will deliver a price-boosting ‘memetic’ – should be treated with a healthy amount of skepticism. There’s no guarantee that the market will interpret such a drastic change as positive. Indeed, resorting to monetary policy may be perceived as a quick fix, a sign of desperation, a signal that short-termism is being prioritized over fundamentals – that is, the ongoing (and increasingly successful) efforts to generate traction for both products.

Furthermore, the downsides to this plan will be priced in by holders and possibly cause the opposite of what’s desired. These downsides include:

  • Damage to the community & staker population – i.e. repaying their years of loyalty with a rug-pull (detailed further in @student’s first bullet point).
  • An exodus of reliable stakers, that can’t simply be magicked back by reinstating inflation in 6 months. Building this community took years.
  • tBTC giving up on any security model besides ‘pure BitVM2’, a massive risk given that it’s not currently in production and will require a Schnorr component (see @mhluongo’s response), which in turn requires a healthy, non-rugged staker population.
  • TACo being decimated – just as we’re becoming the go-to access control plugin for DApps. We’ve integrated / are integrating into Ceramic, Textile/Basin, Zuzalu, Waku, Holonym, Irys, ArDrive and are onboarding Mask, Lighthouse, Fileverse, Maitri, & OpenSocial. These are some of the biggest names in the ecosystem and they all tell us one thing – they’re choosing TACo (and our 130 node-strong, permissionless offering) over infrastructure that’s controlled by a small group that all know each other – which is more or less what this proposal would reduce TACo to. At the very least, that’s how we’d be perceived.
  • Hundreds of Threshold stakers potentially dumping their collateral, given that we’d have eliminated a major reason for them to hold T.

The last point is doubly bad, as it will cause direct price depreciation (as now-obsolete stakers dump), and indirect price depreciation (as hodlers sell in anticipation of now-obsolete stakers dumping).

Since we shouldn’t make any high-risk economic changes based on gut feelings, here’s a starting point for more thorough research and analysis: the relationship between reward rate modification and price for 28 major staking networks over the past 12 months.

X-axis: % Change in Reward Rate (1 yr)
Y-axis: % Change in Price (1 yr)
Bubble size: Market cap (today)

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Threshold happens to be the only network with a zero % change in reward rate, and near-zero % change in price, which makes it straightforward to compare us to other networks. A few things stand out from the graph:
(1) Obviously a myriad factors affect price appreciation/depreciation. See my points above about reducing inflation being absolutely no guarantee of growth. Even so, out of 18 networks which reduced their reward rate (and therefore minted fewer dumpable tokens, as this proposal seeks to do), 13 saw their market cap drop, and 7 of which dropped more than 30%.
(2) If we look at the networks of similar size to Threshold (between 50m & 1bn market cap), the majority of them have depreciated in value over the past 12 months, regardless of whether they increased or reduced their reward rate. In that sense, as a mid-sized network, Threshold is doing ok.
(3) The three Threshold-sized projects that reduced their reward rate the most, located on the far left of the graph, all suffered price depreciation of over 50%.
(4) Some reputable networks increased their reward rate and saw significant price appreciation, including Gnosis, The Graph and NEAR.

The raw data is here → Relationship between reward rate alteration and price (major staking networks > $50m market cap) - Google Sheets

Clearly there are huge challenges in presenting a drastic monetary policy change in a manner that leads to long-term price growth. Even putting aside the internal risks/downsides, the optics challenge is huge. Another very plausible scenario is that, despite our best efforts to advertise and publicize this proposal, barely anyone notices/cares and the price doesn’t budge – but we still sustain much of the aforementioned damage. Even if the initial reaction is ‘number go up’, that boost may be short-lived given the practical, long-term impact that removing rewards would have on Threshold’s fundamentals.

Again, I support well-researched, careful and incremental/decremental modifications to the reward rate.

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The core assumption is not that this has memetic price appreciation potential but that the largest network expense by an order of magnitude is not actually delivering any security to tBTC. And the market has not able to absorb those continued emissions due to the absence of a strong bid for the token (ideally fixed in a future Part 2)

I’m interested in exploring ways to preserve TACo’s high node count (since those nodes are actively contributing to TACo’s security, unlike non-Beta Staker tBTC nodes) while reducing (ideally eliminating) the token emissions subsidy. I think this may be feasible given the comparative ease and affordability of running TACo nodes as compared to tBTC nodes. This could be some combination of altruistic staking, adopters subsidizing with their own token emissions, or unlinking token emissions from stake size (since “large” TACo nodes do not add meaningful security over “small” TACo nodes, as far as I understand).

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Reducing payouts to tBTC non-active, non-beta stakers is entirely valid – that’s what I was referring to in the first and last sentences – although as a tBTC staker, I’d prefer if that was done so in experimental increments, for the reasons laid out above. Regardless, I don’t see why TACo should be dragged into this, when all our nodes are contributing to the service’s security, collusion friction, primary value proposition, and revenue generation! The only reason for doing so would be chasing the memetic of eliminating inflation to zero, which I don’t see a lot of evidence supporting, either empirical or analytical. The closest historical example I could find is a Cosmos proposal to set the minimum inflation to zero, which was roundly rejected.

It’s true that running a TACo node is very lightweight and affordable. I’m open to exploring those ideas, but they certainly aren’t evolved enough to replace our current 3.75% yield anytime soon.

  • Adopters subsidizing nodes is (1) just plain revenue, which we already collect through a dual fee model, or (2) would require app/DApp adopters that also have a liquid token, which would limit our TAM.
  • Unlinking emissions from stake size is basically the holy grail of anti-stake centralization mechanisms. I researched this a lot when designing stable yield, because the common goal is boosting independent stakers, but afaik there aren’t yet solutions, theoretical or otherwise, that aren’t sybil-vulnerable.
  • Altruistic staking might suffice short-term and in some specific domains, but wouldn’t be particularly compatible with any high-stakes data sharing use case – for example, our adopter BqETH (crypto-inheritance) needs assurances that TACo nodes will be economically sustainable over the long-term – i.e. they’re still solvent when called upon to facilitate a (rightful) heir’s access to a seed phrase.
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Lastly, worth mentioning that the 3.75% yield is currently distributed to stakers holding 22.8% of the total supply, which means TACo’s annual dilution impact stands at 0.83%. That’s pretty good value for a tool we believe is steadily becoming an indispensable component of the Web3/DApp stack.

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Im stuck on this idea of how to incentivize Hodling and therfore create a positive feedback loop. Is it unfeasible to create an automatic staking delegation through a smart contract where the hodler could deposit and control the token but the delegate could use the stake and their technical expertise to operate the node and collect fees/rewards? A sort of decentralized/trustless 3rd party staker within the threshold ecosystem. Is that crazy amounts of work, or dumb because other 3rd party staking platforms exist already? Im just imagining if it was trustless and a few clicks on a UI a lot of investors would be more willing to buy/hold because they are earning too and at least staving off dilution while they hold. Please someone tell me if Im just a complete idiot and way off base on this (could be I dont understand how this works).

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