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Token model

Motivation

The KNOW Token Model aims to:

  • secure the network by providing sufficient incentives for validators to participate and delegators to stake their tokens;
  • ensure low-cost participation for Providers and Consumers;
  • incentivize long-term token holding;
  • secure open-source funding & network maintenance.

One issue we've seen with many other layer-1 chains is that to secure the network, they define a high inflation parameter resulting in token selling pressure and unattractive price action. While this is not bad per se for the holders who stake, the reflective nature of crypto assets is further exagerated to the downside when inflation is high during market downturns.

One way to secure the network while limiting inflation is by providing rewards derived from network activity. Unlike Ethereum's EIP-1559, which reduces inflation through fee burning, OKP4 introduces a tax on value-creating network activity: the workflows. As with VAT (value-added tax), a fraction of the workflow's price can be collected to secure the network while reducing selling pressure and even resulting in long-term $KNOW supply reduction.

The two opposite forces that influences the KNOW token supply are (1) the bonded ratio (ρbonded\rho_{\text{bonded}}) which influences the inflation rate (rinflationr_{\text{inflation}}), and (2) the workflow tax which burns tokens.

Mint

Inflation formula

rinflation=1ρbonded×cinflationr_{\text{inflation}} = \frac{1}{\rho_{\text{bonded}}} \times c_{\text{inflation}}

Where:

  • rinflationr_{\text{inflation}} is the inflation rate of $KNOW, representing the rate at which new tokens are created and introduced into circulation.
  • ρbonded\rho_{\text{bonded}} is the bonded ratio, i.e. the ratio between the number of tokens staked and the number of existing tokens. The higher the bonded ratio, the more tokens are needed to increase a validator's voting power, the harder it is for an attacker to reach 1/31 / 3 or the network voting power. The inflation rate, and consequently the staking rewards, increase when the bonded ratio decreases. This would further incentivize token holders to stake their tokens.
  • cinflationc_{\text{inflation}} is the inflation coefficient, a constant factor that adjusts the influence of the bonded ratio on the inflation rate. The higher the parameter, the higher the inflation.

Illustrative scenarios

For example, by setting the inflation coefficient cinflationc_{\text{inflation}} to 0.03, the resulting plot can be observed as follows:

Plot of yearly r_inflation = (1 / ρ_bonded) * 0.03

The yearly inflation rate described above doesn't take into consideration the burning mechanism from the workflow tax, which offsets the inflation.

Burn

Workflow tax

For each workflow, whatever the application, consumers pay providers according to the business model defined on-chain. A tax is applied to the workflow's price. The tax percentage is a parameter defined by governance. When KNOW tokens are used by consumers, the tax is automatically burnt.

This tax compensates for inflation. The higher the tax collected on workflows, the lower the overall inflation rate. Another indirect effect of that tax is to prevent fake volume on datasets and services, making volume a more robust reputation metric.

Other payment tokens

Depending on the business model of the zone and of the invoked resources, consumers can pay for workflows using other cw-20 tokens, such as stablecoins like USDC. While providers will be paid with that payment token, and the same workflow tax will still apply. These payment tokens, instead of being immediately burnt, will be collected into a multisig pool, before getting used to buyback and burn KNOW tokens, using the best route for optimal liquidity. This creates additional buying pressure on the token, while also decreasing the overall supply.