Analysis of the impact of i_rep reduction on the capacity of P-Reps to save 5% of total delegation to pay the IISS 3.0 bond

DISCLAIMER: This forum post is not intended as a critique on the recent lowering of the i_rep. This is an analysis done by the P-Rep teams Espanicon and Transcranial Solutions to evaluate the impact of lowering the i_rep on the capacity of the P-Rep teams (mainly subs P-Rep since B1 rewards are not taking into account) to place the 5% bond that will be required once IISS 3.0 is implemented.

Introduction

IISS 3.0 is the latest update of ICON Incentives Scoring System. The proposal was presented on March 11th and later approved via on-chain vote with a 100% approval of the main P-Rep.

IISS 3.0 introduces many important and positive changes into the overall governance of the ICON Project. One of them is the introduction of a 5% of total delegation bond (6% at the time) to be placed by all the teams as a way to have “skin in the game”.

The details of the discussions regarding IISS 3.0 can be seen in this forum thread. Overall, the vast majority of the teams were in approval of the changes proposed in IISS 3.0.

During the discussions of the IISS 3.0 proposal, the economic structure of the reward system for the P-Reps was different from what we have right now, by that time the i_rep (value used to calculate the rewards of the node) was around 40,000.

Last week a guide titled “Path to Sustainable Economics: P-Rep Commission Rateswas published by the ICON Foundation as an analysis of our current economic state and a guide to improve the ICON Network overall. This guide was received very positively by ICONists and the majority of the P-Reps, and immediate changes were made by the top 22 P-Rep teams lowering the i_rep value from around 40,000 to 18,000 in the span of 15 days. The following chart shows the i_rep values since October of 2019 until June 2020.

The following charts represent the “saving” capacity of the teams to be able to place a bond with 5% of the total delegation with the i_rep historical data until June 6th and projecting from there with the 14,000 i_rep target set by the guide presented by the ICON Foundation.

The first chart shows the cumulative earnings saved according to the values in table 1 for a period of 6 months since January 1th 2020.

date node started earning rewards 1/1/2020
avg % savings since start 75%
date IISS 3.0 was proposed 03/11/2020
avg % savings since IISS 3.0 was proposed 90%

Table 1.

As shown in the table for the case of a team that saved 75% of their earnings since the beginning of their operations and increased their savings to 90% after IISS 3.0 was proposed, even after 6 months the 5% of node delegation bond was not achieved with the rewards of the node.

For accuracy, the last calculated value was compared with the official calculator in the icon.community website and we got a 4.4% error which was taken into account in the chart.

The following chart is a linear projection for the hypothetical case of the value of i_rep staying at a value of 14k, as we can see even after 1 year of saving 100% of the rewards the 5% bond was not achieved.

For this case since it is not possible to predict how other variables like total delegation are going to change we added a 15% error margin to the chart.

Conclusion

Lowering the i_rep is a positive change for the overall economic structure of the ICON Network as also is the bond requirement that will be implemented with IISS 3.0.

Given that the idea behind the bond requirement is to show that P-Reps have “skin in the game”, assigning the percentage of the bond to the total vote allocation of each P-Rep appears to be detrimental to the success of any team. This is because the amount of votes delegated to each team is irrelevant - the important factor is the actual annual return each team will get depending on the total delegation and the i_rep (commision rate).

The results indicate that it takes more than 6 months of aggressive savings for the current P-Reps to ‘break-even’, without considering other expenses including P-Rep registration fee (2000 ICX), server/infrastructure cost, and other business-related costs. With 14k i_rep, it takes approximately 600 days based on our model, provided that total delegation stays the same.

Based on this, we would like to propose that the bond be represented as a percentage of the annual earnings of the nodes instead of the total delegation. This will serve various purposes:

  • It will represent more effectively the relationship between the earnings of a node with the amount of bond required
  • It will allow all the teams to budget their operations more effectively
  • It will discourage teams to raise the commission rate since increasing the commission rate will increase the required bond

We recommend for the bond to be a maximum of 25% of the annual earnings. Why 25%? Using 25% as the value would mean that any team will take approximately 4 months (instead of more than 7 months) to earn enough rewards to be able to place the bond which is a more reasonable timeframe. This is in our opinion a reasonable amount that will allow teams to save enough rewards to be able to place the bond before the implementation of the IISS 3.0 while still showing “skin in the game”.

