Internet Computer (ICP) is a decentralized platform whose evolution is determined by voting by stakeholders. This means that decisions affecting the future of computers on the Internet are made by those who vote. In return for participating in governance, Internet computers give rewards for voting. This article will delve into the mechanics of staking, voting, and rewards and their importance.
Staking and Neurons
Basic concepts of staking
In order to gain voting rights, ICP tokens must first be staked and locked for more than 6 months and up to 8 years. These staked tokens are held in a special account called "neurons". Each neuron has its own identifier, as well as several properties associated with its stake, including:
Length of time to lock ("dissolve delay")
Is it dissolving towards liquidity?
Rewards for voting ("maturity")
Once a neuron has been locked for more than six months, it can submit proposals and vote on them. Depending on how active a neuron is in voting for a proposal, the vote in turn generates a voting reward. You will get the most rewards if you vote on every pending proposal. A neuron can also "follow" other neurons, which causes it to automatically vote the same as the majority of the neurons it follows.
Determinants of voting rights
The voting power of a locked neuron is determined by several factors:
Number of shares: 1 ICP = 1 vote.
Lock-up duration: 1.06x voting rights bonus for 6 months, 2x voting rights bonus for 8 years.
Age of Neuron: 4 years earns 1.25x bonus, multiplied with other bonuses.
This means that the maximum voting power of 2.5 votes per ICP stake can only be achieved by locking the neuron for 8 years and leaving it locked for 4 years. At that point, you will have maximum voting power for the shares you have committed.
Maturity and rewards
Definition of maturity
Maturity represents the cumulative voting reward in a neuron. Each day, the network rewards participants by allocating a portion of the total reward to each voting neuron, based both on its voting power when a proposal was made and on the number of proposals it voted on. Some consider maturity to be similar to "dividends" or "interest," but be aware that different tax jurisdictions may have different views on this issue.
Merger maturity
The most natural activity for those wishing to compound gains in their neurons is to "merge maturity" every once in a while, which has the maturity of minting neurons and adding the minted amount back to the neurons effect in the shares. If you wish to generate income from a neuron, you can "spawn" the maturity into the reward neuron that spawned the parent neuron's and transfer this maturity into the stake of the new neuron.
The importance of staking
For some, staking is seen as a source of income, a way to perform “yield farming” by locking up ICP and enjoying accrued maturity returns. However, staking is not just a revenue tool, it is a way for those invested in Internet computers to decide what happens next to the platform.
Voting rewards
Even if you just do it to be able to participate in governance and vote on proposals, voting rewards are an important aspect of Neurons. At the very least, such returns compound to increase your total voting power.
Daily voting rewards
Every day, the network awards a reward to each voting neuron. The percentage of these rewards each neuron receives depends on the following factors:
Amount of staked ICP
length of dissolution delay
The “age” of neurons
Number of eligible proposals voted on by neurons
For example, if NNS generates a total reward of 1000 ICP in one day, and 10 proposals are submitted, of which only two neurons vote, then:
Neuron A, with a voting power of 20, gets 20% of the total = 200 ICP
Neuron B, with a voting power of 80, gets 80% of the total = 800 ICP
Long term voting rewards
In the first year, NNS allocates 10% of the total supply to generate voting rewards. The distribution rate decreases quadratically until it reaches 5% in year 8. Like all parameters in NNS, the minting rate can be changed via NNS proposals, but this is the current rate schedule.
Inflation and deflation mechanisms
ICP deflation mechanism
Minting cycles used to pay for computation and storage consume ICP to create cycles.
Transaction fee burning.
1 ICP deposit destroyed due to failed proposal.
ICP’s inflation mechanism
Node providers are paid by minting ICP.
Voting rewards are paid by minting ICP, although this minting only occurs at the moment a reward is generated, maturity is merged, or neurons are allocated.
Network factors affecting annual yield
When considering the potential annual yield (APY) of voting neuron-staking ICP, in addition to major factors such as dissolution delay, neuron age, and staked amount, there are also network factors that may affect the potential yield:
The supply used to pay out rewards is allocated each year.
The total voting power of all neurons.
Inflationary and deflationary pressures.
These factors can significantly impact future returns. First, supply starts at 10% at creation but will drop to 5% after the first eight years. Secondly, as staking becomes more common, there will naturally be more competition. If no one else is staking, the rewards will be astronomical; but if almost everyone is staking, the rewards will be even lower. However, economics are always at play. If staking becomes very popular, it means there will be less liquidity available, which will push up demand and therefore the price. So while returns will be significantly lower, higher prices should offset the revenue loss. Conversely, if most people dissolved their neurons to trade on the open market, prices would likely fall and returns would increase. It is reasonable to assume that over time an equilibrium will be established against which interest rates and prices will be driven.
In summary, staking, voting, and rewards are important components of the Internet computer ecosystem. By understanding these mechanisms, stakeholders can better engage in governance and reap rewards from it.