economic design update

book/src/ed_overview.md

@@ -2,15 +2,15 @@
 
 Solana’s crypto-economic system is designed to promote a healthy, long term self-sustaining economy with participant incentives aligned to the security and decentralization of the network. The main participants in this economy are validation-clients and replication-clients. Their contributions to the network, state validation and data storage respectively, and their requisite remittance mechanisms are discussed below.
 
-The main channels of participant remittances are referred to as protocol-based rewards and transaction fees. Protocol-based rewards are protocol-derived issuances from a network-controlled reserve of tokens (sometimes referred to as the ‘mining pool’). These rewards will constitute the total reward delivered to replication clients and a portion of the total rewards for validation clients, the remaining sourced from transaction fees. In the early days of the network, it is likely that protocol-based rewards, deployed based on predefined issuance schedule, will drive the majority of participant incentives to join the network.
+The main channels of participant remittances are referred to as protocol-based rewards and transaction fees. Protocol-based rewards are protocol-derived issuances from a protocol-defined, global inflation rate. These rewards will constitute the total reward delivered to replication clients and a portion of the total rewards for validation clients, the remaining sourced from transaction fees. In the early days of the network, it is likely that protocol-based rewards, deployed based on predefined issuance schedule, will drive the majority of participant incentives to join the network.
 
-These protocol-based rewards, to be distributed to participating validation and replication clients, are to be specified as annual interest rates calculated per, real-time, Solana epoch [DEFINITION]. As discussed further below, the issuance rates are determined as a function of total network validator staked percentage and total replication provided by replicators in each previous epoch. The choice for validator and replicator client rewards to be based on participation rates, rather than a global fixed inflation or interest rate, emphasizes a protocol priority of overall economic security, rather than monetary supply predictability. Due to Solana’s hard total supply cap of 1B tokens and the bounds of client participant rates in the protocol, we believe that global interest, and supply issuance, scenarios should be able to be modeled with reasonable uncertainties.
+These protocol-based rewards, to be distributed to participating validation and replication clients, are to be a result of a global supply inflation rate, calculated per Solana epoch and distributed amongst the active validator set. As discussed further below, the per annum inflation rate is based on a pre-determined disinflationary schedule. This provides the network with monetary supply predictability which supports long term economic stability and security. 
 
-Transaction fees are market-based participant-to-participant transfers, attached to network interactions as a necessary motivation and compensation for the inclusion and execution of a proposed transaction (be it a state execution or proof-of-replication verification). A mechanism for continuous and long-term funding of the mining pool through a pre-dedicated portion of transaction fees is also discussed below.
+Transaction fees are market-based participant-to-participant transfers, attached to network interactions as a necessary motivation and compensation for the inclusion and execution of a proposed transaction (be it a state execution or proof-of-replication verification). A mechanism for continuous and long-term economic stability through partial burning of each transaction fee is also discussed below.
 
