Elastos Ecosystem Tokenomics: Revisited

Elastos Ecosystem Tokenomics: Revisited

(Alex Shipp)

Disclaimer: The content and opinions expressed in this document are exclusive presentations of my own personal opinions; nothing herein should be misconstrued as a representation of opinions or public statements issued on behalf of the Elastos Foundation, Cyber Republic, or any organizations or individuals other than myself, Alexander Shipp. Furthermore, none of the content or opinions expressed in this document are intended to constitute financial advice or market commentary, nor should they be used as a reference thereof.

I. Abstract

This paper conducts a thorough reexamination of the fundamental tokenomic model that governs the Elastos ecosystem for the near-term purpose of stimulating critical discussion in the Elastos community, and the mid-term purpose of implementing cogent tokenomic modifications. In the following text, I take the position that the balance of 16,316,564 ELA that is to be transferred to Cyber Republic (CR) on April 1, 2020, which I refer to as CR Genesis Funds , is excessive and negatively impacts ecosystem participation and community sentiment. This stance is grounded in the philosophy that a blockchain ecosystem’s tokenomics serves two principal functions:

Function #1: To establish a decentralized consensus mechanism that supports all stakeholders and facilitates ecosystem processes; and

Function #2: To encourage ecosystem participation and promote positive community sentiment, thereby supporting development.

The blockchain space presently stands at an early stage in the adoption curve, where ecosystem participation and community sentiment combine to serve as a near-exclusive valuation mechanism for upwards of 99% of digital assets. With the exception of BTC, BCH, XMR, ZEC, and perhaps a few others aiming to become digital cash or SoVs, digital assets have not achieved substantial demand from use-case applications, and most are yet to bring functional products to market. For this reason, this paper places significant weight on the role of Elastos Ecosystem Tokenomics in influencing ecosystem participation and broader community sentiment.

II. Introduction

Tokenomics encompasses the policies which govern a digital asset and its circulation within an ecosystem such that its community may sustainably self-organize and achieve consensus, thereby reducing friction in exchange. Tokenomics then is an extension of economics, and blockchain ecosystems are merely decentralized, digital nations — cyber republics, so to speak. Thus, an introduction to basic economic theory and the fiscal and monetary policies implemented by governments and central banks to support Nation-states and their economies will serve as a strong foundation for advanced tokenomic analysis.

1) The Pre-Token Economy: Funding Fiscal Operations

A government is tasked with providing basic protections for its citizens and ensuring that its society upholds certain rules as a collective. Especially in the absence of blockchain technology and decentralized infrastructures, a government plays a primary role in helping societies to self-organize and achieve consensus on various matters, such as what constitutes money, and which policies to comply with in order to reduce friction in exchange. Because a government does not participate in an economy as would a normal business entity, it receives no income for its necessary support, which is essentially a public service. In order to avoid a Tragedy-of-the-Commons scenario, a government collects taxes from its citizens to fund operations. Often times, a government may wish to mobilize additional public funds, but may not increase tax revenue without upsetting its constituents. As explained by former Chairman of the Board of the Federal Reserve, Alan Greenspan, in his 1966 paper, Gold and Economic Freedom:

“…to retain political power, the amount of taxation [has] to be limited and [a government has] to resort to programs of massive deficit spending.”

-Alan Greenspan, 1966

The term “deficit spending” implies only that a government spends more money than it earns, but offers no insight into its debt source, almost suggesting that a government receives money from nowhere at all. In fact, this is very much the case: government bonds are purchased by central banks with fiat money printed from “thin air.” Of course, while the notes — or, more recently, keystrokes — do indeed come from nowhere, the wealth vested in them cannot; such wealth is extracted from the circulating supply of money-units (Dollars, Euros, Yen, Yuan) in the form of gradual price increases of economic goods — in other words, a depreciation in the money-unit itself. In short, inflation is a form of covert taxation whereby a government extracts wealth from savers and reallocates it to fund initiatives generally classified as “welfare programs.” Economist Henry Hazlitt most concisely captured inflation’s mechanistic subtlety and powerful ramifications in his 1946 publication Economics in One Lesson, calling it:

“[…] the opium of the people.”

-Henry Hazlitt, 1946

Seven decades later, Satoshi Nakamoto cited requisite trust in central banks as being the fatal flaw in money’s modern fiat rendition. One month after releasing the Bitcoin whitepaper, Satoshi posted the following to the P2P Foundation Forum:

“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

-Satoshi Nakamoto, February 11, 2009

Ethical considerations aside, taxation — direct collection , and inflation — indirect collection , remain any governing entity’s two principal means of sourcing wealth from its constituents to achieve sustainable operations and finance ancillary projects.

2) Tokenomic Fundamentals: Creating a Sustainable Ecosystem

While the digital societies and DAOs (decentralized autonomous organizations) made viable by blockchain technology do offer forms of decentralized governance, their underlying infrastructure is still supported by nodes acting to secure their networks. Thus, nodes in a blockchain-based ecosystem require some form of compensation to ensure sustainable operation of the network, and have at their disposal two means by which to collect funds:

1. Transaction Fees: Taxation ( Direct Collection ) → extract wealth from Transact-ers

2. Block Rewards: Inflation ( Indirect Collection ) → extract wealth from Tokenholders

Transaction Fees are collected each time tokens are exchanged between wallet addresses, and are a form of direct taxation on ecosystem participants — especially those who are high-volume transact-ers. Block Rewards , on the other hand, involve issuing new tokens directly to the wallet addresses of nodes that have validated transactions on the network. As newly-issued tokens increase the unit-supply without adding to the wealth vested in the network, they extract wealth from the existing unit-supply, and thus constitute a form of inflation. Through various consensus mechanisms, most blockchain projects use some combination of Transaction Fees and Block Rewards to incentivize nodes to protect the integrity of their networks.

