Introducing burning mechanisms to the Crypto.org chain

Summary

We propose introducing a mechanism to gradually burn a portion of the CRO supply emitted by the network. The overall goal is to reduce the inflation of the circulating token supply and bring long-term benefits to the token economy. Once this proposal is passed, a periodic burning process will be introduced, and approximately 100 Million tokens could be burned in the first year.

Background

The total supply of CRO currently in circulation is 26 Billion, and it is growing at a rate of approximately 2.5% per year, which implies an annual emission of around 646 Million CRO through inflation. In response to the growing attention from the community regarding the token supply, we propose a mechanism to gradually burn a portion of the CRO supply emitted by the network. This mechanism involves allocating a portion of the tokens generated through future inflation to the community pool and periodically burning the accumulated tokens. The expected outcome is a reduction in token supply and the effective inflation rate, which could help improve the CRO token economy. After studying all feasible technical options, we have determined that the proposed mechanism is the most straightforward (thus, least risky), fairest, and most decentralized option: -Most straightforward: no code change needed, only parameter updates; -Fairest: it affects all validators in proportion to their future rewards after the vote, does not affect past rewards already earned that they may have chosen to collect or not. Validators who have chosen to invest in the ecosystem and leave their earnings uncollected, should ideally not be penalized; -Most decentralized: once the tokens have been transferred to the community pool, they are controlled by governance and any token holder can propose to burn them. No single entity is in charge of the burning. While the proposed mechanism will slightly reduce the staking yield of Crypto.org Chain when measured in CRO terms, it aims to acknowledge that the CRO inflation rate has been above target, a technical byproduct of Crypto.org Chain block times having sped up in recent months. By contrast, other established blockchains (such as Bitcoin, Ethereum) have been on a less inflationary, or deflationary, trend. This proposed governance proposal is the first step in addressing the community's concerns and suggestions. Depending on the outcomes of this proposal, future emission reductions may be considered.

Technical details

From a technical standpoint, we propose implementing a token-burning mechanism by updating the network parameter of community_tax by 0.15. After updating the community_tax parameter, a portion of the tokens generated through inflation will be allocated to the community pool, which is a wallet owned at protocol level that would require a governance proposal to take any action on it. Once a certain amount has been accumulated in the community pool, for example, 20 million CRO, the funds can then be transferred to a dead address (i.e. cro1qqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqtcgxmv or any equivalent dead address - See Remark 1) through a community pool spend governance proposal that can be raised by any CRO holder, effectively reducing the available token supply and completing a single burning cycle. This burning process will be executed periodically whenever a specific amount has been accumulated in the community pool. It will be controlled by chain governance.

Projected burning amount and reduction on the inflation rate

Projected burning amount and reduction on the inflation rate. As any assets owned by the dead address are considered unrecoverable and permanently removed from the circulating supply, the proposed burning mechanism will reduce the effective inflation rate from its current rate of 2.49% to approximately 2.1%.

Changes on the staking rewards

The proposed burn mechanism involves allocating a portion of the tokens generated through inflation to the community pool. As a result, staking rewards are expected to decrease by approximately 15% (from about 13.6% currently to 11.5% - See Remark 2), with the diverted portion of rewards contributing to the burning mechanism. Nevertheless, this burning mechanism will reduce the effective inflation rate and the token supply, which we believe will bring long-term benefits to the token economy.

Proposed changes

Please check the field of changes under the proposal message. If the proposal passes, the parameter will be automatically updated at the end of the voting period.

Governance Votes

The following items summarize the voting options and what it means for this proposal. YES: You approve of the proposal on introducing a mechanism to gradually burn a portion of the CRO supply emitted by the Crypto.org network. NO: You disapprove of the proposal in its current form. Feel free to give feedback and suggestions on how to improve the proposal. NO (VETO): You veto the entire motivation for the proposal, and are strongly opposed to its implementation. ABSTAIN: You are impartial to the outcome of the proposal.

Remarks

1)The dead address or zero address is considered as the burning address in many blockchains such as Ethereum and Cosmos community; any assets owned by the dead address are considered locked and removed from the circulating supply permanently; 2)https://docs.cosmos.network/main/modules/distribution#rewards-to-delegators 3)Initial proposal and discusstion on Github: https://github.com/crypto-org-chain/chain-main/discussions/941