Preamble
- ZenIP: 42407
- Title: Tokenomics for Horizen 2.0
- Owner: Domenico Cusumano, Tyler Logsdon
- Discussions-To: dcusumano@horizenlabs.io, tlogsdon@horizenlabs.io
- Status: Draft
- Type: Technical
- Created: September 5th, 2024
Abstract
The approved technical ZenIP 42406: ‘Technical Roadmap for the Migration of $ZEN and EON’ did not include tokenomic changes within its scope. This proposal puts forward a plan for future $ZEN allocations and emissions optimized for a vibrant ZK-community built upon the Horizen 2.0 blockchain. Though changes to allocations and emission timing are proposed, the 21 million maximum supply of $ZEN will be preserved in the proposed tokenomic model.
Motivation
Horizen is transitioning from a proof-of-work UTXO model to a proof-of-stake EVM parachain. Its vision has shifted from facilitating private value transfers to building an ecosystem that supports decentralized applications specifically leveraging zero-knowledge technology. As a fair launch, no pre-mine, no ICO project, Horizen’s current block reward allocations do not reflect the modern needs for ecosystem growth. To ensure Horizen’s success, a tokenomics strategy that aligns with this new direction is crucial. This plan aims to create a more effective tokenomics framework to accelerate the growth of the Horizen ecosystem while equipping the community with the resources necessary to seize new opportunities and honoring the project’s legacy max supply cap.
Specifications
Current Block Reward Allocations
Under current $ZEN tokenomics, 60% of $ZEN block rewards are allocated to miners of the proof-of-work Horizen mainchain. With the full-transition to proof-of-stake on Horizen 2.0, the 60% of future $ZEN emissions allocated to PoW security can be reallocated to other community purposes.
Additionally, Super Nodes are no longer necessary with the transition to Horizen 2.0. Thus the 10% of block rewards allocated to the Super Node pool is to be reallocated, as well.
Proposed $ZEN Allocations for Horizen 2.0
Forger nodes on the EON EVM currently receive 10% of $ZEN block rewards. In Horizen 2.0, the role of Forger nodes will be replaced by Collator nodes. Collators manage parachains by collecting user transactions and generating state transition proofs for relaychain validators. Since Collator nodes will contribute to securing Horizen 2.0, we propose allocating 40% of future $ZEN emissions to the Collator reward structure.
Collator and Delegator Rewards
$ZEN holders can delegate their $ZEN to Collator nodes to receive a pro rata share of $ZEN rewards received by the Collator.
Based on extensive research, we believe a 40% allocation of remaining unmined $ZEN to per-block emissions will strike an optimal balance between the amount of circulating $ZEN delegated to Collators and the returns for $ZEN delegates involved in securing the network.
Collator nodes contribute to the security of the network by gathering transactions from users and generating state transition proofs for main chain validators. This allocation will ensure proper participation of the network, as well as a competitive reward structure for delegators. The 40% of future ZEN emissions allocated to Collator rewards will be divided between Collators and $ZEN Delegators as follows:
To encourage holders to delegate their $ZEN and participate in network security, we propose allocating 85% of Collator $ZEN block rewards to its delegates, with 15% retained by the Collator for its node operation services. We recommend allowing Collators to set their own custom reward split with their $ZEN delegates as a future post-launch update.
The table below demonstrates that even if a substantial portion of the $ZEN supply is delegated to Collators, the rewards remain attractive for $ZEN delegates. Note that these rewards will programmatically decrease over time to preserve the 21m max $ZEN supply.
*The above table displays initial $ZEN delegator reward estimates for illustrative purposes and does not account for transaction fees earned, which will go to $ZEN delegates for maintaining the integrity of the network. Note, delegator rewards will continuously decrease as $ZEN tends to its maximum supply.
Changes to the Emission Schedule
For the Horizen Foundation and the DAO Treasury allocations we propose moving from a per-block emission schedule to a vesting schedule which would release 25% of the allocation at migration, with the remaining 75% to vest linearly, with monthly unlocks, for 48 months. This would result in an increased circulating $ZEN supply at migration, as well as more circulating $ZEN in the short-term. However we believe that unlocking additional resources during the migration to Horizen 2.0 provides the greatest opportunity to cement Horizen at the forefront of ZK application in web3.
$ZEN ‘Security Budget’ paid to Horizen 2.0 Collators will continue to be issued on a per block basis with the emissions rate continuously declining to preserve the 21m $ZEN supply cap. See ‘Replacing the Halving Schedule’ below.
*The circulating supply of 16m ZEN at migration was chosen for illustrative purposes, the actual circulating supply at migration will be determined by total circulating ZEN across Horizen PoW and EON chains at migration.
^ In this example the additional ZEN unlocked is equal to 5m ZEN future emissions * 25% vesting at migration * 60% to Horizen Foundation and DAO Treasury
Horizen Foundation Allocation
Since there was no premine or initial coin offering precluding the launch of the Horizen network, the community has relied on its 20% allocation of $ZEN block rewards to fund all community initiatives and development. As part of the migration to Horizen 2.0, we propose increasing the Horizen Foundation’s share of future block rewards to 32.5%. This will be used to fund the Foundation and its ecosystem development efforts over the long-term. The Horizen Foundation may diverge from these funding guidelines at their discretion, with use of funds from this allocation detailed in the periodic Horizen Foundation transparency reports.
This adjustment will allocate 32.5% of $ZEN emissions to the Horizen Foundation to fund community resources: Ecosystem Development (15%), $ZEN Growth & Stability (10%), and chain infrastructure (7.5%). This allocation will fund the Foundation’s operations long-term. While the spending of $ZEN from this allocation will be at the discretion of the Foundation we recommend funds be deployed as follows:
| Ecosystem Development | 15% | Long-term funding for the operations of Horizen Foundation, its ecosystem development efforts, and maintenance of the Horizen network. |
|---|---|---|
| $ZEN Growth & Stability | 10% | Funds used to support stable $ZEN markets across both CEX & DEX. |
| Infrastructure | 7.5% | Funds allocated to Horizen 2.0 application integration fees and support of the network’s long-term infrastructure needs. |
DAO Treasury
We propose an allocation of 27.5% of the $ZEN emissions to the DAO Treasury, which is divided into individual tracks. Each track will have its own dedicated funds, with voting conducted exclusively within the scope of those allocated resources. This approach ensures that the community avoids overspending or underspending in any specific area, while ensuring that each track receives the necessary attention and care.
| ZEN Sustainability Initiative | 17.5% | This is considered one of the most crucial initiatives. The ZK dApp space is still in its early stages and is primed for disruption. The community should focus on funding the next generation of groundbreaking dApps that can transform the decentralized world and challenge traditional industries. To achieve this, we should attract top-tier projects to build within the Horizen ecosystem by offering funding, supporting their efforts, and backing their product initiatives. In return, these funded projects should be required to allocate a portion of project revenue back to the Horizen ecosystem. We propose a governing body for this track to negotiate terms with projects that include revenue shares with the ecosystem via contributions back to the Sustainability Initiative. This will ensure future growth and sustainability of the community. |
|---|---|---|
| Grants | 5% | For funding requests not suitable for the Sustainability Initiative. |
| Growth and Marketing | 5% | Allocated to drive growth initiatives and support awareness campaigns. |
Replacing the Halving Schedule
The ZEN community has indicated a clear desire to preserve the 21m max $ZEN supply, which is currently implemented via fixed per-block $ZEN emissions halving every four years. While this is an essential element of $ZEN tokenomic design, abrupt halving events have their downsides. Halving events often bring significant market uncertainty, disrupting both the market and the broader ecosystem. Since users and traders are aware of the halving date well in advance, it can lead to excessive speculation and potentially diminish network participation if users anticipate a sudden 50% cut in rewards.
To address these deficiencies, we propose a smoothly-declining $ZEN emissions rate via Collator / Delegator rewards, which halves over the same time period. Max supply of $ZEN would remain at 21m. In the chart below, the effect of the proposed approach is demonstrated by the green line, versus the current halving schedule depicted by the gray line:
This has the potential to reduce unnecessary speculation and unexpected behavior around a single event. This can bring a level of predictability while promoting healthy participation within the network, attracting a more loyal user base.
Rationale
This proposal outlines various strategies for $ZEN tokenomics on the Horizen 2.0 network. The community will need the ability to compete in an aggressive market. By providing sufficient resources at migration, we ensure the community can fund network growth and develop strategies to attract developers for ZK applications. Additionally, the vesting schedule for these funds safeguards the community and promotes responsible spending.
The reward allocation for Collators and their $ZEN Delegates will promote adequate participation in protocol staking, while encouraging users to continue to accumulate and hold $ZEN.
The strategies outlined in this proposal will optimally drive the growth of the Horizen ecosystem while still maintaining the existing supply of 21 million tokens.
Considerations
The plan outlined here provides the Horizen community with the strength it needs to pursue an emerging market and drive success to the Horizen ecosystem. While this plan supports the mission and lays the foundations for exponential growth, it’s important to acknowledge that the entirety of future community funding will become available over the next four years. It’s crucial to use these funds both wisely and strategically, with a focus on producing ongoing revenue streams for the community via the Sustainability Initiative. All community initiatives should align with the protocol’s vision and contribute to its growth.