While Transaction Fees serve as a more direct funding option for network security, the analgesic properties of inflation tend to be more appealing to prospective ecosystem participants, especially during a project’s early community-building stages. Additionally, most blockchain projects that employ inflationary mechanisms do so in a fully transparent format, where inflation is hardcoded into an ecosystem’s techonomic fabric, fully visible to all of its constituents and stakeholders. Nation-states and central banks hardly offer such insight into their monetary operations.

III. Elastos Ecosystem Tokenomics

Elastos is a blockchain-powered, Modern Internet in which a Smartweb comprised of dApps is shaped, directed, and governed by an autonomous community called Cyber Republic. As a second-layer scaling solution based on sidechain architecture, Elastos employs its native token, ELA, to serve as a utility token throughout its ecosystem. ELA is used to perform actions and cover transaction fees on the ecosystem’s main chain and gas fees on its smart contract-compatible sidechains, in effect supporting the Elastos Smartweb’s network of dApps, ecosystem services, and foundational infrastructure.

1) Token Metrics

At its genesis, the Elastos ecosystem pre-mined a Total Supply of 33,000,000 ELA. 50% of these ELA were allocated to individuals and organizations throughout the ecosystem, making up the Circulating Supply; the remaining 50% were allocated to an Ecosystem Development Fund . Of the 16,500,000 ELA allocated to the Ecosystem Development Fund, 183,436 ELA were effectively released to BTC holders — and therefore, the Circulating Supply — in an early-stage airdrop. Upon the formation of Cyber Republic, the ecosystem DAO responsible for community governance, the remaining 16,316,564 ELA of Ecosystem Development Funds were reassigned to constitute the CR Genesis Funds allocated to Cyber Republic. While community members should make every effort to remain fully informed of the past trajectory of Elastos’ Tokenomics, this paper will address pre-mined Genesis ELA as being split evenly between the Circulating Supply and CR Genesis Funds for the purposes of simplicity. Also for matters of simplicity, all models herein will be formulated using Elastos’ Genesis Supply for “year one” — that is to say, all Elastos tokenomic models will be presented under the assumption that no ecosystem inflation has yet occurred.

2) Ecosystem Sustainability

Elastos charges negligible Transaction Fees , and sources funds for node compensation from Inflation . Like Bitcoin, Elastos employs a Disinflationary Model , which means that while the Total Supply of ELA increases over time, ELA’s rate of inflation continuously decreases over time. In other words, as the Total Supply of ELA increases, nominal inflation remains constant over time, thus reducing real inflation — that is, the growth rate of the Total Supply of ELA.

Every year, 924,000 ELA — 2.8% the Genesis Total Supply — are issued to Community Nodes in the Elastos ecosystem in the form of Community Block Rewards . In this model, it is important to recall that 16,500,000 ELA are locked at the CR Genesis Funds Address, and 16,500,000 ELA remain in the Circulating Supply. Thus, as far as the transacting Elastos ecosystem is concerned, inflation produced by Community Block Rewards in Year 1 is 5.6% .

3) Community Block Rewards

Elastos’ hybrid consensus mechanism incorporates Auxiliary Proof-of-Work (AuxPoW) and Delegated Proof-of-Stake (DPoS), both of which are run by Community Nodes . In exchange for their services validating transactions in the ecosystem, Community Nodes receive Community Block Rewards allocations. Cyber Republic Consensus (CRC) also serves as a foundational mechanism for collective decision making throughout the ecosystem, and Cyber Republic receives a CR Block Rewards allocation on this basis. Blocks are published to the Elastos blockchain at (approximate) two-minute intervals, and Block Rewards are allocated as follows:

*Although 12 active DPoS nodes are to be run by CR Council members and are currently classified as CR Consensus (CRC) nodes, they run within Elastos’ DPoS Consensus and receive rewards from its DPoS Block Rewards allocation. Consequently, the Block Rewards allocated to CRC nodes fall under Community Block Rewards allocations.

4) Cyber Republic (CR) Tokenomics

As the ecosystem DAO responsible for community governance, Cyber Republic will receive the 16,500,000 ELA presently located in the CR Genesis Funds Address . Upon the culmination of inaugural CR Council Elections on April 1, 2020, these funds will be transferred to the CR Assets Address . Beginning April 1, 2020, the CR Assets Address will also become the receiving address for CR’s Block Rewards allocation, which amounts to an additional 396,000 ELA per year.

Each year, upon the completion of the CR Council electoral process, the incoming CR Council members gain access to 10% of the funds in the CR Assets Address when they are transferred to the CR Council Expenses Address . The newly instated CR Council may then use these funds as an Annual Budget during the year in which they are elected to serve the Elastos ecosystem. In a given year, CR may elect not to expend all or any of the funds available in the CR Council Expenses Address. In the case that CR does not expend all of its allocated funds in a given year, those funds remain in the CR Council Expenses Address and are used in computing the following year’s Annual Budget . As such, in the event that CR expends less than 396,000 ELA in a given year, it will increase the combined balance of its two wallet addresses, and thus increase the ensuing year’s Annual Budget .