-A high-level schematic of Solana’s crypto-economic design is shown below in **Figure 1**. The specifics of validation-client economics are described in sections: [Validation-client Economics](ed_validation_client_economics.md), [State-validation Protocol-based Rewards](ed_vce_state_validation_protocol_based_rewards.md), [State-validation Transaction Fees](ed_vce_state_validation_transaction_fees.md) and [Replication-validation Transaction Fees](ed_vce_replication_validation_transaction_fees.md). Also, the chapter titled [Validation Stake Delegation](ed_vce_validation_stake_delegation.md) closes with a discussion of validator delegation opportunties and marketplace. The [Replication-client Economics](ed_replication_client_economics.md) chapter will review the Solana network design for global ledger storage/redundancy and replicator-client economics ([Storage-replication rewards](ed_rce_storage_replication_rewards.md)) along with a replicator-to-validator delegation mechanism designed to aide participant on-boarding into the Solana economy discussed in [Replication-client Reward Auto-delegation](ed_rce_replication_client_reward_auto_delegation.md). The [Economic Sustainability](ed_economic_sustainability.md) section dives deeper into Solana’s design for long-term economic sustainability and outlines the constraints and conditions for a self-sustaining economy. An outline of features for an MVP economic design is discussed in the [Economic Design MVP](ed_mvp.md) section. Finally, in chapter [Attack Vectors](ed_attack_vectors.md), various attack vectors will be described and potential vulnerabilities explored and parameterized.
+A high-level schematic of Solana’s crypto-economic design is shown below in **Figure 1**. The specifics of validation-client economics are described in sections: [Validation-client Economics](ed_validation_client_economics.md), [State-validation Protocol-based Rewards](ed_vce_state_validation_protocol_based_rewards.md), [State-validation Transaction Fees](ed_vce_state_validation_transaction_fees.md) and [Replication-validation Transaction Fees](ed_vce_replication_validation_transaction_fees.md). Also, the chapter titled [Validation Stake Delegation](ed_vce_validation_stake_delegation.md) closes with a discussion of validator delegation opportunties and marketplace. Additionally, in [Storage Rent Economics](ed_storage_rend_economics.md), we describe an implementation of storage rent to account for the externality costs of maintaining the active state of the ledger. The [Replication-client Economics](ed_replication_client_economics.md) chapter will review the Solana network design for global ledger storage/redundancy and replicator-client economics ([Storage-replication rewards](ed_rce_storage_replication_rewards.md)) along with a replicator-to-validator delegation mechanism designed to aide participant on-boarding into the Solana economy discussed in [Replication-client Reward Auto-delegation](ed_rce_replication_client_reward_auto_delegation.md). The [Economic Sustainability](ed_economic_sustainability.md) section dives deeper into Solana’s design for long-term economic sustainability and outlines the constraints and conditions for a self-sustaining economy. An outline of features for an MVP economic design is discussed in the [Economic Design MVP](ed_mvp.md) section. Finally, in chapter [Attack Vectors](ed_attack_vectors.md), various attack vectors will be described and potential vulnerabilities explored and parameterized.
 
 <!-- ![img alt text](solana_economic_design.png) -->
-<p style="text-align:center;"><img src="img/solana_economic_design.png" alt="== Solana Economic Design Diagram ==" width="800"/></p>
+<p style="text-align:center;"><img src="img/economic_design_infl_230719.png" alt="== Solana Economic Design Diagram ==" width="800"/></p>
 
 **Figure 1**: Schematic overview of Solana economic incentive design.

book/src/ed_validation_client_economics.md

@@ -1,3 +1,3 @@
 ## Validation-client Economics
 
-Validator-clients are eligible to receive protocol-based (i.e. via mining pool) rewards issued via stake-based annual interest rates by providing compute (CPU+GPU) resources to validate and vote on a given PoH state. These protocol-based rewards are determined through an algorithmic schedule as a function of total amount of Solana tokens staked in the system and duration since network launch (genesis block). Additionally, these clients may earn revenue through two types of transaction fees: state-validation transaction fees and pooled Proof-of-Replication (PoRep) transaction fees. The distribution of these two types of transaction fees to the participating validation set are designed independently as economic goals and attack vectors are unique between the state- generation/validation mechanism and the ledger replication/validation mechanism. For clarity, we separately describe the design and motivation of the three types of potential revenue streams for validation-clients below: state-validation protocol-based rewards, state-validation transaction fees and PoRep-validation transaction fees.
+Validator-clients are eligible to receive protocol-based (i.e. via inflation) rewards issued via stake-based annual interest rates (calculated per epoch) by providing compute (CPU+GPU) resources to validate and vote on a given PoH state. These protocol-based rewards are determined through an algorithmic disinflationary schedule as a function of total amount of circulating tokens. Additionally, these clients may earn revenue through fees via state-validation transactions and Proof-of-Replication (PoRep) transactions. For clarity, we separately describe the design and motivation of these revenue distriubutions for validation-clients below: state-validation protocol-based rewards, state-validation transaction fees and rent,  and PoRep-validation transaction fees.

book/src/ed_vce_replication_validation_transaction_fees.md

@@ -2,8 +2,8 @@
 
 As previously mentioned, validator-clients will also be responsible for validating PoReps submitted into the PoH stream by replicator-clients. In this case, validators are providing compute (CPU/GPU) and light storage resources to confirm that these replication proofs could only be generated by a client that is storing the referenced PoH leger block.2
 
