Over the last few weeks, I've seen several P-Reps use I-Rep as a marketing tool to attract more votes. The pitch is always the same - ICX inflation is spiraling out of control, and lowering I-Rep to 40,000 will solve the “problem”. This situation is an extremely slippery slope, and I urge all ICONists to think about the side effects of lowering I-Rep at this time.
I-Rep is an adjustable economic mechanism that allows P-Reps to maintain a certain level of financial stability in an otherwise hyper-volatile market. The monthly costs of running a P-Rep operation (infrastructure, HR, legal, etc.) are denominated in USD. For example, a high-end AWS server is approximately $1,200 per month. For main P-Reps, this cost has a direct effect on the stability of the ICON network. In other words, the network wouldn't be very stable if main P-Reps scaled down to $50/month servers to cut costs. With this mind, it makes sense to have I-Rep, an adjustable mechanism that allows P-Reps to peg monthly earnings to a reasonable USD target. As the price of ICX rises, P-Reps should decrease I-Rep. Conversely, if ICX is in a downtrend, P-Reps should increase I-Rep to ensure operational stability.
I-Rep - A Marketing Platform
So, why are P-Reps decreasing I-Rep in this bear market?
More specifically, marketing without considering the consequences.
Despite inflation being a necessary feature of DPoS networks like ICON, it's often made out to be the number one cause of a falling token price. Ignore the fact that crypto is 99.99% speculative and pegged to Bitcoin. Inflation is obviously killing the price… This narrative is a popular one in the ICON community. The only problem I see with this idea is that ICX fell from $12 to $0.20 without inflation, which only started after decentralization in late October. Logically speaking, this suggests inflation is probably not the primary cause of ICX's decline in price.
Here are some calculations (formulas can be found here).
- P-Rep Rewards (50,000 I-Rep): 37,039,614 ICX/year
- P-Rep Rewards (40,000 I-Rep): 29,631,691 ICX/year
- ICONist Staking Rewards: 36,842,997 ICX/year
- Inflation (50,000 I-Rep): 9.17%/year
- Inflation (40,000 I-Rep): 8.25%/year
Lowering I-Rep from 50,000 to 40,000 reduces yearly inflation from 9.17% to 8.25% - that's a decrease of 0.92%. Reducing ICX inflation by less than 1% is not going to have a significant impact on price. If P-Reps continue to use I-Rep reduction as a marketing tool (because it's obviously not an effective mechanism in reducing inflation to change the price trend), why would it stop at 40,000? What's next? 30,000? 20,000? 10,000? If this I-Rep race to the bottom continues without an exponential increase in ICX price, the network will fall apart.
Since global I-Rep is a stake-weighted average of individual I-Rep submissions from main P-Reps, it affects everyone.
- Top teams are hurt a little.
- Lower teams are hurt more.
- The ICON network is hurt the most.
Top Teams (#1-10)
Lowering I-Rep from 50,000 to 40,000 at this point in time does not affect top teams (#1-10) too much. Top teams are still generating enough revenue to maintain a profitable P-Rep operation.
Mid-Tier Teams (#15-30)
Like I mentioned earlier, operational costs are statically valued in USD. A high-end node is always going to $1,200 per month, and doesn't depend on the price of ICX. Thus, reducing I-Rep can have a significant negative impact on mid-tier teams where profit margins are somewhat slim, to begin with.
The ICON Network
As a response to the changing economic situation, mid-tier teams may choose to reduce server resources or switch to cheaper infrastructure providers to maintain target profit margins. This effectively reduces the overall stability and security of the ICON network.
The Real Problem
ICON has a wealth inequality issue at the moment - I'm not going to deny that. The top three teams (ICON Foundation, Velic, and ICX Station) have collected over 35% of total votes. All this talk about lowering I-Rep is a distraction. The real problem here is vote distribution.
At the end of the day, vote distribution is the primary metric that determines the amount of ICX a P-Rep earns. I-Rep plays a small role as well, but it is a global metric that is applied equally to all teams. It doesn't make sense to change a global metric to address a problem of relativity. Changing I-Rep drags everyone up or down. Changing vote distribution doesn't.
With this in mind, the short term solution is painfully obvious. ICON Foundation has delegated 24 million ICX to itself. At the moment, the foundation has a 30 million ICX in total delegations. With so much self-sponsored capital, the foundation has the power to singlehandedly fix the vote disparity. I know it's noble and utopian to “leave it to the voters”, but voter apathy has existed since the beginning of time, and the reality is that many voters will not shift votes to suit the needs of the network.
Imagine if ICON Foundation delegated 24 million ICX to all P-Reps based on a publically available distribution curve that places the most votes in the middle ranks, with a dropoff in the higher ranks and lower ranks. This would encourage a lower-ranked team to work harder to attract “organic votes” with the hope of increasing its “subsidy” from ICON Foundation.
I realize the above proposal may sound a little centralized. I don't think that's an issue for a few reasons.
- The current vote distribution is already centralized. The top three teams all have affiliations or partnerships with ICON.
- Distributing votes across all P-Reps creates a more decentralized, stable, and secure network. In this model, it doesn't matter that the majority of votes would be distributed by ICON Foundation because the foundation is the party with the most to lose - if the network fails, ICON fails.
- ICON Foundation doesn't lose any influence in this model. If they need to increase voting power before a major network proposal vote, it can simply shift votes back to itself for the duration of the vote.
Some food for thought…