If, at year’s end — in the case of the CR Council’s inaugural year, March 31, 2021 — the incumbent CR Council has not fully expended the funds available in the CR Council Expenses Address , the following equation is used to ensure an appropriate ELA transfer is conducted between the CR Assets Address and CR Council Expenses Address to form the newly elected CR Council’s Annual Budget :

5) Annual Ecosystem Inflation Potential

Each year, both Community Block Rewards allocations and CR Council Expenditures contribute to ecosystem inflation. Elastos’ Annual Ecosystem Inflation Potential is illustrated in the graphic below:

*Community Block Rewards inflation data is inclusive of all Block Rewards allocations issued to AuxPoW nodes and DPoS nodes (inclusive of CRC nodes).

IV. Critical Evaluation

This paper observes the philosophy that tokenomics serves two principal functions:

Function #1: To establish a decentralized consensus mechanism that supports all stakeholders and facilitates ecosystem processes; and

Function #2: To encourage ecosystem participation and promote positive community sentiment, thereby supporting development.

As follows, both key elements of Elastos Ecosystem Tokenomics, Community Block Rewards and CR Tokenomics , will be evaluated in accordance with their respective abilities to satisfy these criteria.

1) Community Block Rewards

Function #1: Elastos Ecosystem Tokenomics employs a graduated disinflationary model relative to Bitcoin, whose Block Rewards are reduced by 50% at 4-year intervals — often termed “halvenings.” Elastos, on the other hand, relies solely on constant Community Block Rewards to reduce its annual inflation rate. It is also noteworthy that Bitcoin employed an extremely steep inflation rate in its early years not only to secure its network, but also to distribute the majority of BTC into its Circulating Supply with the aim of effectively decentralizing token ownership. In contrast, Elastos pre-mined its initial Circulating Supply and established a decentralized token distribution at its genesis. Thus, to reasonably compare inflation rates between BTC and ELA, analysis should begin 4 years after genesis — that is, immediately following Bitcoin’s first halvening.

*Bitcoin inflation data sourced from bitcoin.stackexchange.com

All matters considered, the gradual, disinflationary Block Rewards model employed by Elastos represents the incremental costs associated with a robust, well-checked, and multi-layered consensus. The reality faced by any and all development teams working to secure a public blockchain is that all basic forms of consensus have strengths and vulnerabilities. Elastos’ consensus mechanism addresses such vulnerabilities through a multi-layered consensus that employs elements of hashpower-backed PoW, staking and voting incentives via DPoS, and democratic representation in CRC — a far more comprehensive consensus than that employed by Bitcoin. Additionally, in order to keep transaction fees at negligible levels so as to stimulate community growth and early-stage adoption during development, significant inflation is warranted to support network operations. To the contrary once again, Bitcoin relies on high Transaction Fees to supplement Block Rewards. In comparing the tokenomics and consensus mechanisms of Elastos and Bitcoin, what is most apparent is that the cost of network security is a significant — albeit necessary — burden, and that it is one borne by tokenholders.

While Elastos’ tokenomic model decreases ELA’s inflation rate over time, Community Block Rewards alone will keep the inflation rate of its Circulating Supply over 4% for the entirety of its opening 8-year time horizon. Such inflation is surely to be a source of substantial selling pressure. However, as Elastos has already secured significant (and growing) hashpower from SHA256 miners and established a complete, 108-node DPoS consensus with inaugural CR Council elections already in progress, elevated inflation levels have proved an effective means of establishing what is arguably the digital asset space’s most robust and best-secured blockchain.

Function #2: The inflation rate generated by Community Block Rewards is not conducive to ecosystem participation or positive community sentiment. Tokenholders may participate in DPoS voting and earn rewards from high-payout DPoS nodes in order to combat some of the effects of inflation, but they maintain a net-losing position unless voter participation is exceptionally low.

The Bottom Line: For well-informed investors, the inflation rate produced by Community Block Rewards can be overlooked, as near-zero transaction fees, strong tech development, and voting rights in CRC offer considerable upside for tokenholders in the Elastos ecosystem. Nonetheless, any source of additional inflation beyond that produced by Community Block Rewards allocations — that is, any purposes for which additional ELA may be injected into the Circulating Supply — should be vetted intensively and kept to a minimum.

2) Cyber Republic (CR) Tokenomics

Function #1: CRC serves as Elastos’ third and final layer of consensus, and is a foundational mechanism for continued ecosystem development. For this reason, the inflationary effect of CR’s 30% Block Rewards allocation justifiably compensates for the integral role it plays in enabling processes of decentralized decision making throughout the Elastos ecosystem. In essence, CR deserves its annual CR Block Rewards allocation of 396,000 ELA because it contributes to a unique form of consensus in processes of democratic decision making, whereas AuxPoW and DPoS nodes contribute to consensus in basic transactions and voting actions. Together, all three forms of consensus enable the formation and function of a truly autonomous and sovereign Cyber Republic. Thus, CR expenditures that draw on CR Block Rewards allocations can be likened to Fiscal Spending , in effect using tax revenues to fund fiscal operations.

