Demand-Gated Emission: Reducing the Fixed 767k/Epoch Validator Subsidy

[Zertruermmerdog]

TL;DR

IOTA currently mints a fixed validator subsidy of 767,000 IOTA per 24h epoch (~280M IOTA/year, ~6% of supply) - validator_target_reward in iota-protocol-config, set to 767_000 * 10^9 nanos with no decay schedule. The net supply change per epoch is validator_subsidy - computation_charge_burned (see match_computation_charge_burned_to_validator_subsidy in iota_system_state_inner.move).

With current network utilization the burn side is negligible, so gross emission is effectively net inflation. I'd like to discuss making emission demand-gated: step the per-epoch subsidy down while burn-side demand is far below emission, protect validators with an explicit viability floor, and allow the subsidy to step back up when demand materializes or participation drops.

Current state (verified against code/docs)

• Subsidy: fixed 767_000 * 10^9 nanos per epoch in protocol config; epochs are 24h. Annualized: ~280M IOTA, roughly 6% of supply.
• At each epoch boundary the system mints subsidy - burned_computation_fees (or burns the excess if fees exceed the subsidy). Optional tips pass through to validators but are ~0 today.
• The computation-fee burn is the only structural supply sink. Storage deposits are locked and refundable, not burned.
• Staking participation is already high: roughly half of the supply is staked, at a median net APY around 11% (early 2026; ~6% / 51% staked, minus avg. commission).

Motivation

1. The security budget likely overshoots. With more than 50% of supply staked, participation is well past the point where the network's economic security is in question. A double-digit real yield - funded almost entirely by emission rather than usage - suggests we are paying more for security than the market requires.
2. Emission is a transfer, not free yield. Every epoch dilutes all holders in favor of stakers/validators. That is a legitimate tool to bootstrap security, but as a permanent fixed rate it is a cost without a feedback mechanism.
3. Structural sell pressure. At minimum, validator operating costs are typically funded by selling rewards; a fixed ~280M IOTA/year of new supply meets thin organic demand.
4. The burn was designed as the counterweight - but it only works if usage grows. Until it does, running the subsidy at full rate is indifferent to the very demand signal the tokenomics design itself relies on.

Proposal sketch (parameter-level, no consensus redesign)

• Target: bring net inflation from ~6% into a 0-2% p.a. band.
• Demand gate: while the trailing computation_charge_burned / subsidy ratio stays below a threshold, the subsidy steps down on a fixed schedule (e.g. per protocol-version upgrade or per epoch-window). If burn-side demand rises, the reduction halts - net inflation is then already falling for free.
• Re-expansion triggers: the subsidy steps back up if staking participation falls below a floor (e.g. X% of supply) - security first.
• Validator-viability floor: the subsidy never falls below a level that keeps an independent, geographically distributed committee economically viable. This is the explicit lesson from Solana's SIMD-228, which failed largely over small-validator viability - and it connects directly to the concern space of IIP-8 (Dynamic Minimum Commission).
• Design variant - continuous usage-coupling (from early community feedback): instead of a stepped schedule, tie the subsidy directly to the demand signal with the current level as a hard cap: subsidy = clamp(k * trailing_avg_burn, viability_floor, 767k). At today's usage that means near-floor emission; as usage grows, rewards grow with it. The side effect may be the strongest argument for the whole idea: validator and staker income becomes directly coupled to adoption, so every reward recipient gains a personal stake in pushing mainnet usage. Notably, early feedback includes stakers explicitly fine with minimal rewards while usage is minimal. Trade-off vs. the stepped gate: simpler to specify and harder to game, but more reward volatility for validators - which the floor absorbs.
• Delivery: change to validator_target_reward handling in protocol config plus a small state-transition rule, feature-gated behind a protocol version bump. No changes to consensus, staking pools, or reward distribution mechanics.

Alternative: raise the fee/burn side instead?

Early community feedback suggested attacking the other side of the equation: increase fees so the existing burn mechanism offsets more of the subsidy. Worth exploring - but as a complement, not a substitute:

• At current utilization the burn offsets only a small fraction of the 767k/epoch subsidy. Even a several-fold increase in the reference gas price would leave net inflation close to gross emission; the fee lever is orders of magnitude too small until usage grows massively.
• Higher fees tax exactly the adoption the burn design is waiting for - cheap execution is one of IOTA's competitive advantages.
• The two levers compose cleanly: a demand-gated subsidy handles the near term, while a healthy fee/burn market makes the gate self-deactivating later (a rising burn/subsidy ratio automatically halts further reductions in the sketch above).

Other variants worth weighing: a one-off reduction (Cosmos Hub style), a hard pause with a floor carve-out, or a fully market-based curve (SIMD-228 style - more elegant, but heavier both technically and politically).

Precedents

• Cosmos Hub Prop 848 - passed; inflation cut from ~14% to ~10%.
• Solana SIMD-228 - market-based emission curve; rejected mainly over small-validator viability, which is why this sketch bakes a floor in from the start.
• dYdX - repeated emission reductions after the incentive phase.
• Ethereum - "minimum viable issuance" as a guiding principle.

Relation to community governance

A Phase-1 proposal ("Pause IOTA Token Inflation Until Sustainable Demand Is Established") has been submitted on govern.iota.org and is currently awaiting moderation. The intent is two complementary tracks: a token-holder mandate via the governance process, and the technical design discussion here. I'll cross-link once the forum topic is public.

Open questions

1. Which gate metric is most robust - burn/subsidy ratio, absolute burn, active-address trends, or a combination?
2. Floor design: absolute amount, cost-model-based, or commission-coupled (as in IIP-8)?
3. Interactions with timelocked staking and the storage fund?
4. If burn-side demand never reaches emission: do we want a small tail emission long-term, or a true pause?
5. Is there appetite for raising the reference gas price / burn share in parallel - and at what point would that start to hurt adoption?
6. Stepped schedule vs. continuous usage-coupling (capped at the current 767k): which is easier to implement, reason about, and govern?

Feedback very welcome - especially from validators on where a realistic viability floor sits, and from core contributors on whether the gating rule belongs in protocol config vs. the system Move package.

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Edit (Jul 9): added the continuous usage-coupling variant and open question 6 based on early community feedback.

[Zertruermmerdog]

Update: the complementary lever is now running.

Following the fee/usage feedback on this proposal, I built the counterpart as a working pilot: a small public gas station that sponsors onboarding transactions.

Live demo: https://doggy-dex.com (IOTA testnet) - press the button, a throwaway wallet holding exactly nothing sends a real transaction, the pilot pays, and you get the gas receipt. Source, access rules and deployment: https://github.com/Zertruermmerdog/iota-gas-station-pilot

Verified numbers from the pilot:

• ~0.001 IOTA per sponsored transaction (computation only, storage fully rebated). One million sponsored onboarding transactions cost about 1,000 IOTA - a rounding error against ~280M IOTA of annual emission.
• Guard rails hold: the station runs a deny-all access policy (single-command calls into the system package, capped budget). The negative test - a 2-command PTB - is rejected with "Access denied by access controller".
• The niche is genuinely unfilled: the IOTA Foundation explicitly does not operate a public gas station ("While we may run an instance to support community projects in the future..." - Gas Station alpha announcement).

Why this belongs here: sponsored fees are still burned, so a funded public gas station converts treasury into adoption and burn at the same time. Combined with the demand-gated subsidy sketched above, the two levers close the loop - emission steps down while usage is low, sponsorship bootstraps usage, and rising burn automatically halts further reductions (open questions 5 and 6).

If there is interest, I will write this up as a funding proposal (community fund / Tangle DAO) with the pilot data as the baseline.