New ACP draft discussion: Fully Dynamic Progressive Reward Burning with Max Supply Reduction for ~2% Net Inflation Target

[mrFawkes]

ACP	[PR Number - to be assigned]
Title	Fully Dynamic Progressive Reward Burning with Max Supply Reduction for ~2% Net Inflation Target
Author(s)	@mrFawkes
Status	Draft for brainstorming/discussion
Track	Standards
Replaces	None
Superseded-By	None

Abstract

This ACP introduces a fully automatic, dynamic burn mechanism on Primary Network staking rewards to achieve and maintain a ~2% net annual inflation target - representing approximately 40% lower dilution than current ~3.5% levels.

Both transaction fee burns and the new reward burns permanently reduce the protocol’s MaximumSupply (in addition to reducing circulating supply), creating a unified, actively shrinking hard cap. The reward burn is progressive and dynamic, responding automatically to stake size, fee activity, and inflation deviation.

Motivation

Current AVAX tokenomics generate ~3.5% inflation. This proposal establishes a clear ~2% net inflation target (~40% lower dilution) through automatic tools that make the maximum supply actively shrink from both fee burns and reward burns.

This delivers structural scarcity, improved real yields, and strong alignment for long-term holders while preserving network security.

Specification

Hardcoded 2% Net Inflation Target

• The protocol targets ~2% net annual inflation (new supply after all burns).
• This delivers ~40% lower long-term dilution compared to the current trajectory.

Unified Deflationary Mechanics

• Transaction fee burns (existing): Reduce circulating supply and permanently deduct from MaximumSupply.
• Reward burns (new): A portion of newly minted rewards is burned and also permanently deducts from MaximumSupply.

Dynamic Progressive Reward Burn Formula

The burn rate B (fraction of gross reward that is burned) is calculated automatically using only on-chain data:

$$ B = \text{base} \times \left( \frac{S}{S_{\text{avg}}} \right)^{0.5} \times \max\left(0, 1 - \frac{F}{F_{\text{recent}}}\right) \times \left(1 + k \times \Delta_{\text{inf}}\right) $$

Plain-English Explanation:

• base: Starting burn percentage (fixed constant, e.g. ~8–10%).
• (S / S_avg)^0.5: Progressivity - larger stakers (relative to network average) burn a higher percentage. The square root keeps it mild.
• max(0, 1 - F / F_recent): Fee-burn adjustment - when transaction fee burns are high (busy network), this drops toward zero → stakers keep almost all their rewards. When fee burns are low, it rises → more deflation.
• (1 + k × Δ_inf): Inflation correction - if current inflation is above 2%, burn more to pull it back down. If below 2%, burn less.

Burn rate is capped at 25% to prevent extremes.

Examples (medium activity, 30-day period):

• Small validator (10k AVAX) → burn rate ~3–4%.
• Medium validator (200k AVAX) → burn rate ~7%.
• Large validator (1M AVAX) → burn rate ~11–12%.

High network activity automatically lowers the burn rate for everyone. Low activity increases it, accelerating max supply reduction.

Implementation Notes

• Applied at reward distribution time using only on-chain state.
• No governance parameters for the burn formula - fully automatic.

10-Year Horizon & Long-Term Investor Benefits

Projected Outcomes (Medium Activity Baseline):

• Net inflation: ~1.9–2.1% (~40% lower dilution).
• Year 10 current supply: ~551M.
• Year 10 max supply: ~710–715M (permanent multi-million reduction from combined burns).
• Stronger deflation during low-activity periods.

Compelling Advantages for Long-Term Holders:

• ~40% Lower Dilution + Actively Shrinking Cap from both fee and reward burns.
• Self-regulating flywheel protects yields during growth and strengthens scarcity during quieter times.
• Larger stakers contribute more to deflation but capture greater price appreciation and economic security.

Backwards Compatibility

Forward-compatible. Existing fee burns now also lower max supply. Upgrade required for dynamic MaximumSupply handling.

Security Considerations

• Dynamic formula maintains staking incentives across cycles.
• Progressive element ensures larger security providers support deflation while benefiting most from scarcity.
• Hardcoded 25% cap prevents extremes.

Open Questions

• Optimal fixed constants in the burn formula for reliable 2% targeting.

Reference Implementation

none

Copyright

Copyright and related rights waived via CC0.