CR Genesis Funds, on the other hand, comprise a form of Deficit Spending , whereby CR receives “thin-air” ELA from a Central Bank of sorts. The critical difference separating CR from a traditional, representative government is that electoral and funding-related decisions are executed on the blockchain, thereby providing radical transparency, dramatically reducing bureaucracy, and ultimately establishing a purer form of democracy in the Elastos ecosystem. Still, when the CR Council expends CR Genesis Funds from the CR Council Expenses Address , it extracts wealth from tokenholders to fund ancillary ecosystem projects.

Unfortunately, because CR Block Rewards allocations are sent directly to the CR Assets Address , they become commingled with CR Genesis Funds, and thus only 10% can be accessed in a given year. Furthermore, CR Block Rewards allocations cannot be accessed until the year following their receipt because transfers from the CR Assets Address to the CR Council Expenses Address take place only at the beginning of each year. This complicates matters immensely, and is analogous to a national government that can only spend tax revenue one year after its receipt, and even then is restricted to a 10% spending limit, after which it must call on the printing press at its central bank. Thus, for both the Cyber Republic Council and the Elastos ecosystem at large, distinguishing between Fiscal Spending and Deficit Spending becomes an intricate arithmetic operation — one which ecosystem participants will likely be unwilling and unable to conduct, especially as the years wear on.

Function #2: Due to the lack of separation between funds allocated to Fiscal Spending and Deficit Spending , Elastos Ecosystem Tokenomics are naturally geared toward stimulating divisive debate and, ultimately, weak ecosystem participation and community sentiment, as community members will be unable to properly assess the spending behavior of the CR Council. Meanwhile, CR Genesis Funds comprise an enormous percentage of Annual Ecosystem Inflation Potential , and are excessive to point of being obsolete. The prevailing argument to support CR’s retention of and access to CR Genesis Funds contends that such funds are needed for ecosystem development and that spending can only take place via CRC. As long as the community has directly or indirectly made the decision to expend funds, it reasons, the decision must be valid and beneficial to all parties. In the ensuing section (V.) , I dissect the indirect effects of Cyber Republic’s CR Genesis Funds allocation, and argue that such logic is not sufficient justification for enabling untrackable and excessive deficit spending.

The Bottom Line: A lack of separation between CR Block Rewards allocations and CR Genesis Funds creates an artificial liquidity crisis for CR, which must leverage “thin air” ELA from CR Genesis Funds simply to fund basic operations. In addition to implementing this necessary separation, further tokenomic modifications must be conducted to optimize CR Genesis Funds so as to produce a tokenomic model that is conducive to robust ecosystem participation and favorable community sentiment.

V. Case Against CR Genesis Funds

1) Damage to Ecosystem Participation and Community Sentiment

As with nearly all blockchain projects, Elastos is still on the path to adoption, and thus the health of its ecosystem rests almost entirely on the sentiment of its community members and their engagement with its development. As Elastos is emblematic of the new cast of revolutionary, innovative technologies exploring the vast use-cases of blockchain, building and maintaining a tokenomic model that appeals to its present and prospective community members alike must be paramount.

To any prospective community member examining Elastos, annual aggregate inflation potential upwards of 10% is a major deterrent. Thus, availing Genesis Funds to CR has an adverse effect on community sentiment — even absent their expenditure. Such a model effectively creates an insular environment around the project, whereby a lack of community growth and a diminishing token value reinforce one another in a positive feedback loop that does not serve the Elastos Foundation, Cyber Republic, or any of their community members.

2) Redundancy and Obsoletism

Funding early-stage development — particularly in the Frameworks Layer and dApps Layer — is of great importance to the future of the Elastos ecosystem, and the perspective expressed in this paper does not intend to overlook such an imperative. What must be explored, though , are the circumstances in which available CR Genesis Funds may realistically be expended. The existing perspective which supports the availability of CR Genesis Funds anticipates that heavy, early-stage Deficit Spending will fund the development needed for meaningful ecosystem growth, and eventually, token appreciation. This perspective hopes, rather ambitiously, that such token appreciation will eventually allow CR to expend far fewer tokens in the future, thereby cutting back on inflation.

The pitfall in this line of logic is that it fails to account for the feasibility of large-volume ELA expenditure in the first place. It must be emphasized that all token valuations are based almost entirely on community sentiment, and that tokenomic models that are disadvantageous to buying and holding tokens will not accrue the necessary buy-side activity to support the selling pressure stimulated by inflation. Thus, the vast majority of CR Genesis Funds become a source of tremendous inertia not only to the development of the Elastos ecosystem, but to their own expenditure.

Likewise, in a tokenomic model that eliminates or drastically reduces CR Genesis Funds, the community sentiment naturally produced by low inflation potential increases buy-side activity. In this scenario, buy-side activity provides support for the selling pressure produced by both Block Rewards allocations (Fiscal Spending) and drastically reduced CR Genesis Funds (Deficit Spending), and may actually increase CR’s Spend Potential.

In effect, the quantity of Genesis Funds allocated to CR imparts an inverse effect on their spend-ability: the more ELA CR is availed, the less selling pressure the open market is able to comfortably absorb; whereas if fewer ELA are availed to CR, the market is able to absorb greater selling pressure.

