[Finished] The New Inflation Model - Discussion

Introduction

Litentry is a Decentralized Identity Aggregation protocol across multiple networks, it features a DID indexing mechanism and a Substrate-based credit computation network. The protocol provides a decentralized, interoperable identity aggregation service that mitigates the difficulty of resolving agnostic DID mechanisms.

LIT token is the native cryptocurrency of the Litentry, including Litmus parachain on Kusama and Litentry parachain on Polkadot with the following utilities:

• Pay transaction fees in the network
• Incentivize collators and fund promotion campaigns to support Litentry parachain
• Empower governance mechanisms in the chain, including proposing referendums, the election of council members, voting in a referendum, etc.
• Serve as the utility token for identity product or service

Guideline of LIT Inflation

• The long-term incentive of nominator and collators for their valuable work
• Low inflation rate (<5%): refer to 10% in Polkadot and Kusama; ~5% in Kilt and Moonbeam.
• The trade-off between inflation rate and staking quantity
• Consideration for a long-term self-sustainable parachain: accumulate LIT in the Treasury and use them for a parachain slot.

Inflation Model

This inflation model of the LIT token aims to guarantee the security of the Litentry network in the long run.

The newly issued LIT can incentivize collators to provide block production services and delegators to stake to support the Litentry network. Litentry collators are run and maintained by the Litentry team at the early stage. We hope the community can participate in running and maintaining the collator nodes to make the identity protocol more decentralized, stable, and robust.

Besides, LIT holders can participate in building network security by staking their LIT and helping power the collator selection process.

Generally speaking, newly issued tokens from inflation are used to pay for a parachain slot in either Kusama or Polkadot. However, it will not be the case for Litentry. Because Litentry has reserved 45% of the LIT for slot auctions and building the ecosystem, the Litentry team has enough tokens to acquire slots on Polkadot and Kusama in the upcoming decade. Inflated LIT tokens will not be used for team or ecology building.

According to the community's opinion and based on the overall market situation, if Litentry parachain enters the inflation model, it will harm the interests of the community and LIT holders, so we will continue to burn the equivalent amount of new issuance LITs from the inflation model quarterly for the next two years after collator staking is deployed.

The new issuance token for the next two years will be：

newToken = 100,000,000 *[(1+1.5%*1/2+2.5%*1/2)*(1+2.5%)-1] = 4,550,000 LIT

The amount of LIT that should be burnt each quarter is：

burnLIT = 4,550,000/8 = 568,750 LIT

The following are the key parameters of the inflation model:

- Target a 1.5% annual inflation rate in the first 1,296,000 blocks(~= 6 months), 0.5% goes towards incentivizing collators, 1% is for users that stake their LIT tokens
- After block 1,296,001 a 2.5% annual inflation rate will be applied, 0.5% goes towards incentivizing collators, 2% is for users that stake their LIT tokens
- 568,750 LIT will be burnt from the ecosystem wallet each quarter and continues for eight quarters (two years).

Figure1.1 shows the pre-inflation LIT token release schedule. A small portion of these released tokens is from the team, but most of them are from crowdloan reward of the slot auctions. According to the existing token release plans, about 55,000,000 LITs will be in circulation by the end of 2024.

                               Figure 1.1 Pre-inflation LIT token release schedule

Figure1.2 presents the inflation rate after collator staking is deployed. The inflation rate will be 1.5% for the first 6 months and 2.5% after 6 months.

                              Figure1.2 The Inflation rate of LIT token

To offset the reduced number of LITs in circulation, we introduced the inflation model, as shown in Figure1.2. When the collator staking functionality comes online, the LITs in circulation will be lower. We can not accurately predict the number of LITs that will be removed from circulation, but this does not prevent us from making a hypothesis.

Assuming that the LITs participating in collator staking receive an annual reward of about 10-20% and that 2 % of the inflation token(i.e., 2,000,000 LITs) is reserved for collator staking users. About 10%-20% of the total LITs (i.e., 10,000,000 -20,000,000LITs) will be taken out of circulation. The estimated circulation of LIT is shown in Figure1.3. There will be about 40,000,000 LITs in circulation by the end of 2024 after collator staking functionality is deployed.

                     Figure1.3 The LIT token circulation after collator staking

Collators

Collators are full nodes for the parachain and the relay chain. They maintain parachains by collecting parachain transactions from users and producing state transition proofs for Relay Chain validators. Even though collator nodes do not contribute to the safety of the network, they are an integral part of the parachain. The Litentry Network will become more stable and robust with a good number of high-quality collators.

Opening collators to community participation is an essential step towards community governance in Litentry parachain. In the early stages of Litentry parachain, collators are run and maintained entirely by Litentry. After opening up to community participation, Litentry will continue to run and maintain some of the collators and will gradually open up the number of collators to community participation. All revenue from the collators run and maintained by Litentry will go to the treasury, and the community will decide how to use it.

Requirements for an organizer candidate include one’s machine, bound, account, and community. Maintaining a collator requires a certain investment of time, technology, and hardware by the candidate, so in our inflation model, about 500,000 LIT new issuance tokens will be used to incentivize the community to participate in the operation of the collator actively.

Staking

LIT holders are encouraged to participate as a nominator. LIT holders can select a list of collators that they trust and stake the amount of LITs to support them. If some of these candidates are elected as block producers, they share the block rewards or the sanctions on a per-staked-LIT basis.

• From the event of unstaking, the unstaked amount remains locked for about seven days.
• Rewards are received as unlocked LIT tokens and are not automatically added to the stake.

  Parameters	Value	Description
  Session duration	1800 blocks (6 hours)
  a specific number of blocks around which staking actions are enforced.
  Minimum staking per candidate	50 LIT	the minimum amount of tokens to delegate candidates once a user is in the set of delegators
  Maximum delegators per candidate	1000	the maximum number of delegators, by staked amount, that a candidate can have which are eligible to receive staking rewards
  Maximum delegations	100	the maximum number of candidates a delegator can delegate
  Reward payout delay	2 sessions (12 hours)	How long until you get the staking rewards
  Add or increase delegation	takes effect in the next round (funds are withdrawn immediately)	How long until your funds will take effect
  Decrease delegation delay	28 sessions (7 days)	How long until your funds will be transferrable after unbonding
  Revoke delegations delay	28 sessions (7 days)	How long until your funds will be transferrable after unbonding
  Leave delegators delay	28 sessions (7 days)	How long until your funds will be transferrable after unbonding