-While replication-clients are incentivized and rewarded through protocol-based rewards schedule (see [Replication-client Economics](ed_replication_client_economics.md)), validator-clients will be incentivized to include and validate PoReps in PoH through the distribution of the transaction fees associated with the submitted PoRep. As will be described in detail in the Section 3.1, replication-client rewards are protocol-based and designed to reward based on a global data redundancy factor. I.e. the protocol will incentivize replication-client participation through rewards based on a target ledger redundancy (e.g. 10x data redundancy). It was chosen not to include a distribution of these rewards to PoRep validators, and to rely only on the collection of PoRep attached transaction fees, due to the fact that the confluence of two participation incentive modes (state-validation inflation rate via global staked % and replication-validation rewards based on global redundancy factor) on the incentives of a single network participant (a validator-client) potentially opened up a significant incentive-driven attack surface area.
+While replication-clients are incentivized and rewarded through protocol-based rewards schedule (see [Replication-client Economics](ed_replication_client_economics.md)), validator-clients will be incentivized to include and validate PoReps in PoH through collection of transaction fees associated with the submitted PoReps and distribution of protocol rewards proportional to the validated PoReps. As will be described in detail in the Section 3.1, replication-client rewards are protocol-based and designed to reward based on a global data redundancy factor. I.e. the protocol will incentivize replication-client participation through rewards based on a target ledger redundancy (e.g. 10x data redundancy). 
 
-The validation of PoReps by validation-clients is computationally more expensive than state-validation (detail in the [Economic Sustainability](ed_economic_sustainability.md) chapter), thus the transaction fees are expected to be proportionally higher. However, because replication-client rewards are distributed in proportion to and only after submitted PoReps are validated, they are uniquely motivated for the inclusion and validation of their proofs. This pressure is expected to generate an adequate market economy between replication-clients and validation-clients. Additionally, transaction fees submitted with PoReps have no minimum amount pre-allocated to the mining pool, as do state-validation transaction fees.
+The validation of PoReps by validation-clients is computationally more expensive than state-validation (detail in the [Economic Sustainability](ed_economic_sustainability.md) chapter), thus the transaction fees are expected to be proportionally higher. 
 
-There are various attack vectors available for colluding validation and replication clients, as described in detail below in [Economic Sustainability](ed_economic_sustainability). To protect against various collusion attack vectors, for a given epoch, PoRep transaction fees are pooled, and redistributed across participating validation-clients in proportion to the number of validated PoReps in the epoch less the number of invalidated PoReps [DIAGRAM]. This design rewards validators proportional to the number of PoReps they process and validate, while providing negative pressure for validation-clients to submit lazy or malicious invalid votes on submitted PoReps (note that it is computationally prohibitive to determine whether a validator-client has marked a valid PoRep as invalid).
+There are various attack vectors available for colluding validation and replication clients, as described in detail below in [Economic Sustainability](ed_economic_sustainability). To protect against various collusion attack vectors, for a given epoch, validator rewards are distributed across participating validation-clients in proportion to the number of validated PoReps in the epoch less the number of PoReps that mismatch the replicators challenge. The PoRep challenge game is described in [Ledger Replication](https://github.com/solana-labs/solana/blob/master/book/src/ledger-replication.md#the-porep-game). This design rewards validators proportional to the number of PoReps they process and validate, while providing negative pressure for validation-clients to submit lazy or malicious invalid votes on submitted PoReps (note that it is computationally prohibitive to determine whether a validator-client has marked a valid PoRep as invalid).

book/src/ed_vce_state_validation_protocol_based_rewards.md

@@ -1,46 +1,40 @@
 ### State-validation protocol-based rewards
 
-Validator-clients have two functional roles in the Solana network
+Validator-clients have two functional roles in the Solana network:
 
-* Validate (vote) the current global state of that PoH along with any Proofs-of-Replication (see [Replication Client Economics](ed_replication_client_economics.md)) that they are eligible to validate
+* Validate (vote) the current global state of that PoH along with any Proofs-of-Replication (see [Replication Client Economics](ed_replication_client_economics.md)) that they are eligible to validate.
 
 * Be elected as ‘leader’ on a stake-weighted round-robin schedule during which time they are responsible for collecting outstanding transactions and Proofs-of-Replication and incorporating them into the PoH, thus updating the global state of the network and providing chain continuity.
 