3) Undefined Budgeting and Convoluted Project Finance

Unfortunately, due to the immeasurable manipulation of spot prices, trading volumes, and order books, no meaningful quantitative estimations of market depth, liquidity, or slippage can be drawn from the vast amount of data available on digital asset exchanges and public data aggregators. Thus, many matters involving tokenomics — an especially quantitative topic — are restricted to qualitative evaluation. However, discussion pertaining to individual expenditures of CR funds — be they from CR Block Rewards allocations or CR Genesis Funds — must be based on clear, quantitative evaluation.

As for any company, project, or society in human history, operating on finite resources is at the very foundation of decision making. Without limited energy, raw materials, and power, all beneficial opportunities may be engaged; it is only in considering costs and scarcity that various opportunities may compete and be compared with one another. Thus, in order for a society — be it physical or virtual — to effectively allocate financial resources — be they metal, paper, or digital — a strong measurement of available resources must be attainable. Otherwise, gauging the worthiness of available opportunities becomes an impossibility. Such is the essence of composing budgets and conducting project finance.

A major challenge presented by excessive CR Genesis Funds is that even a 10% Annual Budget — that is, a transfer of 10% of the 16,500,000 ELA of CR Genesis Funds from the CR Assets Address to the CR Council Expenses Address — can never come close to depletion. In reality, CR’s Annual Budget is not limited by the quantity of CR Genesis Funds deposited in the CR Council Expenses Address to begin the year, but by the downward pressure created by injecting more token-units into the ecosystem than the market can comfortably absorb. Due to a combination of an extremely volatile macroeconomic environment and aforementioned challenges concerning market manipulation, determining realistic annual budgets becomes an impossibility, and evaluating proposals becomes an abstract process — exactly the opposite of what is necessary for successful project finance.

In order to improve ecosystem participation and community sentiment, increase net spend potential, and transform CR annual budgeting and proposal evaluation into structured, quantitative processes, only feasibly spend-able funds should ever be availed to CR .

VI. Proposed Tokenomic Modifications

As previously stated (IV., 2) the inflation produced by Community Block Rewards allocations — that is, newly-issued ELA allocated to Community Nodes in AuxPoW and DPoS Consensuses — constitutes tax revenue which serves to support powerful mechanisms of ecosystem decentralization. These mechanisms are functioning exceptionally well, provide great benefit to the Elastos ecosystem, and should continue to be preserved. In accordance with the logic laid out over the course of this paper, I propose two major tokenomic modifications, both of which take place within the domain of CR Tokenomics:

  1. A Separation of CR Block Rewards allocations and CR Genesis Funds; and
  2. An Algorithmic Optimization of CR Genesis Funds based on actual ecosystem data.

1. Separation of CR Block Rewards Allocations and CR Genesis Funds

In order to properly evaluate the utility of CR Genesis Funds, they must be isolated from CR Block Rewards allocations. For CR, CR Block Rewards allocations constitute a valid form of tax revenue which is used to fund fiscal operations. For matters of transparency and simplicity, CR Block Rewards allocations are to be kept in a separate CR Block Rewards Address . At the beginning of every year, the CR Assets Address will first transfer 10% of its funds to the CR Council Expenses Address . Then, the CR Assets Address will transfer an additional 396,000 ELA to the CR Block Rewards Address to represent the CR Block Rewards allocations to be received by CR in the ensuing year. In the context of the present state of the Elastos ecosystem, these token transfers should take place on April 1, 2020. As a matter of procedure, the CR Council will first fund proposals with the ELA in its CR Block Rewards Address, and will only draw on the funds in its CR Council Expenses Address if and when the CR Block Rewards Address has been fully depleted.

This tokenomic modification produces the following benefits:

  • It delineates a marked separation between Fiscal Spending and Deficit Spending , thus enabling council members and ecosystem participants alike to effectively discern between proposals and their proposed costs, as well as to evaluate the decision making of present and past councils.
  • It enables the CR Council to draw on CR Block Rewards allocations in the year they are received. Here, the CR Assets Address acts as a credit facility of sorts for the CR Council, which may capitalize on near-term opportunities without having to dip into CR Genesis Funds and convolute its processes of project finance. Thus, even in the event that the community votes in favor of a Complete Token Burn of CR Genesis Funds (which this paper does not advocate), 396,000 ELA should be retained in the CR Assets Address to fund the CR Block Rewards Address at the beginning of every year. Over the course of the year, CR Block Rewards allocations will continue to flow into the CR Assets Address to replace the 396,000 ELA transferred out at the year’s start.
  • It enables CR to accumulate funds reserved for fiscal spending. In years where the CR Council does not expend all of its CR Block Rewards allocations, the funds remain in its CR Block Rewards Address , and do not become commingled with CR Genesis Funds. Consequently, the CR Council can benefit from years of conservative decision making by reserving funds dedicated to Fiscal Spending for later use. It cannot be emphasized strongly enough how difficult such a decision would be to gauge and calculate in Elastos’ present tokenomic model. By separating CR Block Rewards allocations from CR Genesis Funds, the entire Elastos ecosystem will gain deeper insight into the spending behavior of the CR Council and a truer understanding of the factors contributing to ecosystem inflation.