In the following google sheet, you can see the data used to make the charts and how the calculations were done, also you can modify the green cells to evaluate different conditions:

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Really interesting write up! Something that’s been on my mind a bit too. We all agreed to the 5% bond before ICON started the campaign to lower I-Rep. Now bond saving looks too difficult for some (I’m saying this as a team who has saved/not spent most all of our rewards and is close to our bond already).

My initial instincts to address this was to suggest lowering the bond % to a figure closer to 3% than 6% (originally started 6, changed to 5). Maybe at 3 or 4% things seem more practical.

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Thanks for your reply!

The rewards of a node are not only dependant on the delegations to the node, they also depend on the i_rep and the overall total delegations (B2 calculation)

Because of this we believe that a bond tied to a % of annual rewards is a more representative relationship than a bond tied to the delegations to the node.

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Thanks for writing this up, Fidel. Good stuff, as always.

As you pointed out, the economic reward situation for P-Reps was different at the time of voting on the IISS 3.0 proposal than it currently is after the push for P-Reps to lower their P-Rep commission rate (i_rep). This has changed the plan for several teams that are preparing for the implementation of IISS 3.0. I tend to think there are some teams that would appreciate taking another look at the bond requirement now that the P-Rep commission rate has been adjusted.

@Benny_Options - Question for you, if you get a chance.

Since the IISS 3.0 proposal has already gone through a vote and passed, how would submitting an amendment to another team’s (ICX_Station’s) proposal work prior to it being implemented?

Would it be possible for a P-Rep to submit an “amendment proposal”, so to speak, prior to 3.0 being implemented that P-Reps could vote on regarding the bond requirement? The hope here would be that the amendment would be voted on and included in the initial implementation of 3.0.

Or, would an entirely different proposal need to be submitted after the 3.0 implementation since the previous one submitted by ICX Station has already passed?

Just wondering how P-Reps can work to draw up a proposal for an amendment to the bond requirement prior to 3.0 being implemented and how it might work. Thanks for any guidance you may be able to provide around the order in which this would need to be done. Appreciate it. :+1:

In the meantime - If there are P-Reps that are interested in revisiting this and drawing up a new proposal of sorts, we will need to discuss the figures Fidel and his team have provided and identify if any adjustments are needed. If there turns out to be a desire to try to amend the bond requirement, we can proceed and draw up a proposal based on guidance received here to ensure we’re doing it the right way.

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Hey Fidel,

Thank you for putting together such a well-thought out proposal in collaboration with Transcranial Solutions. I have serious respect for this level of analysis and effort.

At first glance, two things come to mind:

1.) I need to think more about what you are saying, but it sounds like your goal is to allow P-Reps to save for a bond requirement over a defined period of time. However, the idea of a bond is not to have validators “mine” ICX in order to get the bond, but to require holding ICX as a pre-requisite to validating blocks / earning P-Rep Commission Fees on our network. Community voted P-Reps that have joined from the start have a significant early adopter advantage since they have been able to earn ICX without actually holding any ICX. In IISS 3.0, you must hold ICX in order to earn ICX.

2.) Could you follow up with a specific formula for the required bond? Despite what I have said in point 1, I am open to hearing what you think would be a more reasonable bond requirement / formula for determining the bond and want to fully understand your proposal.

I understand you are targeting 25% of annual income, but annual income is dependent on your bond in IISS 3.0. I believe this turns into a circular reference but I could be wrong, which is why I am asking for a specific formula. Remember that in IISS 3.0 rewards and ranking are based on “Bonded Delegation”, not on the amount of votes you have. For your reference, Bonded Delegation = My Bond / 0.05, with the cap being your actual delegation.

I also want to take this opportunity to take a step back and explore a different perspective. Let’s look at the point of view of a New P-Rep joining the network in IISS 3.0

New P-Rep:

  • Check how much ICX is needed to be in the top 100 to avoid the P-Rep Commission Rate - “What is the bonded delegation for P-Rep #100? Looks like it’s 100,000 ICX. I have 150,000 ICX so if I self delegate I won’t be paying the P-Rep Commission Rate anymore, awesome!”

