ENCOINS protocol economics and governance
This blog post presents our finalized proposals on how the protocol economics and governance should work in ENCOINS version 1.0.
We start by reviewing the ENCS tokenomics. ENCS has a fixed supply of 15 million tokens with six decimal digit precision, minted all at once. 10 million are distributed between project supporters as ISPO rewards, 2 million are given to the original development team, and 3 million are sent to the treasury. ENCS can also be burned.
Below we present two proposals written by the ENCOINS team: on the protocol parameters and treasury management. The plan is to have an official vote on these proposals once the DAO is operational.
ENCS Relay Stake threshold
Motivation: This parameter governs the quantity of ENCS a relay server must have to appear on the Relayers list. Though a relay server has no control over users’ funds, it could process users’ requests incorrectly, resulting in users’ inability to interact with the protocol. This is why we must keep the relay list curated, which is achieved by demanding an ENCS stake.
Implementation: These ENCS tokens do not leave the relayer’s wallet. Instead, any wallet can delegate its ENCS tokens to a specific server by posting a delegation transaction (requires 2 ADA). The server is added to the list when the total stake behind a relay server is greater than the ENCS Relay Stake threshold. We suggest setting the threshold at 100 000 ENCS.
Motivation: Protocol fees serve two purposes:
- These are the primary way to pay for the relayers’ infrastructure.
- It is used to support the future development of the protocol as ADA staking rewards decline.
Implementation: In the following, a withdrawal transaction is any transaction that decreases the TVL in the protocol. Consequently, a deposit transaction is any other ENCOINS transaction. We also distinguish between Wallet Mode, where transactions are signed by the user’s wallet, and Ledger Mode, where transactions are signed by the relayer and include ENCOINS Ledger on-chain script. Finally, let W be the withdrawal amount, i.e., the amount of ADA by which the TVL is decreased in the withdrawal transactions. We suggest the following values for the protocol fees:
- A deposit transaction in Wallet Mode has no protocol fees.
- A withdrawal transaction in Wallet Mode pays a fee of max(3 ADA, 1% of W) split equally between the relayer and the treasury.
- A deposit transaction in Ledger Mode pays 2 ADA to the relayer.
- A withdrawal transaction in Ledger Mode pays a fee of max(4 ADA, 1% of W) split equally between the relayer and the treasury.
Motivation: As users mint encoins, they stake an equivalent amount of ADA in the staking script. Cardano ledger can pay staking rewards even on ADA locked in Plutus scripts. However, in the case of the ENCOINS protocol, a naive way of distributing staking rewards would destroy users’ privacy. A proper reward distribution would involve zero-knowledge proofs of ownership of a particular ADA value (held in encoins) over a specific time interval. Before such a scheme is implemented, we need a more straightforward solution to help the protocol grow in short to medium term.
Implementation: Staking fees will be sent to the project’s treasury.
Treasury management and governance
Motivation: ENCOINS is a decentralized protocol governed by a DAO. ENCOINS DAO will be based on Liqwid’s Agora on-chain governance script. The DAO will be set up shortly after the token distribution. In the meantime, the project’s treasury will be secured by a multi-sig. The treasury will initially contain 3m ENCS. Additionally, the DAO will accumulate protocol fees in ADA. We should decide on the distribution of these funds. At this point in the project’s lifecycle, we suggest spending most of the available funds on further development and protocol security.
- Up to 500k ENCS can be spent on protocol audits.
- 500k ENCS is directed to the bug bounty program.
- 500k ENCS is held at the treasury as an additional reserve.
- The team will receive 66.6% of ADA collected by the treasury and 25k ENCS per epoch (maximum of 1.5m ENCS).
- The other 33.3% of the collected ADA will be kept in the treasury as a reserve for future spending.
Points 4 and 5 above are active until the end of the active development period, until the development team change, or until it is voted otherwise.
As always, we appreciate your support. Stay tuned for more news!