2. CR Genesis Funds Optimization

a) Considerations: Complete and Fractional Token Burns

The most drastic course of action available demands transferring the entirety of CR Genesis Funds to an address whose private key is unknown and inaccessible — in other words, conducting a Complete Token Burn . Because only qualitative arguments can be realistically formulated, and because the cryptocurrency markets are notoriously volatile, providing CR with access to some form of emergency reserves certainly deserves worthy consideration.

A secondary option involves a Fractional Token Burn. Consider that a 60% Fractional Token Burn — that is, disposing of 9,9000,000 ELA of CR Genesis Funds — still enables CR to more than double the spending capacity provided by CR Block Rewards allocations for 5 years.

At this stage, it appears that the CR Genesis Funds allocation grossly overestimated both fund requirements and spending capacity to such an extent that determining an appropriate Fractional Token Burn may leave CR with a significant, lingering surplus. By the same measure, the dangers of an over-aggressive Fractional Token Burn could render the CR Council unable to operate and properly fund critical ecosystem development. As such, there is great benefit to be reaped from a flexible, Algorithmic Token Burn that is executed automatically by code at regular intervals.

b) Introduction: Algorithmic Token Burn

An Algorithmic Token Burn serves two purposes:

  1. To optimize the quantity of CR Genesis Funds that is allocated to the CR Assets Address .
  2. To optimize the Annual Budget for CR — that is, the annual allocation of CR Genesis Funds that are transferred from the CR Assets Address to the the CR Council Expenses Address at the beginning of each year for the purposes of Deficit Spending .

The most effective way to determine appropriate values is by observing real data from annual CR operations, as CR is presently at a stage where development is a foremost imperative. It has been previously established (V., 2) that allocating Genesis Funds to CR imparts an inverse effect on token value, and therefore the total wealth CR can expend per annum is far less volatile than the value of ELA . As follows, the year ahead beginning with the introduction of the inaugural CR Council — slated for April 1, 2020 — serves as a strong sample period to use for measuring real CR Annual Budget Expenditures — denominated in ELA, and independent of its volatility.

c) Proposal: The ELA-Flex Tokenomic Model

A vast array of Algorithmic Token Burn models and solutions exist, and I encourage any and all community members to contribute ideas. After much contemplation, I have developed the simplest and most robust Algorithmic Token Burn Model that my analytical and creative faculties can presently offer. The ELA-Flex Tokenomic Model functions as follows:

  1. Effective April 1, 2020, the funds availed to the CR Interim Council at the CR Interim Assets Address and the CR Interim Council Expenses Address are transferred directly to the Ecosystem Burn Address in a Complete Token Burn. On this date, the complete CR Council will take over, and CR Interim Council Funds will no longer serve a purpose. (For further information, see: (Appendix, A.)) .
  2. Effective April 1, 2020, 8,250,000 ELA of CR Genesis Funds in the CR Assets Address are transferred directly to the Ecosystem Burn Address in a 50% Fractional Token Burn. Due to the present macroeconomic environment, which has done immense damage to the liquidity required to support CR expenditures, an immediate burn will do a great deal to improve ecosystem participation and community sentiment. Meanwhile, the burn will still allow CR to more than double its spending capacity from its CR Block Rewards allocations for nearly 8 years — and that assumes CR expends all of its available funds every year. Due to macroeconomic factors, CR may or may not be able to expend all of its Annual Budget derived from CR Genesis Funds . For these scenarios, further Token Burns must be implemented so as to eliminate obsolete funds, ameliorate community sentiment, and support structured processes of budgeting and project finance.
  3. On April 1, 2021, Annual Budget Expenditures (BEx) will be measured from April 1, 2020 through March 31, 2021, and the Annual Budget (ABx) derived from CR Genesis Funds from the previous year will be recorded. CR’s Annual Budget Expenditures (BEx) and Annual Budget (ABx) are not inclusive of CR Block Rewards allocations.
  4. Having assigned values for (BEx) and (ABx) , the ELA-Flex Tokenomic Model will be employed to determine the quantity of ELA to burn from CR Genesis Funds:

Comments:
i.
The ELA-Flex Token Burn for Year Y will take place in advance of any new CR expenditures, and the new, post-token burn, combined balances of the CR Assets Address and CR Council Expenses Address will be used to compute the Annual Budget (ABy) for Year Y.

ii. As per previous discussion, accounting for ELA/USD rate fluctuation is unnecessary for the purposes of optimizing the balance in the CR Assets Address . In a year where CR does not expend all of its Annual Budget (ABx) , an increase in the value of ELA will both allow and warrant reductions in CR Genesis Funds, and may in fact serve to increase the total disposal wealth available to CR. Likewise, in such a year, a decrease in the value of ELA warrants a reduction in the CR Genesis Funds, as it serves as an indication that such funds cannot feasibly be spent due to the incremental selling pressure they imply.

iii. The maximum Annual Token Burn permitted by the ELA-Flex Tokenomic Model is equal to 50% of the combined balances of the CR Genesis Funds in the CR Assets Address and CR Council Expenses Address at the end of Year X (the previous year just completed) — i.e., the start of Year Y (the upcoming year just begun) . Thus, even in a year when the CR Council places extreme restrictions on spending due to harsh macroeconomic conditions or Black Swan events, a sufficient balance will be retained for a return to relatively normalized spending in the ensuing year. Even in the event that CR elects to expend less funds than it is availed from its CR Block Rewards allocation, a maximum Burn Limit of 50% of total, remaining CR Genesis Funds will be enforced at year-end .

