The upcoming transition to Celo L2 introduces an opportunity to reevaluate the network’s tokenomics for the mutual benefit of all stakeholders. As we adapt to a new architecture that leverages Ethereum for base security, it’s essential to realign incentives, rewards, and resource allocation to ensure the long-term sustainability and efficiency of the ecosystem.
This proposal aims to provide an overview of the adjustments to Celo’s tokenomics and invite community feedback. These adjustments are designed to reflect the L2 architecture’s unique demands while preserving the network’s commitment to sustainability, decentralization, and economic resilience.
The Celo Halvening
One of the most significant changes in the proposed tokenomics is the halving of Celo’s inflation rate, a decision that will fundamentally reshape the network’s economic landscape. This “Great Celo Halvening” will reduce the inflation rate from the current 2% to around 1%, effectively slowing the creation of new tokens and the selling pressure that comes from such inflation. This reduction aligns with Celo’s hard cap of 1 billion CELO tokens and reflects the network’s commitment to a sustainable, long-term strategy.
Overview of Key Tokenomics Adjustments
Reward Realignment:
Staking Rewards: Staking rewards will continue to incentivize CELO holders to participate in governance and elect reliable node operators. The proposed staking reward rate is approximately 1.8-2%, with the exact number depending on factors such as the price of CELO and total staking participation. This represents a reduction from the current rate of around 3.77%. This rate balances the need for governance participation with the goal of reducing long-term token inflation.
Validator Community RPC Provider Rewards: Validators transitioning to running community RPC nodes will receive an annual reward of 30K cUSD (previously 58K cUSD) to maintain high performance and uptime. For more details on this structure, please refer to the validator engagement proposal.
Inflation Reduction: To promote sustainability and address long-term concerns about token supply, adjustments to rewards and ecosystem contributions are designed to lower CELO token inflation. The proposed changes will halve the inflation rate from approximately 2% today to around 1%, aligning with the network’s hard cap of 1 billion tokens and ensuring long-term economic health.
Transaction Fee Allocation: The transition to L2 necessitates changes in how transaction fees are allocated. Currently, 80% of transaction base fees are burned, and 20% are directed to the carbon offset fund. Under the proposed L2 tokenomics:
10% of transaction fees will continue to support the carbon offset fund, maintaining Celo’s environmental commitment. With the current spending levels, the network was achieving offsets approximately 43x over its emissions, allowing this adjustment to reallocate resources toward operational needs while still maintaining a very robust offset strategy.
90% of transaction fees will be directed toward funding key network operations, including:
Data Availability
Layer 1 Fees
Sequencer and Batcher Operations, which may be outsourced from cLabs in the future
This new fee allocation balances the network’s sustainability goals with its operational requirements in the L2 environment.
Carbon Offset Fund Adjustment: The carbon offset fund has consistently reported a surplus, offsetting emissions by approximately 43x the network’s carbon footprint. Given the anticipated reduction in the network’s carbon footprint due to the L2 upgrade, contributions to the carbon offset fund will be reduced by 50%. This adjustment ensures that Celo continues to be carbon-negative and maintains its commitment to sustainability.
Rationale for Changes
The L2 transition shifts much of the network’s operational and security responsibilities, requiring a tokenomics model that accounts for:
Reduced Validator Security Role: As Ethereum provides base security, validator rewards should shift to reflect their new roles in the network.
Operational Sustainability: Supporting essential infrastructure such as sequencers, data availability, and L1 fees requires reallocation of network resources.
Inflation Management: Lowering inflation aligns with the hard cap on CELO supply, ensuring long-term economic stability.
Environmental Leadership: Adjustments to the carbon offset fund reflect a smaller environmental footprint while maintaining strong sustainability commitments.
Next Steps
These tokenomics changes are a path to align with the L2 architecture and support the network’s growth. As always, we value the community’s input and encourage robust discussion around these adjustments.
Great proposal! Halvening is a strong step toward economic stability.
Regarding the Carbon Offset, the reported 43x over-offsetting suggests that block rewards might exceed what’s needed.
Instead of a fixed 10% allocation, stakers or fee payers could choose whether to allocate or not — and if so, direct their contributions to specific carbon projects or other sustainability initiatives. This would make the system more efficient, ensuring resources flow to where they’re most valued.
I don’t think this is the path to improved tokenomics. 3.77% is not exactly a high figure; I don’t see how lowering it should be a priority. Celo needs to focus on demonstrating that it can generate a significant amount of revenue; if you’re gonna change the chain’s tokenomics, that should be your focus. Celo needs to be run more like a business, the way Base, Bnb, and tron are. We have the most user friendly products in the industry, but our failure to address the business side of things is limiting our progress immensely.
I agree also with keeping the 10% allocation for Ultragreen Money but would push strongly to open it up from just carbon credits to the purchase of onchain environmental assets such as ecological hypercerts (starting to being discussed in Ultragreen Money Update (December 2024) - #3 by ddd)
I think by focusing on this, we can additionally drive onchain development regen activities towards the Celo network - strengthening Celo’s mission and commitment.
I generally support reducing the faucets (staking rewards and inflation) but I’d prefer to see a sink mechanism (token burn) remain in place, even if the sink rate is relatively low compared to the faucet rate.
If DA, L1, Sequencer Ops, and revenue sharing will all require selling CELO for EIGEN/ETH/OP/USD then CELO demand is going to become highly dependent on speculators for price support, which not a reliable long-term source of demand.
Celo currently has extremely low cost gas fees relative to other chains and we should aim to maintain and even improve that metric over time. So any burn mechanism should be calibrated based on the cost of using the network, with the goal of keeping costs down.
Are there any other sinks we could evaluate?
demurrage on unspent CELO
burning instead of staking CELO for governance votes
dynamic tokenomics that adjusts inflation and burn rates based on CELO/USD price
From a user perspective, the goal must remain to give as many people access to the entire Ethereum world including the “superchain” as possible. For this, transaction fees have to remain as low as possible which will only be possible, if CELO remains stable against ETH and if most of the transaction fees are actually used to cover operational costs.
Thank you @marek for this update. It is brief and sparks the discussion on key topics such as decentralization, security, and environmental commitment.
We have a couple of questions, we would appreciate they could be taken either by your or by other community member.
Staking rewards. How will this change affect validators and delegators? Was this decision co-decided with them or was it based on specific data that led to keeping all players engaged?
Infation reduction. Will the inflation decision impact the network security and decentralization due to the reduced incentives?
Transaction fee allocation. It is great to know that Celo has achieved a carbon negative status by 43x. Have there been any discussions about diversifying the carbon offset fund to tackle other environmental issues? through for example projects within the Celo ecosystem that are able to offer impact certificates?
Revenue utilization. What is the projected effects that funding network operations will have? for example on maintaining transaction fees, or in onboarding users?
Could you please explain to us why reducing the inflation rate from the current 2% to around 1% is the optimal solution? I mean , how did you decided that the 1% number is the optimal one?
Why not reducing from 2% to 0.7% ? If your selected 1% number is pure chance, your plan is not good. You change the tokenomics of Celo based on your own interests and/or feelings, rather than based on a mathematical proof, and this is bad.
It is not only you around, so if you cannot mathematicaly prove that 1% is the optimal number, then you should better ask the rest Celo community members what number do they think is the more suitable to them.
