The Dfinity Community guide to staking ICP in the NNS will need to be rewritten soon. Proposal 48623 passed last month by a slim margin (12.295% to 11.741%) and will forever change the way staking works on the Internet Computer. Governance proposals like 48623 demonstrate the importance of active community engagement with the NNS.
Some investors are understandably upset about the perceived loss of guaranteed constant ICP returns under the newly passed proposal. However, investors whose neurons were among the 75.964% of ICP staked in the NNS that didn't vote have no right to complain about the outcome. Besides, the notion of constant ICP returns was always wrongheaded and needs to be challenged.
Debunking the Myth of Constant ICP Returns
We've all seen tweets about how if you stake X amount of ICP today, you'll be guaranteed to make Y amount of ICP tomorrow. Even Dfinity Community teammates have unfortunately fallen victim to this belief, which is based on a common misunderstanding of reward distribution within the NNS.
Back in January, it's true that an active 8-year neuron was bringing in around 0.061% maturity every day. A month prior, in December, it had been 0.083%, but then 15 million more ICP got staked in the NNS. It's important to emphasize that maturity accrual has always been based on how much ICP is staked in the NNS.
Therefore, when the Internet Computer inevitably goes mainstream, the amount of ICP staked in the NNS could conceivably increase by a factor of at least two. If that happens, investors will be getting less than 0.03% maturity on an 8-year neuron every day. A neuron with a stake of 1,000 ICP would spawn 1 ICP every three days. Meanwhile, a neuron with a stake of 54.54 ICP would only spawn 1 ICP every 61 days. In other words, an investor who had staked 54.54 ICP would make $1,000 USD every two months, not every month. It should also be noted that NNS reward distributions are not necessarily linear and can be altered by community proposals, like rewards from voting on the governance topic were.
Bottom line: ICP will not have an annualized 20.8% return on investment forever. That's unsustainable and would ultimately result in a runaway price decline for ICP due to exponentially increasing supply. Early investors will benefit most from dramatic returns. Once the Internet Computer enters the mainstream, its value increase will instead most likely slow until it grows at a respectable rate comparable to other technology stocks. The minting of new ICP for NNS reward distribution will likewise decline dramatically.
The Need for Compounding Maturity
With the myth of constant ICP returns out of the way, the Internet Computer community should focus on more pressing matters like taxes and price stabilization. As Dominic Williams explains in detail, Proposal 48623 will begin to address these matters head-on in three key ways.
- Modulation by Price Trend - Maturity will be unused until the neuron's owner selects disbursement, which will occur after a delay and cannot be canceled. The amount of new ICP produced will depend on current ICP price trends. If the price of ICP is trending upwards, then the number of ICP produced will be slightly increased. If not, then the number of ICP produced will be decreased. This will help stabilize supply and demand dynamics as well as avoid maturity being considered taxable income by most jurisdictions.
- Maturity Is Staked, Not Merged - Maturity of a neuron will be staked inside, alongside originally staked ICP tokens. Maturity will increase the voting power of the neuron but will not result in new ICP tokens. Only when the neuron is dissolved, and the contents are disbursed will accumulated maturity produce newly minted ICP as modulated by current price trends.
- Maturity Is Disbursed, Not Spawned - Since disbursal of maturity is delayed, the NNS spawning feature will be discontinued. Instead, neuron owners can simply ask for their maturity to be disbursed. Only when the process is complete will they find out how many new ICP their maturity has minted.
The Reality of Variable Income
In conclusion, like every other legitimate investment option, ICP cannot guarantee constant returns. Not only will its fiat currency value be subject to wider market trends, but also its staking dynamics will evolve over time.
The Internet Computer is a solid long-term investment for serious speculators who want to be actively engaged in the governance of the network via the NNS. However, ICP cannot and will not deliver on magic thinking and get-rich-quick schemes. It's regrettable that hype from certain quarters has created misunderstandings about how NNS reward distribution works, but the passage of proposal 48623 demonstrates the power of the Internet Computer to correct itself and evolve toward better tokenomic models.
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