-Validator-client rewards for these services are to be distributed at the end of each Solana epoch. Compensation for validator-clients is provided via a protocol-based annual interest rate dispersed in proportion to the stake-weight of each validator (see below) along with leader-claimed transaction fees available during each leader rotation. I.e. during the time a given validator-client is elected as leader, it has the opportunity to keep a portion of each non-PoRep transaction fee, less a protocol-specified amount that is returned to the mining pool (see [Validation-client State Transaction Fees](ed_vce_state_validation_transaction_fees.md)). PoRep transaction fees are not collected directly by the leader client but pooled and returned to the validator set in proportion to the number of successfully validated PoReps. (see [Replication-client Transaction Fees](ed_vce_replication_validation_transaction_fees.md))
+Validator-client rewards for these services are to be distributed at the end of each Solana epoch. Compensation for validator-clients is provided via a protocol-based annual inflation rate dispersed in proportion to the stake-weight of each validator (see below) along with leader-claimed transaction fees available during each leader rotation. I.e. during the time a given validator-client is elected as leader, it has the opportunity to keep a portion of each transaction fee, less a protocol-specified amount that is destroyed (see [Validation-client State Transaction Fees](ed_vce_state_validation_transaction_fees.md)). PoRep transaction fees are also collected by the leader client and validator PoRep rewards are distributed in proportion to the number of validated PoReps less the number of PoReps that mismatch a replicator's challenge. (see [Replication-client Transaction Fees](ed_vce_replication_validation_transaction_fees.md))
 
 
-The protocol-based annual interest-rate (%) per epoch to be distributed to validation-clients is to be a function of:
+The effective protocol-based annual interest rate (%) per epoch to be distributed to validation-clients is to be a function of:
 
-* the current fraction of staked SOLs out of the current total circulating supply,
+* the current global inflation rate, derived from the pre-determined dis-inflationary issuance schedule
 
-* the global time since the genesis block instantiation
+* the fraction of staked SOLs out of the current total circulating supply,
 
-* the up-time/participation [% of available slots/blocks that validator had opportunity to vote on?] of a given validator over the previous epoch.
+* the up-time/participation [% of available slots that validator had opportunity to vote on] of a given validator over the previous epoch.
 
-The first two factors are protocol parameters only (i.e. independent of validator behavior in a given epoch) and describe a global validation reward schedule designed to both incentivize early participation and optimal security in the network. This schedule sets a maximum annual validator-client interest rate per epoch.
+The first factor is a function of protocol parameters only (i.e. independent of validator behavior in a given epoch) and results in a global validation reward schedule designed to incentivize early participation, provide clear montetary stability and provide optimal security in the network. 
 
-At any given point in time, this interest rate is pegged to a defined value given a specific % staked SOL out of the circulating supply (e.g. 10% interest rate when 66% of circulating SOL is staked). The interest rate adjusts as the square-root [TBD] of the % staked, leading to higher validation-client interest rates as the % staked drops below the targeted goal, thus incentivizing more participation leading to more security in the network. An example of such a schedule, for a specified point in time (e.g. network launch) is shown in **Table 1**.
+At any given point in time, a specific validator's interest rate can be determined based on the porportion of circulating supply that is staked by the network and the validator's uptime/activity in the previous epoch. For an illustrative example, consider a hypothetical instance of the network with an initial circulating token supply of 250MM tokens with an additional 250MM vesting over 3 years. Additionally an inflation rate is specified at network launch of 7.5%, and a disinflationary schedule of 20% decrease in inflation rate per year (the actual rates to be implemented are to be worked out during the testnet experimentation phase of mainnet launch). With these broad assumptions, the 10-year inflation rate (adjusted daily for this example) is shown in **Figure 2**, while the total circulating token supply is illustrated in **Figure 3**. Neglected in this toy-model is the inflation supression due to the portion of each transaction fee that is to be destroyed.
 