  • P-Rep is launched - “Great, my node is deployed and with my self delegation I’m node number 99 and no longer paying the P-Rep Commission Rate, I love earning more ICX! My Bonded Delegation is 150,000 ICX because nobody else voted for me yet, but with 150,000 ICX I could reach up to 3,000,000 ICX in Bonded Delegation (150,000 / 0.05). Hopefully I get some votes and start earning even more ICX without additional investment!”

  • New P-Rep reaches 3,000,000 in delegations - “Oh wow, I just checked and my Bonded Delegation is now 3,000,000 ICX. So many ICONists are supporting me and are giving me extra income this is great!”

  • New P-Rep receives more delegation and thinks about what they could be making - “Oh wow, I now have 5,000,000 ICX in delegations, I’m getting so much support from ICONists! I still only hold 150,000 ICX so my current bonded delegation is still only 3,000,000, but now ICX is more valuable to me because I could be making much more income! I think I’ll buy more ICX ASAP in order to optimize my income, then as I earn more rewards I can always pay myself back. Or maybe I’ll just wait a while and self-delegate my rewards to optimize my income because I don’t want to invest more money into cryptocurrency just yet. Or maybe I’ll apply for a grant/go to the CPF to earn more ICX and use some of it for my bond.”

What I’m trying to show is that it’s a matter of perspective. Rather than focusing on what they should be making, the New P-Rep is excited about what they could be making. A New P-Rep looks at everything beyond their self-delegation as bonus extra income. To conclude, I’d like to again highlight that early adopter P-Reps have a significant advantage in that they are able to earn ICX without having to own any ICX at all.

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@radiofriendly123 - To answer your question, we could simply vote on changes/amendments. The primary thing to keep in mind is that we need to start writing functional specifications and begin development. I would say to target the end of June to iron out any big changes.

Simple changes of percentages (lowering bond requirement or increasing the amount contributed to the CPF for example) are not a big deal and could be changed even after main net implementation relatively easily. But changing something like how the bond requirement is decided (as we are discussing here) should be finalized as soon as possible.

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Hi @Benny_Options thank you for your reply. To start I would first explain the reasoning or idea behind the proposal.

The calculation for “Representative Rewards” according to the yellow paper is as follow (I’m going to change the variables names to explain it better):

B2 = Representative Reward (per block for all the top 100 nodes)
B2' = Representative reward for a specific team
Dn = Delegated amount to a specific team
Dt = total delegation for all teams

B2 = (i_rep × 1/2 ) × 100 × 1/1,296,000
B2' = B2 * (Dn /  Dt)

It can be expressed like this:

B2' = (i_rep * 100 * Dn) / (2 * 1,296,000 * Dt)

This shows that the rewards for a specific team are in direct proportion to the i_rep and the votes to said team (if the votes or the i_rep increases the rewards increase also) and in inverse proportion to the total amount of votes in the network (an increase in the total amount of votes in the network will decrease the rewards for team with a static set of votes this is an assumption for simplicity sake)

The need for a bond is in no discussion, we agree on that, what Im seeing is that as the amount of ICX keeps growing and the total amount of votes keeps growing, the rewards will continue to decrease assuming that the i_rep is kept in a static value, and if the i_rep gets lowered more the rewards will decrease even more.

If the amount of the bond to be placed (to not say “pay” because that ICX still belongs to you) is a percentage of the votes your team has, this means that as more people keep voting (overall in the network), the ability of the teams to use a portion of the rewards to complete the bond will diminish (given that the rate of growth of the total votes placed on the network is higher than the rate of growth of the votes placed on your team)

The idea is to make the bond a percentage of the annual earnings of the node, this in our opinion is a more appropriate relation because it takes into account (implicitly) not only the changes in the votes placed on your node, but also changes in i_rep and total network delegation.

I understand you are targeting 25% of annual income, but annual income is dependent on your bond in IISS 3.0. I believe this turns into a circular reference but I could be wrong, which is why I am asking for a specific formula.

So far my understanding of the IISS 3.0 is that B2 will still exist (maybe I’m wrong on this), I’m assuming that this process will take place:

Votes to team A: 1,000,000 ICX
Bond (5%): 50,000 ICX

Let’s assume that given a set of defined i_rep and total delegation on the network that the earnings for a month to team A is 4,000 ICX.

