During our recent governance meeting, we announced adjustments to the FLIP token’s emissions budget to reflect actual economic data over the past few months. This decision was made after in-depth discussions with multiple stakeholders and reflects the right direction under Chainflip’s optimistic governance framework.
Emissions budget adjustments
Under the new policy, authority rewards will be reduced from 7% to 4% of the annual budget, while the maximum reward budget for standby validators will be reduced from 1% to 0.5%. This change may cause controversy in other projects, but we believe it is a reasonable decision based on real data and market demand.
In my first article on the topic of emissions, I mentioned the concept of FLIP’s decentralized bank, implying the importance of “interest rates” as a control mechanism. This concept is already taken into account when designing the system, so as market conditions change, it is completely foreseeable to adjust the emissions budget.
The case for reducing emissions budgets
Reduction in expected returns: According to our observations, the market’s expectations for validators’ staking rewards have been reduced. Initially, we forecast returns for mature staking protocols ranging from 6% to 22%. However, according to the latest data, this has fallen to a range of 3% to 10%, meaning that the interest rate of around 19% currently offered in the agreement is well above market standards.
Guaranteed economic security: Currently, approximately 34 million FLIP have been bonded to validators, which provides the protocol with over $100 million in economic security. Even if the FLIP price were to be halved, this level of security would still be enough to protect the operation of the protocol. Therefore, there is little need to further increase staking levels.
Lower the threshold for inflation
The value of FLIP depends on the purchase and destruction mechanism within the protocol. Reducing the issuance budget means fewer tokens need to be purchased and burned to maintain the supply cap or achieve deflation. This will help support higher benchmark prices.
Potential risks and challenges: Despite the above advantages, we still need to face some potential challenges:
Pledger Withdrawal Risk: Reducing emissions may cause stakers to withdraw capital. However, for all stakers, the value of the collateral is usually more important than the annualized return. Reducing emissions will improve the underlying economics of the collateral, thereby reducing negative pressure on its value.
Service provider’s willingness to participate
Some service providers may be unwilling to participate in validator operations for financial reasons. While this may impact revenue in the short term, in the long term the sustainability of the token model is the only guarantee supporting a return on investment in Chainflip.
May need to adjust again: As mentioned at the beginning of the article, we must remain flexible and ready to adjust as the market changes. This may include creating smaller budgets for things like liquidity.
future outlook
The rollout plan for this change is simple. The governance committee will conduct governance transactions on May 22 to directly change emissions rates. This will provide anyone who may be performing emissions calculations with sufficient time to make necessary adjustments.
As Chainflip continues to grow, our goal is to reach $100 million in daily trading volume. If we are successful in achieving this, further adjustments will be necessary to better exploit the opportunities that success presents.
Summarize
The adjustment of FLIP token’s emission reduction policy is a rational decision based on real data and market demand, aiming to promote the long-term sustainable development of Chainflip. Although facing some challenges, we firmly believe that this strategy will bring greater economic benefits to all participants and play an important role in future development.