iv. As noted in (VI., 1) , in the event that the CR Council does not expend all of its CR Block Rewards allocations, those funds are to be stored separately from CR Genesis Funds in its CR Block Rewards Address , and should not be considered in calculating the ensuing year’s Annual Budget (ABx) , nor should they be considered in calculating the ensuing year’s ELA-Flex Token Burn. That is to say, they should under no circumstance be considered in calculating (ABx) , (BEx) , (GFy) , or (ABy) . CR may elect to manage its Fiscal Spending conservatively in the near term so as to save for larger expenditures in future years, and should not be penalized for responsible financial conduct.

d) ELA-Flex Tokenomics: Practical Application

In order to comprehensively illustrate the differences between the ELA-Flex Tokenomic Model and that of the Elastos ecosystem at present, this section provides practical application analysis of the tokenomic outcomes each model produces in 3 separate scenarios:

Scenario #1: CR expends less than its Annual CR Block Rewards allocations.

Scenario #2: CR expends the entirety of its Annual CR Block Rewards allocations, but expends less than the entirety of its Annual Budget (ABx) — that is, less than 10% of total, remaining CR Genesis Funds.

Scenario #3: CR expends the entirety of its Annual CR Block Rewards allocations and the entirety of its Annual Budget (ABx).

In order to simplify analysis, the two models are compared beginning in Year 1, with a full 16,500,000 ELA of CR Genesis Funds available in the CR Assets Address . For further simplification, the immediate 50% Fractional Token Burn proposed in the ELA-Flex Tokenomic Model is not performed. In the figures provided, Year X represents the previous year, Year Y represents the upcoming year, and Annual CR Block Rewards allocations are approximated to 396,000 ELA for the purposes of simplicity.

Analysis

Scenario #1: CR expends less than its Annual CR Block Rewards allocations.

In Scenario #1, Elastos’ Present Tokenomics follows a year of extremely low spending by increasing the Max Spend derived from CR Genesis Funds in the ensuing year. On the contrary, the ELA-Flex Tokenomic Model reduces the ensuing year’s Max Spend substantially by performing its maximum token burn of 50% of CR Genesis Funds. As discussed at length throughout this paper, the major logical flaw baked into Elastos’ present tokenomic model is its failure to identify the relationship between low Annual Spend Potential, low liquidity and depth in the market, and a large quantity of ELA availed to CR by CR Genesis Funds.

A second major distinction between the two models is that the ELA-Flex Model allows CR to retain its unspent CR Block Rewards allocations from Year X (200,000 ELA) in the CR Block Rewards Address , thereby allowing it to expend them in full in the ensuing year. Thus, while a 50% Algorithmic Token Burn of CR Genesis Funds reduces CR’s Deficit Spend Potential in Year Y, proper separation of CR Block Rewards allocations and CR Genesis Funds increases CR’s Fiscal Spend Potential in Year Y — a proper effect of conservative spending. CR would only be able to access 10% of such funds in Elastos’ current tokenomic model; as follows, conducting a Complete or Fractional Token Burn of CR Genesis Funds WITHOUT separating CR Block Rewards allocations from CR Genesis Funds is shortsighted, risky, and severely damaging to CR’s financial operations. Simply put, such a model would prevent CR from enacting conservative spending policy to accumulate funds for significant future expenditures, and would thereby incentivize premature — not to mention ineffective — spending of CR Block Rewards allocations.

Scenario #2: CR expends the entirety of its Annual CR Block Rewards allocations, but expends less than the entirety of its Annual Budget (ABx) — that is, less than 10% of total, remaining CR Genesis Funds.

In Scenario #2, the ELA-Flex Model effectively eliminates unnecessary funds without creating adverse financial conditions for CR. When comparing bottom lines — that is, the Max Spend permitted by each model for Year Y, the differential is extremely narrow. The differences lie in what’s taking place backstage in the accounting books: non-critical, lump-sum calculations on one side, and responsible, departmentalized accounting on the other. Understanding where funds come from, what they represent, and what sources of wealth various development projects will draw on is instrumental in understanding how and when to spend and denominate such funds in the first place.

In this example, the ELA-Flex Model presents a superior form of financial management, as it maintains a strong separation between funds dedicated to Fiscal Spending and funds dedicated to Deficit Spending . The separation between Fiscal Spending and Deficit Spending — that is, between CR Block Rewards allocations and the Annual Budget (ABx) derived from CR Genesis Funds — is integral to the philosophy behind the ELA-Flex Tokenomic Model.

Scenario #3: CR expends the entirety of its Annual CR Block Rewards allocations and the entirety of its Annual Budget (ABx).

In the event CR deems it necessary — and market depth makes it possible — to expend all funds availed by both CR Block Rewards allocations and CR’s Annual Budget (ABx) , the ELA-Flex Model allows the CR Genesis Funds allocation set in place by the ecosystem’s present tokenomic model to remain untouched. Thus, the ELA-Flex Model inherently addresses the risks associated with a premature or excessive token burn.

