Sure @peterdowns , I’ll do my best, there is a lot happening here that is connected. (For simplicity I’m going to ignore the presence of the community fund). BTW, for every 1 cUSD paid to validators, there is 1 cUSD worth of CELO minted that goes to the reserve. So even though it’s cUSD, it contributes to CELO emissions. @albertw please correct me if I’m mistaken here.
1. Validator incentives
The idea of the validator rewards is to ensure the protocol always has an effective set of validators - at a reasonable cost to the platform.
Right now, a simple approach is being taken whereby the platform estimates this price point to be around 75k cUSD.
- This is just a reasonable number that was picked, but it certainly isn’t derived from a market process
- Even this strategy isn’t exactly being implemented because RewardsMultiplier is reducing what is being paid.
2. Locked Celo Rewards:
The idea here, as I understand, is to encourage locking of Celo as this adds stability to the reserve (there is a time delay of 3 days to unlock) in a downmarket. Ideally the platform would maintain a high percentage of locked Celo - again, at reasonable cost to the protocol.
As I understand, the initial rewards were set to target a return of 5-6%.
- Again, this is just a reasonable number that was picked. It’s not derived from a market process.
- The target percentage is affected by RewardsMultiplier.
Note that there is an upcoming governance proposal that will make the locked celo rewards market-based such that it adapts to achieve a locked Celo percentage of 60% (the most likely proposal as I write this).
3. Celo Emissions Schedule:
Now we hit an over-constraint, which is the Celo emissions schedule… It’s not possible to define strategies for validator and locked celo rewards while also sticking to a target emissions schedule.
Right now, what happens is that - whatever the validator rewards algorithm proposes and whatever the locked celo rewards algorithm proposes - the RewardsMultiplier pares that back (or juices it up - although that hasn’t happened yet) so that the protocol is dragged back towards the target emissions schedule.
The Celo emissions schedule is current fixed, so it’s a zero sum game. If we boost up validator rewards then we reduce locked Celo incentives, and vice versa.
As a concrete example, we mathematically can’t:
i) fix validator rewards at 75k cUSD,
ii) dynamically adjust locked-celo rewards to achieve 60% locked, and
iii) stick to the fixed emissions schedule.
We can only do two out of three of these things. In fact, over the long term my preference would be that celo would prioritise the following two things:
i) dynamically adjust validator rewards to maintain certain network performance metrics, and
ii) dynamically adjust locked-celo rewards to achieve 60% locked*.
*as an option, we may want to reward locking and voting, but this is getting too far ahead.
Short Term Fix
If you go back over to the discussion on Celo Epoch rewards, you’ll see that one solution - in the short term - is that we just bump validator rewards back up to roughly 75k. This will reduce locked Celo rewards, which is probably ok for a short period, but my view is that the protocol needs - in the medium to long term - to appropriately compensate both validators (because they uphold transaction reliability) and locked celo holders (because they are stabilising the reserve).