Discover Unikname Network – Episode 3: Supply heading into Phase 2
Welcome to the third installment of the Discover Unikname Network series. This one is all about supply: what strategies exist out there and why they are used, how Unikname does it, how this is all about to change, and what mechanisms will be used to transition from Phase 1 to Phase 2.
The Unikname project is entering a new phase of its development. To accompany this evolution, Unikname Network is moving from an inflationary supply strategy to a fixed supply strategy. As part of the transition, Unikname Network needs to generate new $UNIK tokens. It will do so using a mechanism from Phase 1 called the Pioneer reward that generates $UNIK when UniknameID are minted into the chain. To ensure this mechanism cannot be further exploited, Pioneer rewards will be disabled in Phase 2.
This right here is a tall order! It is somewhat of a philosophical change even. So for transparency’s sake, let’s go over the details of why and how all of this will unfold.
Three types of supply strategy
“The value increase of tokens is limited. Depending on the inflation rate, the token might even lose value over time. This has the effect of limiting speculation.”
All blockchains come with a token. How many tokens are in circulation, at what rates new tokens are created, or how many tokens can be expected to exist have a tremendous impact on the network and the price of said token when quoted.
When it comes to managing supply, there are three main strategies. The supply can either go up over time, stay relatively the same, or go down. Each of these strategies are of course valid and serve different goals.
Inflationary strategies are defined by an ever-growing number of tokens. Consequently, the value increase of tokens is limited. Depending on the inflation rate, the token might even lose value over time. This has the effect of limiting speculation.
“This makes it the perfect strategy for blockchain where the token is not quoted or where liquidity is important.”
When adopting this strategy, the important question to ask is where does the newly created supply go. Does it pay for network security? Is it used as dividends? To be most efficient, newly minted supply should go towards what the system values most. The main downside of this strategy is its potential impact on the token’s valuation. This makes it the perfect strategy for blockchain where the token is not quoted or where liquidity is important.
Paying block validators with both newly minted tokens and transaction fees can be the best way to optimize network security while limiting its cost.
On the opposite side of the spectrum, deflationary strategies reduce supply over time. This approach requires tokens to be destroyed. This act is called burning. The reduction in supply creates a shortage and should enhance the value of each remaining token due to scarcity.
“This strategy is risky. There is no guarantee that burning tokens will lead to a value increase.”
It is important to note that deflationary strategies can still include block rewards. In that case, enough tokens should be burned to offset the newly created tokens. This method can be seen as a way to redistribute the total supply. Tokens can be burned either in bulk or continuously, by burning parts of the transaction fees for instance.
This strategy is risky. There is no guarantee that burning tokens will lead to a value increase. And even when it does, there is no way to quantify the increase beforehand. This practice therefore requires a hands on approach and continuous finicky ajustements. It may also require one or several community actors to hold a large part of the supply in order to bulk burn it.
Because private keys get regularly lost, a blockchain with a fixed number of tokens can also be deflationary. Indeed, the token made inaccessible through unrecoverable keys acts as an involuntary burn that reduces the circulating supply. Fixed supply strategies are often only asymptomatically fixed, meaning that the supply gradually increases until it reaches a predetermined cap. Bitcoin is the best example of this. When newly created tokens are not enough to compensate for lost tokens, a blockchain with a growing total supply can in fact have a fixed circulating supply.
Like deflationary blockchains, fixed-supply tokens have a tendency to increase in value. In particular, when the token has a high utility, i.e. it is required to enjoy the services offered by the network, demand is likely to increase with adoption. As more and more users try to acquire tokens to exchange for services, and with a limited supply, value naturally increases. To keep the system usable, service providers can adapt their prices to reflect the new valuation.
Fixed-supply presents a lot of the same advantages as decreasing supply but are easier to put in place. On the other hand, it offers less control over the token’s value and the total circulating supply.
Total vs Max vs Circulating Supply
It is important at this point to differentiate between a blockchain’s total, max, and circulating supply. There are several reasons why the three don’t match up: supply strategy, vested supply, and locked funds.
Vesting is a common practice where a certain amount of tokens are given to an individual under the enforceable condition that they cannot be spent. Tokens will be released slowly over time or all at once after a vesting period. This can be the case for tokens attributed to the team behind a given blockchain, or it can be a condition for lower-priced tokens in a sale. In the first case, vesting shows that the team is committed to the continued success of the project. In the second case, it protects newly quoted tokens from tanking due to a high volume of sellers wanting to cash-in quickly. It also protects from market manipulation by individuals that would otherwise control too big a portion of the supply early on.
Locked funds can be locked for many different reasons. It can be part of the process to participate in a proof of stake consensus for instance. It is also customary for the team behind a blockchain to keep a reserve of funds to be used in case of an emergency such as an hacking attempt. Funds can also be tagged with a specific purpose such as marketing, or be locked until a given milestone is reached.
The circulating supply is the sum of all tokens that are publically accessible, i.e. all tokens that could theoretically switch hands at any given moment. This number will evolve over time as new tokens are minted, funds are unlocked, or destroyed. All blockchains have a circulating supply. It is what matters most when it comes to the value of a token.
The total token supply of a blockchain is the current number of existing tokens. This number does not include tokens that are yet to be minted or tokens that have already been destroyed. It does however include locked funds and vested tokens. The total supply is always higher than the circulating supply and can always be calculated. It can however decrease over time in a deflationist supply strategy.
The case of Unikname Network: Phase 1
Since the forging of its genesis block in May 2020, Unikname Network has been in its Launch Phase, also called Phase 1. The purpose of this first phase has been to accelerate the network’s launch by attracting new users, generating enough tokens to guarantee access to all services, and ensure minimum token liquidity.