So far I’m assuming that after calculating the “maximum reward” a team will get (in this case 4000 ICX) if the teams have the complete 50,000 ICX as a bond, they will receive the entire 4000 ICX, if they, for example, have 25,000 ICX as a bond, they will receive 2,000 ICX, I know this is not calculated monthly on chain I’m just giving this example to simplify it a little bit.

In this case, the “maximum reward” team A can get is 4,000 ICX (48,000 ICX per year) so the bond for the case of our proposal will be 25% of that value (12,000 ICX).

If the teams allocate 12,000 ICX they will receive 4,000 ICX per month, if they allocate 6,000 ICX as a bond they will receive 2,000 ICX per month, that’s basically the idea.

So basically in order to not be a circular reference the “theoretical maximum reward” (which is, in this case, the B2) is used as a reference and is calculated previously, since this process is already being use right now (calculating B2 I mean) the only technical difference is projecting that rewards to a year and then calculating the 25% of that, instead of calculating the 5% of the votes the teams has at that moment, for the calculation of the bond.

Now on the specific example, you explained, I would argue that it will be the same for self delegated teams if the bond is 5% of total delegation or 25% of annual earnings, the only difference is that in one case the bond is higher than in the other but in both cases, the self delegated team is not paying commission rate for the earnings pertaining the self delegated amount, maybe I’m misunderstanding your example (probably I am).

the thing to consider is that not all teams are 100 % self delegating teams, so we would need a solution that takes also into account teams that are 100% self delegated and teams that are not.

I honestly feel that I did not understand correctly your last example so forgive me for that, I hope that the calculations and the first part of this comment can help clarify your questions about the proposal.

thanks again for replying!

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Interesting points on both sides. I think this comes down to perspective and when one joins as a p-rep. As Scott said, team right now can earn rewards without a bond, and use those to save for the bond. Once bonds are required, then teams will need icx to earn rewards and the bond will be expected. The important consideration here is that the bond / reward situation should be attractive enough to attract the right teams (right teams is subjective based on the ICONist and what they’re looking for in teams).

I have considered whether the bond should be a function of % delegated, rather than total ICX delegated. In the current scenario, the % delegated could stay the same, but ICX delegated increases, resulting in a higher required bond but the same rewards. Food for thought.

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One important point here is that using % reward (adding i_rep in the equation) for bond requirement could serve as a layer of protection for the network. For example, any contentious action by P-Reps (all P-Reps decide to increase i_rep for their temporary gain) may not be as feasible, because it would also increase the bond requirement that is more scaled to their actual reward.

Another benefit is to mitigate what happened over the last of 2 weeks or so. Sudden drop in i_rep was not foreseen by many, and it brought chaos and confusion. Important business decisions would have been made months or years in advance, and if ICON were much bigger than it is today, it could have caused a collapse in ICON economy. It would serve as a buffer in that regard.

Please also consider adding a moving average for the final decision, as a sharp increase/decrease can be better managed for the P-Reps.

I agree that bond should also be a function of % delegated, because the rate of growth will be different (P-Rep’s total vote vs Total network delegation), and the reward will be based on both, not just either one of them.

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Understood! Thank you, Scott - Appreciate the info and guidance.

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This may be an unpopular opinion with some of the current P-Reps who started with this no-bond system, but I think it reflects the general community sentiment…

We think that the higher the bond requirement, the better it is for the community and ICX investors. It benefits ICX holders in multiple ways. There’s obviously some upper limit where it’s not beneficial or feasible, but 5% is definitely below that limit.

Ways that a higher bond requirement is beneficial for ICX holders:

1- Higher bond requirement incentivizes P-Reps to help ICON grow in any way they can since they’ll be more deeply invested. P-Reps having to actually invest money into ICX is a good thing. Purchasing ICX gets people a lot more invested than just using “free” rewards for the bond. ICX holders should want this. P-Reps will have more incentive to make helpful contributions. Also, no one wants P-Reps to use these rewards that are supposed to be used to help ICON for their bond requirement… just to get more rewards. That makes no sense and is not beneficial for ICX holders. Is there a possibility some current P-Reps won’t be able to buy enough to get their full reward if they already have a lot of votes? Yes. But like @Benny_Options mentioned, all that does is increase your incentive to buy more ICX- a positive thing for ICX holders and the community. Which leads to the next benefit…

2- Higher bond requirement increases demand for ICX. The more P-Reps have to purchase in order to get their full reward, the higher the ICX price goes. That’s what literally everyone in the community wants. Everyone is invested to make money.

