Transcription
[Music] Hello everybody. Again, in this talk, we're going to look at the tokenomics of the Internet Computer blockchain. So, let's start by looking at how the network maintains value.
The Internet Computer actually has two native tokens: ICP and Cycles. ICP is the network's master governance utility token, and it can be used to participate in governance and is the source of Cycles. Cycles, meanwhile, power computation in the role of fuel. They also have a constant value over the long term, which contrasts with ICP, whose value will naturally vary over time.
But how many of these tokens will exist at genesis? Well, there will be 469,213,710 ICP, with about 32% circulating and liquid. There won't be any Cycles because you need ICP to create them, and they won't be available until genesis.
Since ICP is so important, our first question must be: how is new ICP created? The network Nervous System mints new ICP tokens to reward different roles that those supporting the network can play. It grants rewards to those running voting neurons in the form of voting rewards, and to those operating correctly functioning node machines in the form of node rewards.
Rewards are calculated differently every day. A fixed neuron's reward is shared amongst the neurons in proportion to their relative claims on an annualized basis. The neuron reward starts at 10% of the ICP supply, then falls over eight years to 5%. By contrast, correctly functioning node machines receive cash-equivalent payments. That is, some monthly reward defined in cash terms is simply divided by the ICP price to determine how many should be dispersed. This is because node operators have relatively fixed recurring costs, composed of hosting costs, equipment depreciation, and so on.
Now, if the supply of ICP only grew, this would be bad for their value in the long term. So, what makes ICP tokens disappear? ICP are consumed and disappear when they are converted into Cycles by the Network Nervous System, which converts them at a floating rate such that ICP worth exactly one SDR (which is a logical currency unit created by the International Monetary Fund) becomes exactly one trillion Cycles.
The next question you probably have is: what will generate demand for ICP? There are several aspects of the network that play this role. Firstly, computation generates demand for ICP. To understand why, you need to know that canister smart contracts must be pre-charged with Cycles, which they use to fuel their computation, for example, when they are interacting with users over the web. This means that people who wish to run canister smart contracts must indirectly acquire ICP first.
Of all, somebody must buy ICP, which might happen on an exchange. Then, they must use the Network Nervous System to convert those ICP into Cycles. Finally, they can charge their canisters with Cycles, which will burn them, powering computation. This creates a relatively predictable driver of demand. The more computation that is being performed on the network, the higher the demand for ICP.
What else generates demand? Well, decentralized financial systems also drive demand. To understand why, it's important to know that decentralized financial systems need tokens with constant value to be maximally effective. For example, if someone borrowed ICP and its value doubled, then they would have to return more than twice what they were lent, which is no good.
Currency plays three key roles: unit of account, medium of exchange, and store of value. The Nobel Prize-winning economist Friedrich Hayek wrote a famous book called "The Denationalisation of Money," in which he argued that the most effective currencies would be the most stable, since that would enable them to perform the first two roles best.
Now, as you know, Cycles are designed to have a constant value over the long term. One trillion Cycles can always be acquired for one SDR, a logical currency created by the IMF from a basket of one Euro, Japanese Yen, UK Pound, and US Dollar fiat currencies. That's about one dollar and 44 cents. Cycles always return to their constant maximum value over time because of the computation being performed on the Internet Computer network.
For example, imagine that a financier dumps surplus Cycles he owns, causing their price to fall, say, from one SDR to 0.96 of an SDR. Well, at that moment, nobody will use the Network Nervous System to convert ICP into Cycles anymore, since the surplus Cycles are cheaper. That means that the surplus Cycles will be purchased by those that need to fuel their smart contract computations on the Internet Computer, and that eventually all the surplus Cycles will be burned, such that the price of Cycles returns to one trillion for one SDR. This is the first time that blockchain has used computation to create tokens with constant value. What's amazing is that as the quantity of computation being performed on the Internet Computer increases, its power to restore the price of Cycles to their usual value will also increase.
DeFi smart contracts need to process stable tokens, such as Cycles, to be maximally effective. That means that the more DeFi that is being performed on the Internet Computer, the higher the demand for ICP. But of course, that's not all. The practice of neuron staking will also create demand for ICP. Simply put, by staking ICP inside the Network Nervous System, users can earn voting rewards in exchange for making their ICP non-transferable for a while. As general confidence in ICP increases, so will more people wish to stake ICP within the Network Nervous System in order to earn voting rewards.
Okay, that's it. Thanks for listening, folks.
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