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December 19, 2022
Flow Ecosystem Priorities: Protocol Economics
Flow Ecosystem Priorities: Protocol Economics

The Protocol Economics working group is responsible for the token economy, which optimizes token distribution, governance, and security of the Flow network. The group works towards designing incentive systems that reward users for adhering to the publicly stated rules of the network and penalize them for inappropriate behaviors. The group relies on mathematics, game theory, and economic theory to improve the design of staking, delegation, transaction fees, token distribution, and monetary inflation.

Protection against state bloat

Flow has a multi-node architecture where all nodes specialize and fulfill a specific role in the operation of the network. Execution nodes (ENs) maintain state computation and have a cryptographically verifiable data store for all user accounts and smart contract states. However, other node types in the network – Collection, Consensus and Verification nodes – do not deal with state concerns. With this separation of roles and concerns, state bloating has been isolated to a handful of ENs that can scale independently without impacting other nodes in the ecosystem. ENs store the account state along with 100 previous blocks, exerting pressure on the actual storage requirements as new accounts and smart contracts on the network grow.

Storage fees were implemented to regulate the state's growth, limiting the maximum amount of storage each account could use. This incentivizes developers to use on-chain storage efficiently and avoid storing unnecessary data. While ‍the minimum balance has been extremely low (0.001 FLOW) in the network's early onboarding days, the working group must revisit the storage pricing to account for current and future state growth. Any storage fee changes must be carefully executed to minimize the impact on Dapps in production and to nurture Flow as a cost-effective platform for future developers. This part of the ecosystem is under consideration and we will update this page at an appropriate time.

New transaction fees metering for enhanced network security

Recent work around segmented transaction fees introduced variable execution fees, which ensure fair pricing based on the impact on the network. For instance, heavier operations will require more resources to process and propagate transactions.

Similarly, this working group can explore and test a new model to enhance network security for spamming attacks with variable inclusion fees and surge pricing. A network surge may be applied when the network is either under pressure due to:

  • Demand: An increased influx of transactions that require processing
  • Supply: A reduced ability to process transactions

Currently, the network surge factor is fixed at 1.0. Costs for inclusion will be impacted by the byte size of the transaction and the number of signatures required. Most importantly, the fee-management experience for developers must remain intuitive and the network should continue to offer high throughput and scalability, such that Flow endures as a cost-effective platform for developers.

Revisiting FLOW issuance rate

Flow, like many other blockchains, uses protocol-level rewards paid to the operators of nodes in its network. The original FLOW Token Distribution plan detailed a strategy of using 5 percent token rewards for the first 18 months, then suggested adjusting the rewards rate as decided by the community. Given the current macroeconomic headwinds faced by the industry and global economy, the Flow team released a proposal suggesting that the 5 percent inflation remains unchanged.

Flow faces the classic trade-off of minimizing the inflation rate to reduce the implicit cost of holding FLOW tokens with synchronously incentivizing the node operators to run nodes via sufficient rewards. The network must balance transaction fees, new token issuance, the minimum stake required to be a node operator, and the number of nodes in the system. All things considered, this part of the ecosystem is under consideration, and the page will be updated at an appropriate time.

Lowering barriers to entry with lower staking requirements

While no single node is solely accountable for the network’s overall security, node operators are mandated to stake minimum financial security comprised of FLOW tokens for a protocol-defined lock-in period to disincentivize faulty behavior. For node operation to be an accessible and rewarding activity, the current minimum staking amounts must be revisited. First, the team would undertake a practical analysis of operator COGS over the last two years. Then, through a democratized process, decisions on the new staking thresholds would be made to maintain network security and promote decentralization, while making it worthwhile for operators to participate across different node roles.

At this time we are inviting other node operators to share their COGS analysis through this publicly visible forum.

The core contributors for this working group include entrepreneurial support organizations, non-profits, Dapper Labs and academic institutions including Berkeley, Purdue, UC Davis, and Rochester Institute of Technology. Any proposed protocol economics improvements are collaborated in public using Governance FLIPS. And in the near future will host a public R&D meeting to discuss updates to work streams, cross-functional brainstorming, and receive feedback from one another.