3- A higher bond requirement leads to higher security of the ICON blockchain. The single most important thing that these incentives and requirements are for is the security of the blockchain. Having a higher bond requirement more closely aligns P-Reps’ incentives and desires with the community’s. No one wants teams to roll in and get millions of votes when they have nothing at stake themselves. People with no vested interest in ICON could swoop in and sabotage the governance or cause other issues. The less P-Reps have to hold as a bond, the lower the barrier to attack from that vector. Higher bond = higher barrier to attack.

Anyway, we’re obviously coming from a different perspective since we have already purchased more than enough to cover any bond requirement we’ll ever need. I know a lot of teams are struggling with how to max out their future bond requirement and it’s easy to get caught up in your own “problems” (most people wouldn’t consider it a problem to have a lot of votes…). But I think it’s valuable to try to look at the situation from the community’s perspective. For the average ICX investor, the higher the bond requirement, the better.

6 Likes

thank you for your input.

One thing I believe we need to consider is how the 5% bond requirement will affect the current P-Rep teams.

Is easy to see at a glance that the vast majority of the current P-Rep teams does not have big financial organizations backing them up. It would be amazing and very positive for big players to be the norm as P-Rep teams for the ICON network, but we can all agree that is not the case right now.

So if we don’t have that environment of teams being capable of buying ICX to place the bond, what will happen in the current environment?

Having a bond is important, our proposal is just to make the bond have a more direct relationship with the variables that affect the earnings of the nodes.

2 Likes

Appreciate everyone sharing their perspectives. I definitely see the wisdom of why a higher bond will be best in the long run.

Perhaps we all as a community can work a little harder to let each other know if these financial changes are going to have drastic impact on business plans. There are grants and delegation programmes so there are plenty of opportunities for those that want to work. I bet there are further creative solutions too.

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This thread was not intended to ask for the reduction in the bond, but rather make it more scaled to the reward. Please consider the following scenarios:

<Starting with 1 million votes>

Grey bars are reward each block (please look at Y-axis to the right).
Orange is current 5% bond requirement, black is proposed requirement (Y-axis to the left).

See (A)

The reward has decreased over time (Grey Bar, right Y-axis), and quite drastically in the recent times. Bond requirement keeps going up due to self-staking increase in the total votes. For those who have been around since the beginning, maybe it may not be as critical (at least for now), and they could potentially afford to have full bond for maximal profit. Over a longer period, given that Total delegation of the network keeps increasing and it will lower ICX rewards even further, it does not look sustainable.

Please then look at the following scenario - 0.5% growth each day
SEE (B)

This is similar, but more drastic. With such exponential growth in P-Reps votes, the P-Rep will be required to produce more bond, even though the reward has reduced substantially. Again, as for those who have been around, this may not be as problematic (for now), but it does not look sustainable.

For newly proposed bond, % of earning can be adjusted accordingly. For example, below is the 40% of the earnings * 365
SEE ( C)

There is no way of knowing what total delegation of the network will look like, but assuming that it goes at 0.04% rate, then this happens, with i_rep at 14000.

SEE (D)
The amount of ICX reward stays stagnant (or would probably decrease and not increase over time), but the bond increases exponentially for maximal reward. I am not sure how sustainable this would be, if we impose 5% on the delegation of each P-Rep.

Unfortunately I am a new user and I had to compile into one big mess. I hope that this makes sense.

We are not asking for lower amount of bond, but a sustainable one.

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Replying both to you and to @TranscranialSol.

I understand that it may be difficult for current P-Reps to save enough for 100% of their bond requirement. And I understand that 5% may not be “sustainable” (apparently meaning that a P-Rep would not either have to cap their max votes or buy more ICX on a public exchange). Neither of these things are bad for ICX investors though. Those things are only “bad” for P-Reps who can’t keep up with the number of votes they are receiving. And even then it’s not necessarily bad, but just adds motivation for them to invest more in ICON- which is good for the community.

