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Fundamentals: Aleph Zero and its Inflation Mechanism

Jul 15, 2022

AI Summary

Here's your AI summary of Fundamentals: Aleph Zero and its Inflation Mechanism on Aleph Zero blog

Top 10 key takeaways:

  1. Inflation's Role in Proof-of-Stake Blockchains: Inflation is essential for sustainable growth in proof-of-stake blockchains, incentivizing validators and nominators to maintain the system's integrity.

  2. Validator and Nominator Incentives: Validators verify transactions, and nominators vouch for validators' honesty. Both groups stake tokens and are rewarded through inflation, ensuring they remain honest.

  3. Annual Token Supply Increase: Aleph Zero's token supply will increase by 30 million tokens per year, subject to change by decentralized governance.

  4. Economic Arguments for Inflation: Inflation encourages long-term holding and reduces panic selling, as staked tokens have a two-week unbonding period, promoting stability.

  5. Ecosystem Treasury Funding: 10% of the annual 30 million tokens will go to the ecosystem treasury, funding development and growth initiatives like the ecosystem grant program.

  6. Staking Vested Tokens: Owners of vested tokens can stake them and choose where rewards are accumulated, similar to unvested tokens, aligning with practices in Polkadot and Cosmos ecosystems.

  7. Controlled Inflation: Aleph Zero's consensus mechanism ensures inflation benefits the community and network, with policies in place to avoid negative impacts.

  8. Decentralized Governance: The inflation rate and other policies are subject to change through decentralized governance, allowing community participation in decision-making.

  9. Community Engagement: Users are encouraged to stay updated on developments and participate in staking to earn rewards and support the network.

  10. Further Learning: The blog also offers insights into Aleph Zero's DAG implementation, zero-knowledge proofs, and rotating committees, providing a comprehensive understanding of the ecosystem.

AI Summary

Inflation is the bogeyman of economics, almost always seen in a negative light. This isn’t always the case, though, as inflation is crucial for maintaining sustainable growth in proof-of-stake blockchains. By analyzing Aleph Zero’s inflation mechanism, we’ll learn more about how these two concepts intertwine. 

In the past few weeks, we’ve received numerous queries regarding the inflation mechanism in the Aleph Zero ecosystem—and today, we want to dive deep into how inflation makes staking possible for the broader ecosystem.

In Proof-of-Stake blockchain protocols, a certain group of users called validators and nominators are responsible for the system’s functioning. Validators verify the truthfulness of the transactions, whereas nominators vouch for the validator’s honesty. Both groups involved must stake their tokens, introducing a financial incentive for remaining honest. 

Validators and nominators are compensated for maintaining the blockchain’s decentralized structure and verifying the transactions. Inflation is a key element that makes this process possible—but how exactly does it work? 

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Why Do We Need Healthy Inflation in Proof of Stake?

In traditional capital markets, a controlled influx of capital into the circulating supply provokes consumers to buy now rather than wait because they are aware of the potential price growth that is lurking around the corner. In the context of blockchain ecosystems, many of the same arguments apply.

Aleph Zero’s token supply will be supplemented by 30 million tokens per year—at least until that number is voted to be increased or decreased by the decentralized governance that will be in place. Now let’s go through the multiple reasons for introducing inflation:

The Basic Arguments:

  • First, the nodes securing the chain (i.e., validators) need to be incentivized to do so, and the rewards for the work are procured by increasing the circulating token supply.
  • Second, the nominators need to be remunerated as well, as they play a similarly important role in securing the system by choosing the more trusted validators over the less trusted ones. 

The Advanced Arguments:

  • The ecosystem in its entirety benefits through the constant influx of funds into the treasury. Currently, 10% of the 30M tokens that are dedicated to maintaining inflation will be redirected to the treasury per year. These funds will benefit the Aleph Zero blockchain as they will be spent on ecosystem growth, ensuring the constant development of the network. 
  • One of the economic arguments for maintaining a healthy dose of inflation can be attributed to the fact that because it is distributed among stakers, its existence provides an incentive for long-term holders and reduces the risk of panic token sales in the face of the ever-changing market conditions—staked tokens have a two-week unbonding period. Besides helping to choose trustworthy validators, staking can be seen as an act of faith in the token, as this practice makes it impossible to engage in quick sell-offs. As such, lock-ups are very beneficial for the token economy and should be incentivized. 

The Ecosystem Treasury and Vested Tokens  

As mentioned before, 30 million tokens are being introduced into the current circulating supply of tokens per year. That number will be distributed among validators, nominators, and the ecosystem treasury. 

The former group will receive 90% of the tokens, whereas the ecosystem treasury will benefit from the remaining 10%. The funds that make their way into the ecosystem treasury will be used to ensure the ongoing development, growth, and sustainability of the Aleph Zero project through multiple initiatives such as, for example, the ecosystem grant program. 

When it comes to the tokens that are currently vested, the system allows owners of such coins to stake them, and users may choose the destination at which the rewards will be accumulated, similarly as in the case of staking unvested tokens. This is similar to many other chains, such as the entire Polkadot and Cosmos ecosystems.

AZERO Staking

Keeping Inflation Under Control 

The consensus mechanism at the heart of the Aleph Zero blockchain ensures that inflating the circulating supply of AZERO tokens serves only to further the best interests of the community and the network we are building collectively. 

Moreover, we are confident that the solutions adopted thanks to our involvement with Substrate will guarantee a responsible and safe policy to help us avoid the negative impacts of inflation. 

Keep in mind that the number is subject to change as soon as decentralized governance is in place.

Be a part of the Aleph Zero community for updates on the latest developments in the ecosystem. You can also stake AZERO to participate in this inflation mechanism and earn rewards.

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