Strategic Tokenomics Upgrade – Transitioning Tezos to a Deflationary Model

Philosophy and Economics
1

Hi everyone,

While Tezos delivers top-tier tech, a liquid proof-of-stake design, and advanced rollups (like Etherlink), our economic model remains strictly inflationary. In the current market, the lack of programmatic deflation limits XTZ’s competitiveness and long-term price stability.

Before we dive into technicalities, let’s address the fundamental reality of Web3: Without strong tokenomics, we cannot attract or retain liquidity. And without liquidity, developers will eventually abandon our ecosystem for other blockchains, no matter how superior or advanced our Rollup technology is. Technology and token value must grow together; one cannot survive without the other.

Relying solely on L1 transaction fees is mathematically insufficient to offset our ~42M XTZ annual inflation. To bridge this gap without hurting network security or altering the basic rewards for L1 bakers, I would like to propose a discussion around three actionable deflationary mechanics with estimated annual burn potentials:

  1. 100% Fee Burn on Layer 2 (Etherlink & Smart Rollups)
    • The Concept: Adopt an Ethereum EIP-1559 style model specifically for our L2 ecosystem.
    • The Mechanism: 100% of all transaction and execution fees generated inside Etherlink and future Smart Rollups should be permanently burned.
    • Estimated Impact: Assuming a moderate target of 500k daily L2 transactions with an average fee of 0.01 XTZ, this could organically remove ~1,800,000 XTZ per year without cutting into L1 bakers’ yields.

  2. Storage and State Space Burn Model (NEAR / Celestia Style)
    • The Concept: Since Tezos L1 currently does not suffer from high congestion or gas wars, a priority fee model is not practical for us right now. Instead, we should look at a Storage Burn model.
    • The Mechanism: Currently, users pay an XTZ fee for allocating new storage on the blockchain (Storage Limit). We should optimize the protocol to ensure that 100% of the XTZ spent on state/storage allocation is permanently burned every time a new smart contract is deployed or a new wallet is initialized.
    • Estimated Impact: Based on current on-chain smart contract activity, converting 100% of state allocation costs into a permanent burn would easily eliminate ~200,000 to 400,000 XTZ per year.

  3. Tezos Foundation Baking Reward Burn
    • The Concept: Reduce the continuous supply dilution caused by the Foundation’s own baking operations.
    • The Mechanism: Implement a protocol rule to automatically burn or permanently lock 100% of the baking rewards generated by the Foundation’s official treasury addresses (which hold around 100M-120M XTZ).
    • Estimated Impact: At the current floating staking yield of ~8%, this single upgrade would immediately prevent ~8,000,000 to 9,600,000 XTZ per year from diluting the market, acting as a massive deflationary anchor.

Conclusion
Combined, these three pragmatic upgrades can burn roughly 11,000,000 XTZ annually. This would effectively slash our network’s annual inflation by over 26%, sending a powerful signal to the market that Tezos is modernizing its token economics to support long-term value.

I would love to hear from core developers, bakers, and the Foundation:

  1. Which of these approaches is most technically feasible for the upcoming protocol proposals?
  2. Can we initiate an off-chain community poll here on Agora to gauge broad ecosystem sentiment before drafting a TZIP?

Looking forward to your feedback!

1 Like
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You kinda have some quite outdated data since 42M XTZ annual emission is very old news

I want to support number one (full or partial fee burn) as it is also mitigates some esoteric economic attacks/manipulations possible by validators, based on the fact that they always receive back 100% of fees in the block they bake (assuming they do not miss a block) combined with their ability to censor or reorder transactions. Partial or full fee burn disincentivizes most of them and makes risky the rest. What exactly those are, I, Grimoire Weiss, won’t tell you, (if EIP-1559 proposers didn’t do it and just generalized, who am I to reveal this mystery - though one can always can ask Claude, who knows). So I do see only pros and no cons in it.

As for number two, we do burn 100% of storage fees already. So it already works, if I’m not missing anything. It is just very cheap so does not move the needle much. Though I’m all in to make it more expensive and burn more

3 is too controversial and not happening, forget about that dear sir. Even though I’m a big burn maxi, I would vote against it. If they burn voluntarily, fine, but it should not be enforced by protocol. The next you gonna burn me, Grimoire Weiss, who one day may have even more tez than foudation

2 Likes
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To clarify your assumptions for 1)

Execution gas fees on Etherlink are already burned [docs]

you can see the tez burnt in each transaction on the block explorer eg Etherlink transaction 0xa9e6fd4ee70347d9cb75627a8a00b10e88c5e28c361c7c9a7db5d927aa8db3db | Blockscout

Data inclusion fees (also a component of an Etherlink transaction) are used to cover gas fees for including info about the Etherlink transactions on L1 and are paid to bakers - you can see this as “smart rollup add messages” operationss in tzkt in each L1 block eg Block 13563569 on tzkt.io

Your transaction assumptions for Etherlink volumes are also a little on the high side - 0.0015 xtz average fee per transaction and between 100k-200k / day.

1 Like
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I would love for Tezos to be deflationary, but I do also love the yields as a baker (which is important to keep people securing the network while receiving a reward for it).

My thoughts on this are:

There are 3 ways I can think of to make it deflationary on a protocol level.

  • By minting less XTZ (which is static)
  • By burning more gas/storage fees (which is dynamic, based on usage)
  • By doing both

The baker yields are instant rewards which is nice in the short term, but bad in the long run if not being offset with enough burned XTZ.

Inflation could be dynamic based on a percentage of the amount of gas/storage fees per block or cycle, while the gas fees are being burned as a whole as well as storage fees. This way bakers receive more if the usage of the chain increases. If the percentage of newly minted XTZ is always less than the amount of fees being burned, then it will not be inflationary in general.

Or just receive a percentage of gas/storage fees directly and burn the rest to make it simple.

If the amount of possible transactions per second increases, then the maximum amount of rewards for bakers could also increase while not making transactions more expensive.

Also, in my opinion, bakers should be penalized or not receiving full rewards if not participating in voting.

These are just some general raw ideas, but I’m happy to hear if there are better ways.