Cardano’s monetary policy
The circulation of coins addresses two issues:
- The need to offer rewards to people who participate in the network.
- Financing the treasury
The future expansion and improvement of the Cardano block chain will be greatly influenced by its community, which should be encouraged through rewards to participate in the development of Cardano.
Participation rewards for delegates and stakeholder operators come from two sources:
- Transaction fees: the fees for each transaction of all blocks produced during each period go into a virtual ‘pool’. A fixed percentage (ρ) of the remaining ada reserves is added to that fund.
- Monetary expansion: a certain percentage (τ) of the fund is sent to the treasury and the rest is used as epochal rewards.
This system is designed to ensure that the share of the rewards extracted from the reserves is high at the beginning, when the number of transactions is still relatively low. This encourages early users to move quickly to benefit from high initial rewards. Over time, as the number of transactions increases, the additional fees will offset the smaller reservations.
This mechanism also ensures that the available rewards are predictable and do not vary dramatically. Instead, rewards change gradually. The fixed percentage taken from the remaining reserves at each time ensures a smooth exponential decline.
The objective of the Treasury is to provide funds to develop Cardano’s activities through a voting process. This requires a process by which funds are sent regularly to the Treasury to ensure that funds are always available.
Political basis of the securities ρ and τ
Much thought went into determining what the values of ρ (fixed percentage) and τ (funds going to the Treasury) should be.
While searching for the right ρ value, the team faced a dilemma: a higher value would mean higher rewards for everyone initially, and the Treasury would fill up faster. But higher values of ρ would also mean reserves would be depleted faster. Paying high rewards and incentivizing early adopters is a crucial consideration, but so is providing a long-term perspective for all stakeholders. Therefore, the solution to this dilemma requires a compromise between these two issues.
Adopting an exponential decline approach to avoid depleting the Cardano reserve makes sense in this situation.
The calculation of the “half-life of the reserve” (i.e., the time it takes to deplete half of the reserve) visualizes the impact of choosing one specific value from ρ over another. This was the subject of much discussion and, in the end, the value assigned was 0.22%. The reason is that the mathematical projections showed that a value of ρ (the fixed percentage of ada that enters the virtual pool each time) of 0.22% means an average reserve life of four to five years. In simple terms, only half of the remaining reserve will be used every four or five years.
Determining the correct value for τ (the percentage of unclaimed rewards that automatically go to the reserves in each era) was equally challenging. After discussions, deliberations and projections, the value chosen was 20%, which means that, initially, 20% of the monetary expansion and transaction fees are sent to the treasury after each era.
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