VII. Closing Thoughts

Elastos now possesses one of the most robust, well-checked consensus mechanisms in the short history of blockchain architecture, and its technology is advancing rapidly. Be that as it may, it is undeniable that there remains at least one major obstacle that is hindering this project’s growth, as community expansion and sustainable public attention have been hard to come by; in spite of recent technical accomplishments, the path to adoption still feels abstract and distant. I submit that the missing piece is not technical at all, but economic — tokenomic, to be specific.

Right now, Elastos is swimming upstream against a current it that it has summoned itself. Every ELA of CR Genesis Funds that has been allocated to support the project and advance development in challenging circumstances has in fact contributed to creating and reinforcing those very circumstances. While proposing a Complete Token Burn of CR Genesis Funds is to demand that the entire ecosystem take on tremendous and unnecessary risk, implementing a separation between CR Block Rewards allocations and CR Genesis Funds, a Complete Token Burn of CR Interim Council Funds, and a near-term Fractional Token Burn of CR Genesis Funds followed by annual, algorithmic contractions based on actual ecosystem data is well within reason. I contend that such procedures will, in time, relieve a great deal of the stress the ecosystem is presently experiencing. I have laid out in this paper that excessive CR Genesis Funds inherently prevent their own expenditure by virtue of their allocation to CR, and serve no purpose except to deter outsiders and convolute processes of budgeting and project finance. Elastos Ecosystem Tokenomics can at once support an industry-leading consensus, fund ongoing development, and strengthen ecosystem participation and community sentiment. But we must first have the confidence to purposefully and methodically dispose of the excess coinage that is weighing us down, and make the statement that we know we can do it — that we know our system works.

VIII. Appendix

A. CR Interim Council Funds
Prior to the establishment of Elastos’ Hybrid (AuxPoW + DPoS) Consensus, the Elastos Foundation was responsible for validating network transactions and received all Block Rewards allocations directly to an Ecosystem Inflation Address . The Ecosystem Inflation Address has continued to accumulate and will continue to accumulate ELA from Block Rewards allocations on the following basis:

  • Prior to the establishment of AuxPow Consensus, it received 100% of total Block Rewards allocations;
  • After the establishment of AuxPoW Consensus, it received 65% of total Block Rewards allocations;
  • After the establishment of Hybrid (AuxPow+DPoS) Consensus, it received 30% of total Block Rewards allocations; and
  • After the completion of inaugural CR Council Elections on April 1, 2020, it will cease to receive any Block Rewards allocations.

At present, the CR Interim Council controls the Ecosystem Inflation Address and uses it as a CR Interim Assets Address of sorts, which directly parallels the function of the CR Assets Address. From the CR Interim Assets Address (i.e., the Ecosystem Inflation Address ) the CR Interim Council has allocated a portion of funds to a CR Interim Council Expenses Address of sorts, from which the CR Interim Council funds ecosystem development via CRC. As the CR Interim Council does not have access to CR Funds at present, this is a wise practice. However, as with all Block Rewards allocations outside the Circulating Supply, the expenditure of these funds constitutes inflation, and the relatively conservative spending habits of the CR Interim Council have prevented it from becoming yet another source of steep inflation in the Elastos ecosystem. As of April 1, 2020, the funds in both the CR Interim Assets Address and the CR Interim Council Expenses Address — which will total approximately 1,500,000 ELA — will be transferred to the CR Assets Address.

As it has already been observed that the existing CR Genesis Funds allocation is excessive, adding to these funds will only exacerbate aforementioned challenges pertaining to ecosystem participation and community sentiment, inert spend-ability, and convoluted project finance. As such, in (VI., 2), c), 1)) I propose that these funds should be transferred to the Ecosystem Burn Address when the CR Council begins operations on April 1, 2020.

B. Relevant (ELA) Addresses

CR Genesis Funds Address (formerly: Ecosystem Development Funds Address):
8KNrJAyF4M67HT5tma7ZE4Rx9N9YzaUbtM

CR Assets Address:
( ELA address not yet listed )

CR Council Expenses Address:
( ELA address not yet listed )

CR Interim Assets Address (Ecosystem Inflation Address):
8VYXVxKKSAxkmRrfmGpQR2Kc66XhG6m3ta

CR Interim Council Expenses Address:
8MoqqaXmfTLfBH28QBzDjWbWmsNkJswChc

Ecosystem Burn Address:
ELANULLXXXXXXXXXXXXXXXXXXXXXYvs3rr

C. References

  1. Greenspan, Alan. “Gold and Economic Freedom.” Constitution Society: Everything Needed to Decide Constitutional Issues , Objectivist, 1966, www.constitution.org/mon/greenspan_gold.htm.

  2. Hazlitt, Henry. Economics in One Lesson . Ernest Benn, 1947.

  3. Nakamoto, Satoshi. “Bitcoin Open Bitcoin Open Source Implementation of P2P Currency.” P2P Foundation: The Foundation for Peer to Peer Alternatives , P2P Foundation, 11 Feb. 2009, p2pfoundation.ning.com/forum/topics/bitcoin-open-source.

  4. Murch, and Nick ODell. “How Much Inflation Does Bitcoin Have, Year by Year?” Bitcoin Stack Exchange , Stack Exchange Inc., 26 Apr. 2015, bitcoin.stackexchange.com/questions/37077/how-much-inflation-does-bitcoin-have-year-by-year.

https://twitter.com/AlexShippELA/status/1234455471337230337

Elastos Ecosystem Tokenomics: Revisited