[FINAL] Validators rewards - change in epoch parameters

Governance
11

Hello everyone,

As I’m not able to edit the first post, here’s the final proposal that will be submitted for a governance vote:

Overview

This proposal seeks support to change the epoch parameters in Celo. The reason is that the validator rewards have gone down by 56%, the annual rewards are close to $33k and it continues to further go down.

The situation is not sustainable. Many of the small independent validators are coming from the Baklava Stake Off organised in 2019. The hardware requirement has more than quadrupled, all the business operation costs have gone up and maintaining a secured 24/7 operation in a high inflationary environment with regulation uncertainty is a challenge for many of us.

Background Information

The chain was launched with 600m Celo at genesis in April 2020. The remaining 400m were reserved for epoch rewards. These epoch rewards are currently going to voting rewards, validator rewards, community fund and carbon offset fund.

If we look at the circulating supply, we have a total of 690m Celo so that means that the chain has created new 90m Celo since genesis. This means our annual inflation rate has been less than 3.6% and current network inflation rate is 2.09%. There are about 40k new Celo minted daily. By looking at the code, there was supposed to be a linear reward of 200m over 15 years so that’s about 36.5k Celo per epoch and 13.3m Celo per year.

As per the initial token release schedule, the community fund would have received 171m Celo over the span of 30 years. There was an assumption that if there are low voting rewards then people would not lock their Celo and this could be a security risk but reality is that people have been rather insensitive to the voting rewards and very few people know the current rewards. The community fund is set to receive a total of an extra 120m Celo from the Mento reserve.

Proposed Changes

This proposal is to revert back and freeze the reward multiplier to its previous value two years ago. The following changes will be implemented:

  • Validators Celo Epoch rewards will be adjusted from the initial $75k to $58.5k (0.78*$75k) and the reward multiplier will be freeze and brought back to 1. This will stabilize validators rewards around $58.5k
  • To account for the total of 120m Celo being transferred from Mento, this proposal will significantly cut down the emissions to the community fund
  • We will freeze the emission to locked voting Celo. This will have the advantage of maintaining consistent yield and prevent further decreased that has occurred in the past for the locked voting Celo

Edit: We’ve received feedback from one of the approvers that the yield could decrease by 9%. The 3.7% is the current overall staking yield on locked Celo but this is an average that’s affected by all validators scores. At present, a validator with a perfect 100% score has a compounding yield of 4.13%. With this change, his yield will decrease to about 3.77% but it will also cease to decrease further over time.
The formula for calculating 4.13% is (1+ (0.000252*0.441))^365 == 1.04139475603
The formula for 3.77% is (1+0.0001015*1)^365 == 1.0377

Verification

This command shows the proposal:
celocli governance:show --proposalID 178 --node https://forno.celo.org

Risks

The contract change is regarded as low risk as this proposal only changes the value of the different parameters without changing the underlying logic. The stability and safety of these changes have been confirmed on testnet.

This proposal aims to complement the Retroactive Validator Rewards Program that was put forward shortly afterwards. As a result, the reward multiplier has been deliberately kept below 1 to maintain balance during this transitional phase.

This proposal serves as a temporary measure to provide relief to the validator community. However, it is crucial that we engage in a broader and more comprehensive discussion concerning the reward and incentive structures affecting all stakeholders (Validators, Celo holders and even stablecoin holders). This discussion is especially pertinent as we prepare for the transition to Layer 2, which may necessitate a reevaluation of our overall tokenomics to ensure long-term sustainability for the protocol economics.

Useful Links

Multiple discussions have been held around this topic over the course of 4 years:

@Thylacine @Patrick @Dee

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