-| Percentage circulating supply staked [%] | Annual validator-client interest rate [%] |
-| ---:    | ---:      |
-| 5       | 13.87     |
-| 15      | 13.31     |
-| 25      | 12.73     |
-| 35      | 12.12     |
-| 45      | 11.48     |
-| 55      | 10.80     |
-| **66**  | **10.00** |
-| 75      | 9.29      |
-| 85      | 8.44      |    
+<p style="text-align:center;"><img src="img/p_ex_schedule.png" alt="drawing" width="800"/></p>
+**Figure 2:** In this example schedule, the annual inflation rate [%] reduces at around 20% per year, until it reaches the long-term, fixed, 1.5% rate.
 
-**Table 1:** Example interest rate schedule based on % SOL staked out of circulating supply. In this case, interest rates are fixed at 10% for 66% of staked circulating supply
+<p style="text-align:center;"><img src="img/p_ex_supply.png" alt="drawing" width="800"/></p>
+**Figure 3:** The total token supply over a 10-year period, based on an initial 250MM tokens with the disinflationary inflation schedule as shown in **Figure 2**
 
-Over time, the interest rate, at any network staked percentage, will drop as described by an algorithmic schedule. Validation-client interest rates are designed to be higher in the early days of the network to incentivize participation and jumpstart the network economy. This mining-pool provided interest rate will reduce over time until a network-chosen baseline value is reached. This is a fixed, long-term, interest rate to be provided to validator-clients. This value does not represent the total interest available to validator-clients as transaction fees for both state-validation and ledger storage replication (PoReps) are not accounted for here. A validation-client interest rate schedule as a function of % network staked and time is shown in** Figure 2**.
+Over time, the interest rate, at a fixed network staked percentage, will reduce concordant with network inflation. Validation-client interest rates are designed to be higher in the early days of the network to incentivize participation and jumpstart the network economy. As previously mentioned, the inflation rate is expected to stabalize near 1-2% which also results in a fixed, long-term, interest rate to be provided to validator-clients. This value does not represent the total interest available to validator-clients as transaction fees for both state-validation and ledger storage replication (PoReps) are not accounted for here. 
+
+Given these example parameters, annualized validator-specific interest rates can be determined based on the global fraction of tokens bonded as stake, as well as their uptime/activity in the previous epoch. For the purpose of this example, we assume 100% uptime for all validators and a split in interest-based rewards between validators and replicator nodes of 80%/20%. Additionally, the fraction of staked circulating supply is assummed to be constant. Based on these assumptions, an annualized validation-client interest rate schedule as a function of % circulating token supply that is staked is shown in** Figure 4**.
 
 <!-- ![== Validation Client Interest Rates Figure ==](validation_client_interest_rates.png =250x) -->
 
-<p style="text-align:center;"><img src="img/validation_client_interest_rates.png" alt="drawing" width="800"/></p>
+<p style="text-align:center;"><img src="img/p_ex_interest.png" alt="drawing" width="800"/></p>
 
-**Figure 2:** In this example schedule, the annual interest rate [%] reduces at around 16.7% per year, until it reaches the long-term, fixed, 4% rate.
+**Figure 4:** Shown here are example validator interest rates over time, neglecting transaction fees, segmented by fraction of total circulating supply bonded as stake.
 
-This epoch-specific protocol-defined interest rate sets an upper limit of *protocol-generated* annual interest rate (not absolute total interest rate) possible to be delivered to any validator-client per epoch. The distributed interest rate per epoch is then discounted from this value based on the participation of the validator-client during the previous epoch. Each epoch is comprised of XXX slots. The protocol-defined interest rate is then discounted by the log [TBD] of the % of slots a given validator submitted a vote on a PoH branch during that epoch, see **Figure XX**
+This epoch-specific protocol-defined interest rate sets an upper limit of *protocol-generated* annual interest rate (not absolute total interest rate) possible to be delivered to any validator-client per epoch. The distributed interest rate per epoch is then discounted from this value based on the participation of the validator-client during the previous epoch.

book/src/ed_vce_state_validation_transaction_fees.md

@@ -1,6 +1,6 @@
 ### State-validation Transaction Fees
 
-Each message sent through the network, to be processed by the current leader validation-client and confirmed as a global state transaction, must contain a transaction fee. Transaction fees offer many benefits in the Solana economic design, for example they:
+Each transaction sent through the network, to be processed by the current leader validation-client and confirmed as a global state transaction, must contain a transaction fee. Transaction fees offer many benefits in the Solana economic design, for example they:
 
 * provide unit compensation to the validator network for the CPU/GPU resources necessary to process the state transaction,
 
@@ -10,11 +10,11 @@ Each message sent through the network, to be processed by the current leader val
 
 * and provide potential long-term economic stability of the network through a protocol-captured minimum fee amount per transaction, as described below.
 
