NULS Consensus Rewards Mechanism Explained
In June 2019, Berzeck, a NULS NTC developer, submitted a NULS proposal that set a maximum supply for NULS coins. The proposal was accepted by 97.23% of the community voters. Today, Berzeck is the NULS Western Director.
Before Berzeck’s proposal, NULS created 5 million new NULS each year. The newly created NULS were rewarded to NULS consensus nodes and the people who stake in the consensus nodes. The proposal caused the NULS tokens created each month to decrease by 0.41% until the total supply reached 210 million NULS. At that time, there will be no more new NULS created. The first monthly decrease occurred on July 12nd in 2020. The total supply will reach 210 million NULS in July 2064.
Why it was necessary to cap the NULS Total Supply?
Initially, NULS was designed to create 5 million news NULS annually (approximately 416,667 monthly) with no supply limit. Considering the long-term well-being of NULS, continuous inflation and infinitely increasing supply is the opposite of sustainable development and organic value growth. So, Berzeck proposed to limit the total supply to 210 million.
The proposal described a combined inflation and deflation mechanism for the NULS coin. The NULS created monthly for the consensus nodes, will be reduced gradually until the 210 million total supply is reached. At that time, there will be no more NULS created. The inflation is the monthly created NULS, reduce by the deflation which is the 0.41% compounded monthly reduction. (See Figure 1.) Since the rewards allocated to the consensus nodes is the NULS created for that month reduced by the deflation, the rewards for the consensus nodes decrease every month.
Note, that this is a gradual phenomenon. No need to panic or rethink your current investment plans. By 2036, the consensus amount with be ½ of 416,667!
Reducing the amount of Consensus Node rewards, every month
The NULS deflation mechanism was built-in into the NULS 2.0 code and was activated on July 12nd 2020. Beginning July 12, 2020, the consensus rewards are reduced each month.
Here is the gradual reduction of the monthly consensus rewards. It takes 64 years for NULS to increase from 110,000,000 NULS to 210,000,000 NULS while reducing the number of NULS created every month by 0.0041%.
Why not apply for the Bitcoin Halving implementation?
The Bitcoin Halving implementation is: “After every 210,000 blocks mined, or roughly every four years, the block reward given to Bitcoin miners for processing transactions is cut in half. This event is referred to as halving because it cuts in half the rate at which new bitcoins are released into circulation.” (https://www.investopedia.com/bitcoin-halving-4843769)
Why not use the Bitcoin Halving implementation? We receive this question from our community from time to time. There are economic and security reasons why that Bitcoin implementation is not used for NULS.
- Token Economic Reasons
The rewards miners receive are based on the POW, Proof of Work, mechanism. Miners who want to participate in BTC mining invest in expensive mining machines. As the Bitcoin rewards are halved, suddenly miners are competing for 50% smaller rewards, while their total mining cost remains the same. Miners find they are earning less, yet they continue to because of their financial investment.
NULS supports POS, Proof of Stake, which is a gradual decrease in rewards. However, if NULS halved the consensus rewards, suddenly the consensus incentive is 50% less. Where the POW miners paid a high cost for their mining equipment and remain tied to POW due to their mining investment, the POS miners paid less for their server as POS miners do not compete for the rewards by solving a problem. Instead, POS miners maintain good credit and wait for their turn to receive the rewards. (This is a simplified explanation.)
Therefore, if the rewards were halved, POS miners are likely to choose to withdraw their coins and participate in another consensus with a higher APR. Therefore, from an economic perspective, the halving mechanism is not a suitable solution for a POS blockchain like NULS.
- Security Reasons
From a cybersecurity perspective, the halving model does not suit NULS POS. If the current NULS consensus rewards remained at 5 million NULS annually, the consensus staking ratio (NULS staked in the consensus nodes versus Total NULS available) is maintained at ~56%, and the consensus staking APR would be maintained at ~10%.
In the halving situation, consensus nodes and consensus node stakers would suddenly be earning 50% of what they were originally earned. To restore the APR, 50% of the current consensus nodes would be disbanded and the node owners would seek better opportunities, With 50% fewer nodes the consensus staking ratio would be 23%, i.e. NULS staked in the consensus node versus Total NULS available.
When the halving occurred again, the consensus staking ratio would be reduced to ~11.5%. That means 89.5% of the current supply of NULS is available. Given that the minimum cost to create a consensus node is 220,000 NULS, it is possible for additional consensus nodes to be created to position NULS for a 51% attack. Then, the NULS network is compromised.
Please note this is a potential scenario, not a fact. This scenario occurs because the consensus rewards income is halved suddenly, instead of reduced gradually as it is done in NULS.
This discussed consequence applies in every POS blockchain where a sudden halving will cause an APR drop, thus affecting the staking ratio, and thereby exposing the entire blockchain to security threats. From the perspective of security, the halving model doesn’t apply to POS blockchain.
To maintain NULS blockchain stability and all NULS holders’ well-being, the total supply is set to 210,000,000. The benefits are:
- Significantly reduces the inflation of NULS.
- Lowers the risks for the network itself
- Increases the potential rewards for consensus node owners and NULS holders.
The NULS community’s door is always open for worldwide developers and contributors. Here we are together to create valuable things, to make blockchain easier, to make blockchain more accessible for everyone out there. We believe blockchain will shape the world in a way we have never seen before!