Long-term incentives and Celo's deflationary model

The documentation states that CELO’s total supply is capped:

A total of 400 million CELO will be released for epoch rewards over time. […] It has a fixed total supply and in the long term will exhibit deflationary characteristics like Bitcoin.

If that is the case, the question arises how block producers are being incentivized long-term, especially since EIP1559 is implemented which burns the transaction fees.
Will minting CELO completely stop or will minting stay below threshold newlyMinted ≤ burnedCELO ?

Hello and thanks for the post!

Wanted to add some clarification, we have a gas pricing inspired by EIP1559, but AFIAK, the network doesn’t burn CELO for transactions fees. More here on how gas price is calculated.

Even if miners get paid some transaction fees, there is a strong risk of reorgs due to fees and MEV. How would the Celo protocol prevent that?

Paper: “On the Instability of Bitcoin Without the Block Reward”

To quote zviad from discord:

CELO distribution curve is quite long. That is at least 20-30+ years out in the future. Most likely even within 10 years, bunch of things will change wrt to validator payments.

There are many ways validators can get paid without CELO inflation:
→ They can get paid from the reserve. assuming network is successful, reserve will be expansionary so it will have funds to spend.
→ They can get paid by directly extracting MEV from the network. Once/if network gets more traffic, there can be more ways to extract fees from transactions other than just direct gas fees. For example: Priority transaction ordering and placement can have a cost which can fund all the validators. (If you are familiar with flashbots on Ethereum, that would be something similar).
→ There are also many otherwise that can show up in the future. Once network is actually doing useful amount of work, it will be fairly easy to find a way to extract fees to pay to the validators to secure the network. And it is more likely that validator pay will increase in future as network gets larger and starts securing more overall total capital.

and also Tim:

Also - Validators and Validator Group rewards are made in cUSD, so if the price of CELO goes up, the CELO set aside for that purpose lasts longer. The bigger question (and bigger budget) is rewards for voters who lock their CELO – over time, this may be addressed by a proof of stake system that can scale to more validators and is less dependent on offering high yield for locking up funds.