-Many current blockchain economies (e.g. Bitcoin, Ethereum), rely on protocol-based rewards to support the economy in the short term, with the assumption that the revenue generated through transaction fees will support the economy in the long term, when the protocol derived rewards expire. In an attempt to create a sustainable economy through protocol-based rewards and transaction fees, a fixed portion of each transaction fee is sent to the mining pool, with the resulting fee going to the current leader processing the transaction. These pooled fees, then re-enter the system through rewards distributed to validation-clients, through the process described above, and replication-clients, as discussed below.
+Many current blockchain economies (e.g. Bitcoin, Ethereum), rely on protocol-based rewards to support the economy in the short term, with the assumption that the revenue generated through transaction fees will support the economy in the long term, when the protocol derived rewards expire. In an attempt to create a sustainable economy through protocol-based rewards and transaction fees, a fixed portion of each transaction fee is destroyed, with the remaining fee going to the current leader processing the transaction. A scheduled global inflation rate provides a source for rewards distributed to validation-clients, through the process described above, and replication-clients, as discussed below. 
 
-The intent of this design is to retain leader incentive to include as many transactions as possible within the leader-slot time, while providing a redistribution avenue that protects against "tax evasion" attacks (i.e. side-channel fee payments)<sup>[1](ed_referenced.md)</sup>. Constraints on the fixed portion of transaction fees going to the mining pool, to establish long-term economic sustainability, are established and discussed in detail in the [Economic Sustainability](ed_economic_sustainability.md) section.
+Transaction fees are set by the network cluster based on recent historical throughput, see [Congestion Driven Fees](transaction-fees.md#congestion-driven-fees). This minimum portion of each transaction fee can be dynamically adjusted depending on historical gas usage. In this way, the protocol can use the minimum fee to target a desired hardware utilisation. By monitoring a protocol specified gas usage with respect to a desired, target usage amount, the minimum fee can be raised/lowered which should, in turn, lower/raise the actual gas usage per block until it reaches the target amount. This adjustment process can be thought of as similar to the difficulty adjustment algorithm in the Bitcoin protocol, however in this case it is adjusting the minimum transaction fee to guide the transaction processing hardware usage to a desired level. 
 
-This minimum, protocol-earmarked, portion of each transaction fee can be dynamically adjusted depending on historical gas usage. In this way, the protocol can use the minimum fee to target a desired hardware utilisation. By monitoring a protocol specified gas usage with respect to a desired, target usage amount (e.g. 50% of a block's capacity), the minimum fee can be raised/lowered which should, in turn, lower/raise the actual gas usage per block until it reaches the target amount. This adjustment process can be thought of as similar to the difficulty adjustment algorithm in the Bitcoin protocol, however in this case it is adjusting the minimum transaction fee to guide the transaction processing hardware usage to a desired level.
+As mentioned, a fixed-proportion of each transaction fee is to be destroyed. The intent of this design is to retain leader incentive to include as many transactions as possible within the leader-slot time, while providing an inflation limiting mechansim that protects against "tax evasion" attacks (i.e. side-channel fee payments)<sup>[1](ed_referenced.md)</sup>. 
 
-Additionally, the minimum protocol captured fee can be a consideration in fork selection. In the case of a PoH fork with a  malicious, censoring leader, we would expect the total procotol captured fee to be less than a comparable honest fork, due to the fees lost from censoring. If the censoring leader is to compensate for these lost protocol fees, they would have to replace the fees on their fork themselves, thus potentially reducing the incentive to censor in the first place. 
+Additionally, the burnt fees can be a consideration in fork selection. In the case of a PoH fork with a  malicious, censoring leader, we would expect the total fees destroyed to be less than a comparable honest fork, due to the fees lost from censoring. If the censoring leader is to compensate for these lost protocol fees, they would have to replace the burnt fees on their fork themselves, thus potentially reducing the incentive to censor in the first place.