So, and I don’t mean this callously, I just don’t think the community or ICX investors care how it affects the majority of current P-Reps. I don’t think they really should care either since, as I see it, lowering the bond requirement or making it “sustainable” for P-Reps with no future investment is just an attempt at keeping their own rewards as high as possible with the lowest risk. It’s current P-Reps looking out for themselves and not for the network and investors. New P-Reps could replace 90% of the top 100 and the average ICX investor wouldn’t even notice. If anything that would be good for them because it means more competition for votes and higher demand for ICX.

One complaint could be that a bond requirement reduces the amount of development or marketing funding or whatever else a certain P-Rep wants to focus on. However a high bond requirement doesn’t really affect the amount of funds going toward development because most (if not all) of what would be used for development is preserved in the CPF. And if current P-Reps are just saving their rewards for the bond anyway, wouldn’t the average ICX investor rather replace them with a P-Rep who is using their reward for other things?

So I just don’t think that we should be concerned about whether the 5% bond requirement is “sustainable” or not for current P-Reps. My points above were saying that, if anything, we should be asking if 5% is high enough. It’s hard to know how things would play out, but even a 10% bond or more seems like a net benefit for the vast majority of ICX investors.

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I believe that the point we are trying to make is not completely understood yet, I concede that using 25% as the figure made it seem that the important part of the proposal is just lowering the bond.

please take a look at the latest charts published by @TranscranialSol , the main point of the proposal is to have a bond that is more closely related with the ups and downs of the annual returns depending on all the variables involved, having the bond only related to the percentage of votes a team has is detrimental in the long term and at some point, only teams that are completely self delegated will be able to place the bond.

I understand your point and I agree that the bond is important but we can all also agree that there is a tipping point were it starts becoming detrimental in the sense that it will not be attractive to investors to come and join as P-Rep teams unless they are self delegated teams.

In our proposal, another percentage can be used, we just recommended 25% as a reasonable value, but the important thing is the relationship between the behavior of the bond compared to the annual earnings.

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I would like to chime in here and provide a bit more context from my (Foundry Box Media) point of view as a small P-Rep and a developer. In short, Foundry Box Media is about to actually cost me money to keep going as it is. Right now if I_Rep and market prices stay about the same, I am barely covering the cost of my node and other technical infrastructure for ICONalyst. Saving for the 5% bond was something I started doing, but now it’s technically impossible.

I have applied to the delegation program to help support my efforts in the short term, but this becomes a new problem with the IISS changes coming down the pipe since I won’t have enough to cover the delegated amount of ICX in the bond and certainly won’t be making enough (even with a large delegation) to cover it.

So, personally, i’m a bit torn and frustrated. On one hand I do see the need and value for these changes in the long term, but on the other it is putting a serious strangle hold on my vision and goals for ICONalyst and my plans for new development projects going forward. And it’s especially frustrating when put in the context of the tangible contributions of other teams who are raking in large sums of ICX for comparable efforts while simultaneously increasing inflation by a much wider margin and encouraging changes that will force others to work significantly harder for significantly less.

All that said, i’m just one person and I would much rather see ICON thrive because of necessary changes like this and hope it does, I’m just not sure how much apart of that I will be in the future.

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one quick note, as you can see in the charts published by @TranscranialSol, charts C and D are examples of using 40% of annual delegation as the bond.

This two looks like the most appropriate compromise between the 5% of total votes delegation VS 25% annual earnings for the bond.

In the case of C we see a common team that has increase delegation over time (lets say the are doing a good job and creating valuable projects), as more people vote for them their bond increases and the value for the bond at the beginning is higher than just 5% of delegation.

but then we see that a drop in i_rep (like the one we just got) will also affect the bond, now since the team is earning less per year the bond also decreases, when it the case of 5% of votes (orange line) it keeps going up.

we can also infer from this that a sudden increase in the i_rep will also increase the bond, this offers a protection to the network from bad actors wanting to increase the i_rep for their own gains.

as we can see, having the bond be related to all the variables affecting the earnings is a more appropriate calculation for the bond.

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Just to keep you updated we are currently reviewing this proposal. Essentially what you are proposing from my understanding is to have a fixed ROI for the bond since it increases and decreases with Commission Rate. I need to think about whether or not that is a good thing.

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Thanks for taking this proposal into consideration

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