Hello Tezos community!
At P2P.ORG we’ve been involved with Tezos since the early days and I’d like to share the respect to everyone in the community who actively participates in discussions and thinks towards Tezos improvement.
The purpose of this post is to share our perspective on Adaptive Issuance [AI] and its potential influence on baker, delegator, staker economics and collect more feedback from bakers and delegators.
We’ve made a public Oxford AI spreadsheet so you can get a grasp of the numbers in different scenarios. Feel free to make a copy and play with it, if you will find any critical issues with the calcs, let me know.
Thoughts:
After AI activation, delegators will start earning less rewards than stakers. Initially, it will lead to delegators transitioning to the staker role raising amount of XTZ locked → lower issuance (current amount of staked XTZ is ~7%).
After staked % doubles and grows further, baker economics will be under pressure as fee gains will decrease along with AI. It becomes crucial in current market conditions. AI activation can take ~4-6 month (fixes in the next proposal + separate activation) but we can’t properly forecast the timeline for better market environment. It’s important to ensure stability in this period.
At 30% of staked XTZ APR will be ~0.66% for delegators and ~1.32% for stakers. It will cause bakers who operate as a business to raise the fee in order to remain profitable decreasing rewards of delegators and stakers even further. At high staked ratio they might raise fees up to 50-70% to maintain a profitability breakeven point assuming current XTZ price of ~0.7 (lower selling pressure won’t cause XTZ price to skyrocket x times).
Possible outcome: Some delegators can leave the ecosystem while some bakers can shut down their operations.
In order to be a baker you need to provide a slashable self-bond that can be considered as an opportunity cost versus alternatives like simple ETH staking. Even assuming that ETH APR will decrease over time, self-bond reward rate (RR) that is comprised of earned rewards + fees from delegated and staked XTZ should ideally be higher to justify running a bakery. In Oxford it’s hardly achieved at staked XTZ of >40% and might be even harder for smaller bakeries.
Possible outcome: Bakers can withdraw self-bond and deploy funds to more fruitful sources of income.
There are clear benefits of AI that were emphasized by @murbard pretty well so I won’t repeat those again. All of the above are just thoughts as in the end it’s very hard to predict the exact behavior of participants and network parameters.
We encourage bakers and delegators to calculate and share their perspective on economics under various AI conditions. We might need to fine tune AI parameters based on the feedback to ensure lower pressure on baker economics in the days of uncertainty.