Phase 1’s supply strategy is inflationary. 10 millions $UNIK have been generated at genesis. Since then, and during the entirety of Phase 1, the block reward has been set at 2 $UNIK per block. These $UNIK are awarded to the delegate that validates the block. A new block is generated roughly every 8 seconds. Delegates are also rewarded for empty blocks. This translates into 7.884.000 additional $UNIK every year.
In addition, to encourage adoption, pioneer rewards are minted and distributed when a UniknameID is generated:
- 100 $UNIK for minting a UniknameID of type individual;
- 10,000 $UNIK for minting a UniknameID of type organization;
- 1,000,000 $UNIK for minting a UniknameID of type network.
Phase 1 is set to end in Q4 2021, slowly transitioning into Phase 2. Phase 2 is set to start by Q4 2021 or in early 2022.
Transitioning into Phase 2
After successfully developing its first module, Unikname Connect, Unikname is expanding into a platform specialized in decentralized identity and their applications. This new phase of Unikname’s evolution comes with the open-sourcing of our code base, as well as the quotation of the $UNIK token. In this optic, design decisions that made sense in Phase 1 are no longer suited. Changes are therefore required.
Among these changes, and because of the upcoming quotation of the $UNIK token, Unikname Network will transition from its current inflationary supply strategy into a (mostly) fixed supply strategy. Phase 2 supply rules have been defined as follows: Pioneer rewards are disabled.
No new $UNIK will be minted when a new UniknameID is created. The block reward has been dropped to 1 $UNIK. The block rate is expected to be maintained at 1 block every 8 seconds. This equates to 3.942.000 additional $UNIK per year. Additionally, before Phase 2 can begin, the total supply of $UNIK will be increased to the total $UNIK supply expected.
Astute observers will have noticed that, with a little bit under 4M new tokens every year, the supply of Phase 2 will not exactly be fixed. Why not get rid of the block reward entirely you ask? The block reward and the additional tokens it represents serve two purposes: it secures empty blocks and compensates for lost tokens.
Blockchains with no block reward rely on transaction fees to reward those who secure the network. This pushes the price of security entirely onto the users, leading to high transaction fees, and is only possible when a high volume of transactions is guaranteed. In such a setting, there is no incentive to create empty blocks. There might even be an incentive to slow down the block creation rate to include a maximum of transactions in each block. This is not healthy for the network and throws off every estimation that uses blocks to measure elapsed time. For instance, it makes milestones more difficult to schedule.
“Past studies have estimated that 20% of the Bitcoin supply was lost.”
Furthermore, the $UNIK is a utility token. It is required to take advantage of the services offered by Unikname Network and the Unikname platform. Liquidity is paramount. In the blockchain ecosystem, keys and the corresponding tokens are regularly lost. Past studies have estimated that 20% of the Bitcoin supply was lost. The block reward is therefore meant to compensate for lost tokens by adding new one into the circulating supply.
Even with this block reward, and with an initial total supply of more than 400M, this represents an inflation rate of under 1%. We can therefore consider the supply to be pretty much fixed.
Token Generation Event
The current total supply of $UNIK sits at roughly 26M. Phase 2 is expected to start in early 2022 with an initial supply of more than 400M. If these numbers do not seem to add up, don’t worry. Because they don’t. To transition between Phase 1 and Phase 2, Unikname Network needs to generate a lot of tokens, relatively fast. To do this we have considered two solutions.
The first option is to code a milestone in the chain, also called a softfork. This would generate all the missing tokens at the same time at a pre-approved time and date. It would also require specific code be written into the blockchain to allow this operation. This option requires a strong buy-in from the community and provides a lot of transparency, including reviewing the code in question.
However, we fear that creating code that can drastically increase the supply of a given chain is dangerous for the ecosystem. Unikname Network is based on Ark.io and shares a lot of code with Ark Core.
The code would therefore be likely to work for every blockchain in the Ark ecosystem. This could lead to security issues down the line. Furthermore, announcing the date and time of such a major event far in advance would leave the network open to attacks targeting this specific block.
“To preserve their namespace, these UniknameID will be randomly generated long character strings”
The second option consists in exploiting the pioneer reward to generate the missing supply over time. According to Phase 1 rules, the creation of a network-type UniknameID generates 1M $UNIK. By creating enough of them, the supply can be increased without introducing new code. This has the added benefit of spreading creation events over blocks and time, thus making it more difficult for attackers to target them.
This method requires the creation of a lot of bogus, or dummy, UniknameID. To preserve their namespace, these UniknameID will be randomly generated long character strings. They are not meant to play a role in the chain beyond that. This option also highlights the limit of the Pioneer Reward and explains why it must be disabled in Phase 2.
As you may have guessed, we have opted for the second option. For security reasons, the dates of the token generation events will not be publicly disclosed. There will be around 375 events over the next few weeks. After the missing supply has been generated, we will announce a milestone that will end Pioneer Rewards.
What should you retain from this article? The quotation of the $UNIK token is closer than ever. In order to make it possible, a mere 375 M tokens need to be generated. This generation will take place incrementally over the next few weeks using the Pioneer Reward mechanism, beginning the transition of Unikname Network from Phase 1 to Phase 2, and from an inflationary supply strategy to a fixed supply strategy. In this endeavor, we have opted for the strategy that seemed the least risky for both Unikname Network and the bigger blockchain community.
The upcoming quotation of the $UNIK token and what it means for Unikname Network will be the subject of further discussion, so stay tuned.
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