Overview
The economic model for DoubleZero rewards has two potential vulnerabilities: the inorganic traffic problem and the over-concentration problem. With respect to the former, network contributors are potentially incentivized to send inorganic traffic over lines they operate, to earn an outsized share of the rewards. With respect to the latter, the token supply may concentrate in the relatively small set of network contributors over time, given their abilities to earn continuous rewards once bearing fixed costs.
Both of these threaten the integrity of the network, in different ways. The former threatens the short-term economic integrity of the network, with network traffic and rewards that do not correspond to organic communication needs. The latter threatens the long-term community integrity of the network, with a small set of actors who have outsized governance power and shape the DoubleZero network in ways that favor them.
Fortunately, both of these problems can be stemmed if a certain proportion of the rewards are burned. This restores the integrity of the DoubleZero network, on both dimensions.
Proposal
We propose burning rewards at a rate that is needed to support these two forms of integrity. More specifically, we propose that the burn rate be the greater of two independent floors: one that supports economic security (i.e. fights the inorganic traffic problem), and one that supports community alignment (i.e. fights the over-concentration problem). The community floor will be a smooth function that starts at 10% and asymptotes to 50%; while the economic floor will be a noisier function that depends on the particular network contours of that epoch.
A stylized diagram of the burn rate across time is presented below, with a community floor (blue), an economic floor (red), and a burn rate (black) as the maximum of those two at any point in time. Note that this figure is for illustrative purposes only, and the exact shape of the community floor with respect to time is to be determined.
Economic Security
Burning tokens protects the economic integrity of the protocol, by disincentivizing network contributors from sending inorganic traffic over their lines. Since there is a disconnect over the economic properties of distance in DoubleZero (wherein distance traveled does not factor into user payments, but it does factor in contributor rewards), network contributors could potentially send artificial traffic over long lines they control to earn an outsized share of rewards. Burning a percentage of those reward tokens disincentives that.
This rate can be computed through the methodology outlined in Dissuading Inorganic Traffic, and gives the first of two floors. It is important to remember that this floor is unpredictable in advance and only knowable at the epoch’s conclusion. This is because the optimal rate is calculated at the conclusion of each epoch, and it is a function of the traffic patterns and network topology in that particular epoch.
Community Alignment
Burning tokens also allows for more balanced community representation in DoubleZero, as otherwise the system risks being imbalanced. In particular, there will almost certainly be a small set of network contributors who both can muster the capital and technical resources to contribute to DoubleZero and who generate much of the value in the system. Without burning, they would grow to have outsized governance power over time.
Burning tokens — and especially when balanced by inflating tokens, as discussed in Inflation and Network Security — offsets that dynamic. It gives room for non-contributors and especially stakers to stay relevant in the DoubleZero community. This floor, unlike the economic floor, is knowable in advance as it is merely a function of time.
Balancing Short-Term Efficiency
There is one downside of burning rewards, which is that they serve as a wedge on network contributors’ profit margins. This is intended in the long run, but this is problematic in the short run, when contributors are incurring most of the fixed costs and the network is finding its footing with new customers.
This is the rationale for the gradual curvature of the community floor, which starts small and only eventually reaches 50%. Moreover, in the short run, the network is fairly robust against inorganic traffic attacks, because DoubleZero’s first target market is the Solana validator set. As such, all organic traffic patterns between validators are effectively certified by the Solana blockchain, and so a network contributor has to run a profitable and well-staked validator to “attack” the system.
This gives breathing room for network contributors to finance operations and for users to onboard to the system. Over the long run, the community floor rises as time passes and the economic floor likely rises as more peripheral actors to the blockchain are brought onto the network.
Further Reading
Please see the document below for methodological details on calculating the economic security floor:
