ZenIP 42407 Proposed: Tokenomics for Horizen 2.0

Preamble

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.

14 Likes

Fully supportive and looking forward to seeing this implemented

6 Likes

I fully support ZenIP 42407. The proposed tokenomics for Horizen 2.0 ensures the sustainability of the ecosystem while preserving the 21 million max supply of ZEN. The shift from PoW to PoS, optimized rewards for Collators and Delegators, and focus on ecosystem growth aligns with Horizen’s mission. This guarantees that ZEN holders are part of a project with a strong future, well-equipped to compete in the ZK dapp space.

6 Likes

This is a comprehensive tokenomics system!

With the halving of block reward scheduled for December 2024, the 40% of remaining ZEN per block is equal to 20% today, which is the same as what forgers and stakers together receive for staking.

To me, staking ZEN will be twice as profitable as it was going to be if we did nothing.

I like this plan!

6 Likes

I am excited to be moving to fully proof of stake, with more advanced governance features. I also am looking forward to having all staking to one one service, or one server, instead of having to run many servers.

Supernodes are not all that profitable right now, whereas staking to validators will be much more profitable

5 Likes

Excited to see that the Horizen ecosystem will finally have the funding it needs to power ahead to its next phase. It’s been a long time coming and I’m glad to see it happening.

5 Likes

After reviewing everything, I believe the proposals are generally strong, but there are a few areas that could be improved for clarity and engagement.

First, the structure of the proposed $ZEN allocations and emission schedules is well thought out, but simplifying some of the language could make it more accessible to a broader audience. For example, in the Collator and Delegator Rewards section, terms like “state transition proofs for parachain validators” could be explained in simpler terms to help readers understand the technical aspects more easily. Similarly, providing more detail about the specific benefits for delegators beyond receiving rewards would help encourage participation.

The Collator reward split (15% commission, 85% to delegators) is competitive, but a comparison with other networks could further demonstrate how beneficial this is for ZEN holders. Additionally, in the DAO Treasury section, adding examples of how the ZEN Sustainability Initiative and Community Grants will support the ecosystem would provide more context and show the long-term vision for these allocations.

Lastly, while the proposal touches on the importance of network security, framing the contributions of Collator nodes around overall security improvements—especially in comparison to other consensus mechanisms—could further emphasize how the transition to Horizen 2.0 strengthens the ecosystem.

In short, with a few tweaks to the language and added context, I think we can make the proposal more engaging and easier to understand, while also highlighting the long-term benefits for both collators and delegators.

3 Likes

i agree , fully support

3 Likes

Thank you for this proposal.

It makes sense to have new tokenomics in place to successfully embrace Horizen 2.0. There should be enough funds for the DAO (and therefore the community), grants, new listings, and rewards for the community members who are securing the network.

I like also the fact that it keeps the Horizen identity with the max supply at 21 million and emission-like schedule.

It’s a good proposal and I look forward to have feedback from the community about it.

5 Likes

Thanks for the comments, all good recommendations to consider.

Just a note that the collator / delegator split will be something the users could set as part of a future update, post launch.

4 Likes

This strategy will help ensure the remaining tokens are used effectively, without changing the total supply while rewarding community participation and security contributions.

4 Likes

Totally agree on clarifying context. My only comment would be that we don’t want to be too prescriptive at this stage on what exactly the community funds would go towards, and should leave that largely to the discretion of the community in the future when decisions are made. It’s a great point, however, to seed the discussion with long term vision around which the community can rally and have coherence around a grant program and other initiatives.

5 Likes

I like this proposal of tokenomics for Horizen 2.0 and I think that Replacing the Halving Schedule is really an excellent change!

Additionally, in the DAO Treasury section, adding examples of how the ZEN Sustainability Initiative and Community Grants will support the ecosystem would provide more context and show the long-term vision for these allocations.

and also for Horizen foundation, I think it’s really important.

And last (more “techincal”) it’s probably a topic that will be evaluated later, however I hope that the “List of collators” will be not “closed”, for example only the first 30 in order of stakes, but something similar to the current forger method with (maybe) a minimum (and a maximum?) to be able to “register” the collator.

Well done! :slight_smile:

5 Likes

The proposal outlines a well-thought-out tokenomic shift aligned with Horizen’s transition to a proof-of-stake model. Reallocating block rewards to Collator and Delegator rewards makes sense for securing the network in Horizen 2.0, while maintaining the 21 million max supply respects the project’s legacy.

Shifting resources from outdated models like Super Nodes to a more dynamic reward structure also supports future scalability. However, allowing Collators to set custom reward splits might require careful monitoring to ensure fair distribution and network stability.

I fully support this proposal… let’s keep moving forward

5 Likes

There are a million different ways to go with tokenomics so it is no small task to come up with a plan as thorough and complete as this. Well done, nice work!

4 Likes

@domenico do we have a sense yet of what the collator topology will look like? Meaning, do we know whether there will be an open or restricted set (restricted in number that can participate, not some sort of gatekeeper)?

3 Likes

@Sodiomayor @finpunk some things:

  • The staking pallet has limit of 200 collators, however this limitation can be removed. We would want to do some testing on performance before removing such a limit however.
  • Collator selection is as follows:
    • A subset of the total collators is chosen based on the amount of stake they have (those group of collators that have the most stake)
    • From that subset a sort of round-robin implementation is used for selecting which collator prepares a block.
  • Similar to the collator limit, the subset selection process could be updated to select collators based on different criteria, and it likely does not require a hardfork to do so. Similarly to some other features that were mentioned in this post, we propose any changes to this mechanism as a post launch update if its something the community wants.
2 Likes

My first impression is that Horizen is aiming to achieve financial independence, with the migration designed to establish a fund that will support the foundation, partners, and the broader ecosystem, while ensuring operational security for collator nodes and their delegates.

As a developer, I’m particularly interested in the tokenomics since they will indicate whether the environment will offer incentives for usage. The change in halving reduction is a big plus, as it ensures that not all $ZEN goes solely to trading and holding, haha!

I completely support ZenIP 42407!

I’m very excited to see how the new home of ZK dApps emerges.

4 Likes

Thanks @domenico. I guess the point is that for initial settings, we want to keep things as out-of-the-box from Substrate as we can and focus mainly on differentiators, like ZK precompiles. Once the system is out there and we’re getting traction, we absolutely should be thinking as a community what types of adjustments we want to make to other parts of the system.

3 Likes

I am overall in favor of the proposal. However, I have a few questions/suggestions.

What is the immediate need to unlock 25% of the vested amounts for the Foundation and DAO? Do neither entity have an existing treasury that can be used for current funding needs? What was wrong with the previous per-block emission strategy? I have a concern that if the Foundation/DAO need funding more than 4 years in the future, this will be an issue, and the proposal seems to be very focused on short-term development. Additionally, if there are major needs for short-term funding, wouldn’t it be best for the Foundation/DAO to seek funding elsewhere so that they don’t need to dump these large amounts of ZEN on holders?

The change in the operator to community-funding emission ratio is also slightly concerning to me. This ratio used to be 80:20, and is now being proposed to change to 40:60. I understand that the Foundation and DAO have a desire to grow and develop faster, and those desires require funding, but this drastic of a change seems excessive to me. A more in depth analysis of this change, including the costs required to run infrastructure as an opererator before (miners + supers + forgers) and after (collators) the change, could help justify this reduction for me.

4 Likes